慧榮科技 (SIMO) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Silicon Motion Technology Corp. Q4 2020 Earnings Conference Call. (Operator Instructions)

This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and for the results of operations, financial conditions and business prospects.

Although such statements are based on our own information and information from the 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 the technology and consumer demand of multimedia consumer electronics, the state of and change in our relationship with our major customers and change 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 the 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 today, Mr. Chris Chaney, Director of Investor Relations and strategy. Thank you. Please go ahead, sir.

Thank you, A.J. Good morning, everyone, and welcome to Silicon Motion's Fourth Quarter 2020 Financial Results Conference Call and Webcast. As A.J. mentioned, my name is Chris Chaney, Director of Investor Relations. And joining me today on this 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 fourth quarter results and our outlook. We will 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 just read at the beginning of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on our 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 similar to how we analyze our own operating results.

For more consistent year-over-year comparison 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 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.

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 the fourth quarter, we delivered $144 million in sales, about 4% more than the high end of our guidance range. Compared to the third quarter, revenue was up 14% sequentially.

Earnings per ADS for the fourth quarter were $0.86, up from $0.76 in the third quarter. For the full year, revenue was $540 million, up 20% compared to last year. Earnings per ADS was $3.24, up 25% from a year ago.

Our fourth quarter results were stronger than expected. The consumer procurement continues to be robust. Sales of our eMMC+UFS controller for smartphones and IoT devices were especially strong. And our SD controller continued to benefit from strong PC demand. Sales of our SSD solutions were, however, seasonally soft.

Based on purchase orders received from our customers, we are expecting the strength of our fourth quarter to strengthen further through the first quarter and stay robust through the rest of 2021. Purchase order received for the first quarter already exceeds our first quarter sales guidance. And purchase order for the full year already meaningfully exceed our full year guidance.

Our ability to meet customer order is, however, limited by our product supply. Our first quarter sales are limited by a variability of product inventory. And our full year sales growth is limited by the current foundry supply shortage that is also affecting much of the overall semiconductor industry today.

Demand of our SSD and eMMC+UFS controller remain very strong. We continue to see robust sales of PC driven, especially by the need of working from home and online learning. Additionally, OEM adoption of SSD in PC and other devices continued to grow as more low-cost NAND for SSD facilitates the replacement of HDD.

And furthermore, we expect our SSD controller market share gains to accelerate based on our pipeline of design wins, both with NAND flash makers and module makers for the OEM market. We are expecting stronger SD controller sales growth this year compared to last year.

We continue to see OEM smartphone build activity improve. More meaningfully, the transition from the legacy eMMC mobile embedded storage to newer UFS technology continued to increase rapidly. As OEM pair UFS with new generation of application processors and higher stack cameras.

Additionally, sales of eMMC controller to module makers who are building cost-effective storage solution for low-cost smartphones, Chromebooks, smart speakers and other IoT devices remain strong. As previously discussed, NAND flash makers have been turning over legacy eMMC business to module makers, and we benefit from this.

We are also expecting stronger eMMC+UFS controller sales growth this year compared to last year. We believe our SSD and eMMC+UFS controller market share gains will accelerate because of our growing design win pipeline. Currently, foundry capacity shortage is also affecting NAND flash makers with captive controller programs as well as other merchant controller suppliers. Because of the shortage issue, we are seeing NAND flash makers rationalize internal controller program and seek to outsource more.

We are also seeing merchant controller competitors who are all meaningfully smaller than us, face more adverse boundary supply shortage issues, which has led several of bigger customers to redirect business to us.

Let me now share with you key objectives from our 3-year strategic plan. With the growing strength of our business and better visibility from our expanding OEM program, we are increasingly confident that we can achieve our strategic plan of delivering USD 1 billion of sales by 2023, with a stable 50% gross margin to represent target operation margin and EPS growing meaningfully faster than revenue. Our orders booked to date, unconstrained by foundry capacity limitation, will already take us to considerable weight beyond our full year guidance towards this $1 billion sales objective.

With sales growth primarily from our clients need and eMMC+UFS controllers, plus additional contribution from our Ferri industrial SSD. With our new PCIe Gen5 enterprise SSD controller sampling in the second half of next year, we are not expecting our enterprise SSD controller to be a material contributor to our $1 billion sales objective. We are planning a material enterprise SSD controller sales contribution only after 2023.

In the 500 PLUS gaming units a year client device market, primarily SSD supply to PC, consumer electronics and industrial OEM as well as into aftermarket channels, SSD adoption has increased rapidly and will continue to increase rapidly as HDD are further replaced.

With our design win pipeline, we expect a roughly double our SSD controller sales in 3 years from our combination of SSD adoption in client devices increasing from 60% to 65% last year to 80% to 90% by 2023. And our overall market share increasing to about 40%. Our market share in smaller channel segment is already high, while our share in the larger OEM sector segment is low.

We expect to maintain our high share of the channel market and drive faster growth with OEM, the segment where we have a large and growing pipeline of design wins and rapidly gain market share in the OEM segment. We expect to deliver our SD controller growth objective just based on sales to the existing NAND flash and module maker customers.

Our eMMC+UFS controllers, we are expecting our sales to more than double by 2023, driven by a combination of our market share reverting to about 1/4 from meeting last year, as well as UFS adoption in smartphones and other devices increasing from 45% to 50% last year to at least 80% in 3 years' time.

Again, we are also expecting to deliver our eMMC+UFS controller growth objectives just based on sales to existing NAND flash and module maker customers. Separately, we are also expecting meaningful sales growth from our FerriSSD, a part of our SSD solutions.

In past years, most of FerriSSD was sold into diversified set of industrial, commercial equipment and data networking applications. More recently, we also started selling to automotive component supplier, building infotainment system and dashboards for Japanese and German car brands and expect meaningful growth over the next 3 years from sale to these customers.

To summarize, we have high confidence in delivering to our strategic plan, not only because of grown NAND flash and module maker customer base. And the extensive pipeline of business engagement, but also because our order book, that is now limited by foundry supply availability, will already take us to a considerable way towards our $1 billion sales objective.

I would like to thank TSMC for their continued support, without which our ability to support our broad customer base and the extensive NAND flash ecosystem this year will be in jeopardy and our customer for their understanding of the extraordinary supply constraints that we are temporarily facing.

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 fourth 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 data is included with the earnings release issued yesterday.

In the fourth quarter, revenue was $144 million, 14% higher sequentially and 6% lower year-over-year. For the full year, revenue of $540 million was 20% higher than a year ago. In the fourth quarter, earnings per ADS were $0.86, 12% higher sequentially and 11% lower year-over-year. For the full year, earnings per ADS of $3.24 were 25% higher than a year ago.

Now for some details, starting with performance of our 3-key products. SSD controller sales increased 5% to 10% sequentially, in line with our sales plan. Full year sales were up 15% to 20%, meaningfully faster than client SSD controller market revenue growth. SSD controller sales remained 50% to 60% of total revenue, similar to the prior year. eMMC+UFS controller sales rebounded 65% to 70% sequentially, after a sharp decline in the prior quarter, as our large NAND customer worked down its inventory and started actively restocking.

Full year sales grew 35% to 40%, sequentially faster -- substantially faster than market revenue growth. eMMC+UFS controller sales increased to 25% to 30% of total revenue from 20% to 25% in the prior year.

SSD solutions sales were seasonally soft and declined 30% to 35%. Full year sales grew 35% to 40% with positive contributions from both Shannon and Ferri. SSD solution sales increased to 10% to 15% of total revenue from roughly 10% the prior year. Gross margin in Q4 increased slightly to 49.3% from 49.1% in the prior quarter.

For the full year, gross margin decreased to 49.2% from 50.1% in the prior year due to a higher mix of lower gross margin SSD solutions sales as well as a slight decrease in controller gross margin. Operating expenses in Q4 were $39.5 million, $6.6 million higher than the prior quarter, primarily due to higher R&D tape-out related expenses. Also, OpEx was roughly 4.5% higher because of NT dollar and renminbi foreign exchange appreciation.

For the full year, operating expenses were $147.7 million, 14% higher than the prior year, primarily due to higher headcount and compensation-related expenses, but also due to higher R&D tape-outs. 60%, 65% of our operating expense is headcount related, and roughly half of the remainder is related to R&D tape-out, IP and other project-related expenses. Last year, over 80% of our R&D project expenses were for SSD controllers, and roughly 1/4 of this was for enterprise SSD controllers. For the full year, operating expenses were roughly 1.7% higher because of the NT dollar and renminbi foreign exchange appreciation.

Operating margin in Q4 was 21.9%, slightly lower when compared to 23% in the prior quarter due to higher operating expenses. Full year operating margin was 21.8%, up from 21.2% in the prior year. Our effective tax rate in Q4 was 7.5%, below our 15% to 20% tax rate guidance due to certain onetime benefits and timing differences. Stock-based compensation in our operating expenses, which we exclude from our non-GAAP results, was $8.7 million in Q4 within our $8.4 million to $9.4 million guidance range.

We had $369.2 million of cash, cash equivalents, restricted cash and short-term investments at the end of Q4 compared to $368.4 million at the end of the prior quarter. We paid $12.1 million in dividends to shareholders. The first quarterly installment of our $1.40 per ADS annual dividend that was announced last October.

Let me update everyone about our Shannon product line, which has continued to underperform in terms of sales, profitability and cash flow. Shannon was an acquired asset. We are required to test for asset impairment at least annually. During our recent assessment, we determined that our asset was impaired and wrote off the remaining $17.5 million of Shannon goodwill on our balance sheet. Additionally, we wrote down $4.9 million of inventory, primarily NAND flash components to fair market value and Shannon SSDs for obsolescence.

Although sales of our Shannon data center SSDs grew last year, sales significantly underperformed internal plans. Gross profitability was also significantly lower, and excluding the inventory write down, our Shannon product line incurred an operating loss of about $5 million.

Sales of differentiated open channel SSDs to Alibaba were in line with expectations, but sales of standard NVMe SSDs to other data center customers were off considerably because of the soft demand environment in China for enterprise SSDs and brutal competition from the NAND flash makers. We continued to restructure our Shannon operating team, which included the departure of many senior managers last year and are working to restore this product line to growth and profitability.

We expect Shannon sales in 2021 to contract meaningfully as our large customer worked down its elevated inventory of SSDs procured from us and other suppliers last year before restocking. And we focus on fewer but higher-margin sales. With lower levels of sales, we are also expecting our Shannon operating loss to widen further this year.

Now let me turn to our first quarter and full year guidance and forward-looking business trends. For the first quarter, we expect revenue to increase 7% to 12% sequentially to approximately $154 million to $161 million. For full year 2021, we expect revenue to increase 20% to 30% to $650 million to $700 million.

As Wallace had discussed, we already have purchase orders for significantly more than our revenue guidance range, but are limited by foundry capacity available to us. If more foundry capacity were made available to us, we could grow even faster. The guidance range that I had just provided is based on current uncertainties primarily relating to foundry capacity allocation.

In the first quarter, we are expecting strong SSD and eMMC+UFS controller sales growth and more modest SSD solutions sales growth. For the full year, as Wallace had highlighted, we are expecting both our SSD controllers and eMMC+UFS controller sales to grow much faster than last year and our SSD solutions sales to be flat.

First quarter gross margin should be in the range of 48% to 50%. For the full year, based on certain assumptions, we are expecting gross margin in the 47% to 49% range. Assumptions are substrate and packaging costs are increasing, and we expect the whole prices flat unless they are subject to contractual pricing arrangements in supply agreements. However, our gross margins could be higher if we're able to negotiate higher prices and separately successfully execute initiatives to reduce product cost. If we're able to increase our prices and lower our costs, our gross margin could be higher than guidance.

We expect first quarter operating margin to be in the range of 21% to 23%. For the full year, we expect operating margin in the 24% to 26% range. As many of you know, the NT dollar and renminbi had strengthened considerably, especially in the second half of last year. If exchange rates are maintained at year-end rates for the rest of the year, which we are assuming, we estimate the impact to our operating expenses compared to last year is approximately 2% to 2.5%.

In the first quarter, we expect stock-based compensation in the range of $3.1 million to $3.3 million, amounts consistent with the seasonal timing of RSU grants in past years. For the full year, we expect stock-based compensation in the range of $14 million to $16 million, consistent with the prior year. We expect our effective tax rate for the year in the 15% to 20% range with tax rate in the first quarter in the lower half of the range.

On February 24, we will break ground for the construction of our Hsinchu office building. We spent $59 million in 2018 for the purchase of land. Construction is budgeted to cost $77 million with $7 million spent this year and $34 million spent next year. We expect to complete construction in 2024. Upon completion, we plan on a sale and leaseback of the building.

This concludes our prepared remarks, and now we'll open the call to your questions.

(Operator Instructions) We have the first question from the line of Karl Ackerman from Cowen.

First question for me. I appreciate the full year outlook you provided. And in your prepared remarks, Wallace spoke about how competitors are facing challenges with supply, enabling you to bring some new customers on to your platform. And you also spoke about how some NAND OEMs are easing on their willingness to move to internal solutions.

So my question is, are these volumes ad hoc and opportunistic? Or what sort of volume commitments are you able to secure that would help support both your full year guide and view through 2023?

So as we stated, our current committed wafer supply from our foundry makers, we are -- can fulfill our full year guidance 20% to 30%. There's no question. If we have additional incremental wafer allocation for our foundry makers, our guidance will be higher.

Okay. I appreciate that. I guess then relative to your SSD solution business, could you discuss how the shift in the consignment model will impact at least qualitatively your revenue and profitability in 2021 versus 2020? I guess the -- is the widened operating loss expectation coming only from enterprise SSD? That's my question.

Yes. That's related to the operating loss and the consignment, that relates specifically to our Shannon data center SSD product line. So as we talked about during the call, our Shannon product line had under-delivered in terms of revenue growth, profitability and cash flow generation.

And so we -- as part of our regular testing of our acquisition, the valuation of our acquisition, we have determined that the assets were impaired and so took a full write-down of the remaining goodwill.

So in terms of the profitability of our business, our gross margins have been below our corporate average by a significant amount because of the products that we're building, requiring the purchase of NAND. So as part of that -- or this issue, last year, we started for one specific customer, for Alibaba, moving to a consignment business model where Alibaba procures NAND and we build the SSDs based on what they -- on the NAND they give us. So our margins -- our gross margins are significantly improved because of this.

But we also have a lot of other customers. Most of -- majority of our sales of our Shannon products are in fact standard NVMe SSDs to non-Ali customers. And for these customers, we're buying NAND, and so our gross margins are a lot lower.

We have our next question coming from the line of Rajvindra Gill from Needham & Company.

And congratulations on the momentum, very impressive. Wallace and Riyadh, when you're putting up this $1 billion sales target, which is very ambitious, I just wanted to get a sense in terms of how to think about the cadence of that. If you look at your full year guidance in 2021, it's at $675 million at the midpoint. I believe that's the highest in recent history for your company in terms of overall revenue. Correct me if I'm wrong there. But it's extremely high, and that could be higher if you get more wafer allocation.

So I wanted to get a sense from working off that base to get to $1 billion, that's about 50% growth. How do we think about the cadence on a kind of year-over-year basis? And is this really being driven by the combination of kind of higher attach rates that you're seeing in other adjacent markets outside of PCs? Is it being driven by consistent, sustainable market share gains? I'm just curious in terms of some of the color there.

Yes, I think you asked a very good question. We're definitely prepared to answer the questions. We have a very strong confidence to achieve our financial objective, $1 billion within 3 years. It is through our major design pipeline from client SSD controller as well as mobile eMMC+UFS controller.

I think that we start to really cook the design win pipeline since 2 years ago, and we're really gaining momentum and market share, focused on technology for new product development, moving to 16-, 12-nanometer, mobile, we're going to move to 7-nanometer 3 years from now.

But I think for a lot of R&D investment, that's why you see our increased R&D expense in the last 2 years, year-by-year. I think from this current design pipeline from the backlog in our hand, PO in our hand, our sales, there is no restriction constraint for wafer supply will be much higher than our current full year guidance, 20% to 30%.

That's why it gives us significant confidence and we can continue to carry the momentum from this year to next year. Yes. That's why we start to work with TSMC right now for 2022 wafer supply for all the different technology node, from 55-, 40-nanometer to 28-, 16-, 12-nanometer and make sure we can get sufficient supply to meet our major OEM customer requirement for 2022.

Of course, I think TSMC -- we have a long-term relationship with TSMC and we have a significant good support from them in the past 10 years, then we probably can get more allocation in the second half of this year. There's no commitment right now. So we can only base on the committed wafer supply to make a full year guidance to the investor. But for 3 years for $1 billion target, we have a much better confidence to achieve the goal. Maybe it will be earlier.

Thank you for that. That's excellent news. And Riyadh, I know it might be hard to quantify, but just if you could give us some sense if you get more wafer allocation from TSMC, which you have a great relationship with to begin with. Any way to think about what the potential upside would be on that $675 million target?

Raji, that's another excellent question. The way to think about this is our operating infrastructure has the ability to have considerable operating leverage. The operating expense infrastructure that we have built, our R&D teams, our sale and marketing teams, the rest of our operating infrastructure, it's an infrastructure that we can load a lot more revenue on.

And so for what we have today, and if we're able to achieve much higher levels of revenue this year, in the event we're able to secure additional wafer, there is no -- beyond what we have guided. If we're able to secure additional wafer, this would just flow through our P&L and deliver the incremental profitability on our bottom line.

The next question comes from the line of Craig from B. Riley Securities.

This is Carlin Lynch on for Craig. Congrats. And I just wanted to drill down on something that Wallace said on the last question. Did -- Wallace, when you said the 20% to 30%, is that the amount of supply constraint that you're currently seeing right now?

So in theory, if there were no supply constraints, the guidance would have been 20% to 30% higher. Did I understand that right?

No. I'm saying is, we've guided 20% to 30% growth from 2020 based on our current variable wafer committed. But we can grow much higher and guide much higher if we can get an incremental with allocation from our foundry supplier.

Got it. Okay. Sorry about the miscommunication. So my second question is, on the new -- you mentioned that a bunch of smaller suppliers or a bunch of customers have kind of come your way due to the supply constraints. What are you guys doing? And how confident are you that you can hold on to these new customers as they come towards you, given that you're already supply constrained?

Yes. Most of these new demands are really not a major customer. As you know, some of our customers maybe 80% use our controller, 20% use other controller maker in order to bargain the price with us in the past many years.

But now because wafer is shortage globally. So many small player controller player, they even probably cannot get even worse wafer supply to their demand. That's why a lot of the customer before is maybe 80% come to us not gave us a 90%, 95% order to us.

But that is now our really main goal. I think from the existing original estimation for our business is stronger than 30% growth year-over-year. But with additional fee demand just make our allocation even worse than what we can offer to the customers.

Got it. Okay. And then one last quick one for me. Obviously, I understand what's going on with gross margin, given the higher kind of inputs this year and not wanting to provide any insight about price increases at this point.

But as I look out to fiscal '22, and you mentioned the 50% gross margin target, with Shannon now kind of a much smaller percentage of sales expected moving forward. Would it be fair to say that gross margin in calendar '22 can get back to the 50% maybe quicker than expected beyond all -- assuming that all of the things that are impacting gross margin this year come out of the model? It just seems to me that -- and then, ultimately, why isn't that number -- why couldn't that number be higher? We saw 50.1% in calendar '19. Just trying to get the sense of upside gross margin from the 48% guided to in calendar '21?

I think you are correct. Theoretically, we definitely show -- improve our gross margin in 2022. I think this is now the goal we're looking for. However, I think we all have some major program with the contract price. It all depend on our foundries provider, whether they will continue some regular wafer discount annually. Because of a severe shortage, they are not going to reduce the wafer price, instead, they increased wafer price.

So we have to prepare all the different scenario to play conservative model. I think that's our obligation to the shareholder to make sure we give you conservative guidance, then we can have a better result than expectation.

We have the next question from the line of Gokul Hariharan from JPMorgan.

Congrats on the great results. So just wanted to understand, when we think about our $1 billion revenue target, do you think that the product mix is going to be reasonably similar to what we have right now? I think right now, we are probably about 55% to 60%. The controller is roughly about, I think 25% mobile or 30% mobile and about 10% to 15% SSD solution.

Is the mix going to be fairly similar when we get there? Could you talk a little bit about how we think about that? And then I had a follow-up question.

I think, roughly, the mix will be maintained the same. As I said in our statement, we don't count the new customer -- customers we don't have today. We based on existing NAND maker and module maker customer, we are able to achieve the $1 billion target within 3 years.

So we have enough design pipeline from PCIe Gen3 to PCIe Gen4, from eMMC to UFS 2.0, 3.1. We don't even count enterprise controller. We don't count on even UFS 4.0, we think we can achieve $1 billion target within 3 years.

Gokul, let me also add, while -- when we achieve $1 billion of sales, the product mix should be quite similar to what it is today, but I would also add that our mobile controllers, our eMMC+UFS, we're expecting to grow a little bit faster than our SSD controllers over the next 3 years.

Got it. Just related questions. What gives you the visibility? And pardon me for asking, but revenues have essentially been in the $500 million to $550 million range for probably 3 to 4 years, right?

So I just wanted to understand what gives us the visibility given the business nature, especially for the mobile side and to some extent, for the module makers also in consumer have been fairly volatile. So what is the confidence interval on this? And what gives you that visibility suddenly to change that?

Second, then we have foundry shortages like this in the past in, let's say, 2017 or 2014, we've clearly had a lot of kind of concerns about inflated orders from customers, especially like PC module customers, eMMC customers, et cetera. How do you discount for that factor when you think about your forecast and your POS from customers?

Okay. Let me just give you answer first. So first question, the reason we have high confidence to achieve a $1 billion target by 2023 is based on current -- the booking backlog PO in our hands for 2021. As we said already, we -- based on our variable wafer -- committed wafer supply, we have the 100% confidence to reach 20% to 30% growth from 2020.

But our backlog and the PO in hand are much bigger than this number. So this going to carry -- continue to 2022. And because that is a major design pipeline, very hard to customer -- major customer to change the design. And we also continue work with TSMC. Hopefully, they can provide more wafer. But as you know very well, it's a very difficult moment.

And as to the -- to answer your second question, yes, we suffered one of the major NAND makers for eMMC business from the peak of 2016, and they start to use internal controller, then we suffer the sale revenue decline, a down to very, very slow last year, then that actually will be gone. For UFS 2.0, 3.0, I think it's going to stay for next 3 years, UFS 4.0 will start to picking up from 2024. So we have very high confidence our business model and growing our eMMC customers are very, very strong. We are the dominating eMMC provider outside the NAND makers.

So we probably own 80% of the market share, if you don't count on NAND maker customer. That's why we have confidence to grow mobile controller business as well as the client SSD business, which are very strong today. And that gave us the confidence to show how we can reach the outline for $1 billion sales target.

Got it. Could you also tell us like, I think -- are you taking some discount or something for the POs that you get from your module maker customers or OEMs, even at times like this when we hear about shortage across the board. Clearly, there is some degree of inflated order books that is usual.

So can you talk a little bit about how you think about the PO and the book -- order book and how you think about the health of that order book?

I think some module maker POs, that's a very small portion, for our -- as a contribution for revenue. The major visibilities are OEM because they are also worried they cannot get a supply. That's why they gave us visibility much better because normally, they only give us 3 months PO and the 6 months forecast. Now they gave the full year PO, that's why we can see through the 2021 demand for our major OEM customer.

We have the next question from the line of Anthony J. Stoss.

Boy, in the 10 years of covering Silicon Motion, I've never seen this kind of visibility from you guys and excitement. Maybe you can talk about if you've scrubbed the pipeline for 2021, if you think there's a chance that there's double ordering in that pipeline or if it's just mainly market share strength from you guys?

And then also, not including the enterprise controller in the 2023 revenue goal. I'm curious, maybe you can give us more detail. Is that behind plan? Or any more color would be helpful.

And then lastly, maybe for Riyadh, if Shannon continues to underperform, why not just walk away from Shannon? Why do we still keep it in operational?

So let me comment for your first question. I think, last year, we have so many major designs for PC OEM, not just from NAND maker, but also from module maker, and they all start to ramp-up in 2021. That's why we see we gained market share for global client SSD controllers. And we expect to ship much more for this year.

However, due to the wafer shortage from the foundry makers, we can only provide such a guidance, but we originally expect to have even much stronger momentum if we can get a full supply from our TSMC major partner. This is depending on how we see the migration from the technology node from SATA, the PCIe Gen3 from PCIe Gen3 to PCIe Gen4, I think we will continue the momentum pipeline for clients SSD.

Regarding the mobile controller for eMMC and UFS, and we -- as I stated, we have more than 80% of global design outside the NAND makers. And a lot of these module makers has been prepared -- practice in the past 5 to 6 years. Now finally, they are entered design to smartphone in low-value line smartphone and from Chromebook and to set-top box and Smart TV. They are gaining market share.

And please understand these module maker mobile controller revenue add together are close to the NAND maker sale revenue. So it's not like a very big gap between module maker and NAND maker. So we see the transition is very, very strong. And some module maker, or eMMC customer also turning into UFS. They give us a much broader angle looking for the pipeline, not just 2021, also beyond this year to 2022 and 2023.

We also have several major programs, which we cannot comment right now. When it's become materialized, we will talk to the -- our investors.

Tony, let me also address your third question about Shannon. Shannon clearly has been a disappointment to us. But we're -- it's also a strategically important piece of business to us. And so we're actively working to restore this product line's growth and profitability. What I mean by strategically important is because without Shannon, we will not be able to sell SSD controllers, enterprise-grade SSD controllers directly to Chinese hyperscalers as they do not have the engineering capabilities to develop their own SSDs using merchant controllers, right?

So Shannon designs these SSDs using our controllers and therefore, helps facilitate our sell into this market and also provide street credibility to our enterprise-grade controllers. Where, as you know, we're new to the enterprise SSD controller market, and so it's important to develop street credibility in Shannon. Through our experience, our exposure at Shannon with the Chinese hyperscalers, we're also gaining a lot of street credibility.

So it's important for us to -- strategically important to us. We're working to fix the financial profiles of Shannon. But eventually, if we cannot fix this, then we may have to consider strategic options.

Let me add a comment too, Riyadh. I think we underestimate the complexity for enterprise controller and enterprise business. Our competitor, the NAND maker, they spent 20 years' experience in the front end, then they are leading in the technology and product. We are just about 4 to 5 years, and we only focus on enterprise controller just about 2 years.

So we learned so much from Shannon customer, especially from Alibaba, Baidu and [Biden] and several leading hyperscalers. Then we understand the complexity almost find time in client SSD. But we are improving fixes. We are filling the gap. We are gaining confidence and continue improving our firmware algorithm and our AC architecture. That's why we are so excited about enterprise PCIe Gen5 controller, which we will tape-out in early next year and assembling in the second half of 2022.

We believe this will bring us a big momentum and coming to enterprise. As you know well, client SSD in the next 3 to 5 years will be slowing down and saturated after 5 years from now. So we are preparing for another momentum to growth for enterprise controller. It's very important for a company to maintain the growth momentum continually and to the shareholder.

If I'm not mistaken, didn't you say that you're not including any revenue from the enterprise controller in your $1 billion 2023 forecast? Is that just to play conservative given what you just said about...

Exactly. Exactly. That's correct.

We have our next question from the line of Mehdi Hosseini from SIG.

Yes. This is Mehdi Hosseini from SIG. Just 2 follow-up. Riyadh, did you say that any wafer price increase is already dialed into your gross margin guide for 2021?

Mehdi, we are not expecting wafer cost increase this year. We are, however, expecting cost from substrates and packaging, and that's reflected in the gross margin guidance that we have provided.

Okay. Clear. Just curious, if there is incremental capacity becoming available, but at a higher cost, would you be able to offset that?

Depends on the pipeline. For very important mobile product line, high end, we definitely need to because our customers desperately need more supply.

Okay. Got it. And then I joined the call a little bit late, so I apologize if the question has already been asked. But when you think about mobile opportunities, UFS and comparing it to SSD controller for 2021. Which segment do you expect to offer higher growth?

I think Riyadh has already mentioned, for total dollar amount client SSD is still bigger, where for the growth rate, mobile controller will be a little higher and faster because the base is smaller. And we -- because I think for mobile, major is only 3 NAND makers has a mobile DRAM. So it's very easy to figure out that's why the momentum will grow stronger if you have design in the 3 major NAND maker with mobile DRAM.

Great. And then would you expect your mobile mix, especially from China or contribution from China, to increase as demand capacity comes online -- NAND capacity from domestic players?

When the China NAND maker increase the output, we definitely will benefit from these output because a lot of our module customers will also use the NAND from the China NAND makers. But I'm not sure how much they're going to impact for the mobile business because there probably will be in value line eMMC, but now in the high end eMMC or UFS.

If there are no further questions, I would like to hand the call back to our presenters for any closing remarks.

Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. I would like to leave you with some final thoughts.

Our business continues to be quite resilient in spite of the volatility to our business caused by the pandemic, we continue to achieve well. I have never been more confident about our business. We look forward to a safer world free of devastation caused by the coronavirus. We also look forward to sharing with you the expected rapid growth of our business this year and our progress towards our 2023 $1 billion revenue target.

We will be attending several virtual investor conferences in the next few months, the schedule of which will be posted on our Investor Relationship website. Thank you for continued interest and for listening to our call. Goodbye for now.

Thank you. Ladies and gentlemen, that does concludes the conference for today. Thank you for participating, and you may all disconnect now. Thank you.