Silicon Motion(SIMO) - 2024 Q4 - Annual Report

Company Information Business Overview Silicon Motion leads globally in NAND flash controllers for SSDs, offering high-performance storage solutions for diverse applications under brands like "SiliconMotion" and "MonTitan" - The company is a global leader in NAND flash controllers for SSDs and other solid-state storage devices, with over 20 years of experience[126] - Over the last ten years, the company has shipped more than six billion NAND flash controllers, supporting components from all major NAND producers[126] - Key product brands include "SiliconMotion" for PC controllers, "FerriSSD" for specialized storage, and "MonTitan" for enterprise SSD controllers[127] Products and Revenue Mix NAND flash controllers and SSD solutions are primary products, with 2024 net sales dominated by SSD controllers (50-55%) and significant revenue (98%) from outside the US, primarily China, Singapore, and Korea Net Sales Breakdown by Product Category (2022-2024) | Product Category | 2022 Revenue % | 2023 Revenue % | 2024 Revenue % | | :--- | :--- | :--- | :--- | | SSD Controllers | 45% - 50% | 55% - 60% | 50% - 55% | | eMMC & UFS Controllers | 35% - 40% | 25% - 30% | 35% - 40% | | SSD Solutions | 5% - 10% | 5% - 10% | 5% - 10% | - In 2024, 98% of revenue originated from sales outside the United States, with China, Singapore, and Korea collectively contributing 68% of total revenue[134] - The company offers a broad range of controllers for computing-grade SSDs, enterprise-grade SSDs, eMMC/UFS mobile storage, and specialized industrial/automotive SSDs[135][138] Customers and Sales Channels Silicon Motion sells to a concentrated customer base, with the top five accounting for 66% of 2024 net revenue, primarily through a direct sales force (65%) - Sales to the five largest customers constituted approximately 67% in 2022, 61% in 2023, and 66% in 2024 of net revenue[139] - In 2024, Micron, Kioxia, PHISEMI, and AFASTOR each exceeded 10% of net revenue, collectively representing 57% of total net revenue[139] - In 2024, approximately 65% of sales were generated by the direct sales force, with the remainder from distributors[141] Research & Development (R&D) R&D focuses on NAND flash controller solutions from centers in Taiwan and China, with expenses rising to $217.8 million in 2024, supported by 3,087 patents and 1,100 pending applications R&D Expenses (2022-2024) | Year | R&D Expense (US$ Millions) | | :--- | :--- | | 2022 | 188.5 | | 2023 | 174.4 | | 2024 | 217.8 | - As of April 1, 2025, the company holds 3,087 patents and has 1,100 pending applications worldwide[148] - Primary R&D centers are located in Hsinchu and Taipei, Taiwan, and Shanghai, China[147] Manufacturing and Quality Assurance Silicon Motion operates a fabless model, outsourcing manufacturing to primary foundries like TSMC and SMIC, and assembly/testing to subcontractors such as SPIL, PTI, and KYEC - The company employs a fabless business model, outsourcing manufacturing to independent foundries and subcontractors[149] - Primary wafer fabrication partners include Taiwan Semiconductor Manufacturing Company (TSMC) and Semiconductor Manufacturing International Corporation (SMIC)[150] - Key assembly and testing subcontractors include Siliconware Precision Industries Ltd. (SPIL), Powertech Technology Inc. (PTI), and King Yuan Electronics Corp. (KYEC)[152] Legal Matters: MaxLinear Merger Termination MaxLinear unilaterally terminated the merger agreement in July 2023, prompting Silicon Motion to initiate arbitration in Singapore seeking a $160 million termination fee and additional damages for alleged willful breach - On July 26, 2023, MaxLinear purported to terminate the Merger Agreement shortly after receiving antitrust approval from China's SAMR[131] - Silicon Motion considers MaxLinear's action a willful and material breach, filing a claim with the Singapore International Arbitration Centre (SIAC)[131] - The company is seeking a $160 million termination fee, along with further substantial damages, interest, and costs[131] Key Information and Risk Factors Risk Factors The company faces significant risks including semiconductor industry cyclicality, customer concentration, rapid technological change, reliance on third-party foundries, geopolitical tensions in Taiwan/China, intellectual property issues, and cybersecurity threats - The business is subject to the cyclical nature of the semiconductor industry, characterized by rapid technological change, price erosion, and supply/demand fluctuations[23][30] - A significant portion of revenue derives from a few large customers, with the top five accounting for 66% of net revenue in 2024; their loss could materially affect financial results[25][53] - The company faces substantial risks from its significant operations in Taiwan and China due to tense geopolitical relations, as most employees, R&D, and manufacturing partners are located in this region[25][102][103] - Reliance on independent foundries like TSMC and SMIC for manufacturing poses risks related to capacity, quality, cost, and delivery schedules[25][70] - The company is exposed to risks from potential failure to protect its intellectual property, intellectual property lawsuits, and cybersecurity threats[25][76][86] Operating and Financial Review Financial Performance Summary (2024) In 2024, Silicon Motion achieved strong financial recovery with total revenue increasing 26% to $803.6 million, gross margin improving to 45.9%, operating profit surging 128% to $90.9 million, and diluted earnings per ADS growing 67.7% to $2.65 Key Financial Highlights (2024 vs. 2023) | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $803.6 million | $639.1 million | +26.0% | | Gross Margin | 45.9% | 42.3% | +3.6 p.p. | | Operating Profit | $90.9 million | $39.9 million | +128% | | Diluted Earnings per ADS | $2.65 | $1.58 | +67.7% | Results of Operations (2024 vs. 2023) Net sales grew 26% in 2024, driven by increased SSD and eMMC/UFS controller sales, while gross margin improved to 46%; R&D expenses rose 25% to $217.8 million, and G&A increased 12% due to legal fees - Net sales increased by 26% to $803.6 million in 2024, primarily driven by a 65-70% increase in eMMC/UFS controller sales and a 15-20% increase in SSD controller sales[201] - Gross profit margin increased to 46% in 2024 from 42% in 2023, attributed to new projects and efficient product scaling[204] - R&D expenses increased by 25% to $217.8 million in 2024, mainly due to higher IC tape-out costs and investments in next-generation solutions[205] - General and administrative expenses rose 12% to $31.4 million, primarily due to legal and advisory fees related to the terminated Merger Agreement arbitration[207] Liquidity and Capital Resources As of December 31, 2024, the company held $276.1 million in cash, with $77.1 million net cash from operations, while investing activities used $44.1 million and financing activities used $67.3 million, including dividends, with a new $50 million share repurchase program authorized - Cash and cash equivalents totaled $276.1 million as of December 31, 2024[213] Summary of Cash Flows (in US$ Millions) | Cash Flow Activity | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 83.9 | 149.1 | 77.1 | | Net cash used in investing activities | (32.9) | (49.1) | (44.1) | | Net cash used in financing activities | (183.1) | (16.7) | (67.3) | - In 2024, the company paid $67.3 million in dividends, and a new share repurchase program of up to $50 million was authorized in February 2025[223][225] - Material cash requirements include $14.9 million in total operating lease obligations and ongoing construction of office buildings in Hsinchu and Taipei[228][229] Critical Accounting Estimates Critical accounting estimates include inventory valuation, income taxes, and legal contingencies, with 2024 inventory write-downs of $6.1 million and unrecognized tax benefits of $43.6 million at year-end - Inventory is valued at the lower of cost or net realizable value, with obsolescence write-downs totaling $15.8 million in 2022, $7.9 million in 2023, and $6.1 million in 2024[192] - Accounting for income taxes requires significant estimates for deferred tax assets and liabilities, with a valuation allowance of $27.8 million for deferred tax assets as of December 31, 2024[195] - Unrecognized tax benefits totaled $43.6 million as of December 31, 2024, with no significant change expected in the next 12 months[196] Directors, Management, and Employees Directors and Senior Management The company is led by Chairman James Chow and CEO Wallace C. Kou, with a nine-member board of directors overseeing audit, compensation, and nominating committees - The leadership team includes James Chow as Chairman of the Board and Wallace C. Kou as President, Chief Executive Officer, and Managing Director[234][235][236] - The board of directors comprises nine members and maintains an audit, compensation, and nominating and corporate governance committee[233][250] Compensation and Employees In 2024, aggregate compensation for directors and senior management was approximately $3.73 million, while total headcount grew to 1,819 employees, with R&D personnel at 1,490, primarily based in Taiwan - Aggregate compensation for directors and senior management members was approximately US$3.73 million for the year ended December 31, 2024[267] Employee Headcount by Function | Function | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Management and administration | 133 | 118 | 123 | | Operations | 46 | 42 | 38 | | R&D | 1,262 | 1,229 | 1,490 | | Sales and marketing | 202 | 157 | 168 | | Total | 1,643 | 1,546 | 1,819 | - As of December 31, 2024, the company had 1,819 employees, with 1,560 located in Taiwan[280] Corporate Governance and Controls Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with Deloitte & Touche issuing an unqualified opinion on internal controls - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[345] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2024[347] - Deloitte & Touche, the independent registered public accounting firm, issued an attestation report concurring with management's assessment of effective internal control over financial reporting[348][351] Cybersecurity The company's cybersecurity risk management program, based on the NIST framework and overseen by the audit committee, identified no material threats to business, operations, or financial condition in 2024 - The cybersecurity risk management program is designed based on the National Institute of Standards and Technology (NIST) framework[372] - The board of directors delegates cybersecurity risk management oversight to the audit committee[375] - In 2024, the company identified no cybersecurity threats that materially affected or were reasonably likely to materially affect its business strategy, results of operations, or financial condition[374] Financial Statements and Notes Consolidated Financial Statements As of December 31, 2024, consolidated financial statements show total assets of $1.03 billion, total liabilities of $259.1 million, total shareholders' equity of $772.3 million, with $803.6 million in net sales and $89.2 million in net income for the year Consolidated Balance Sheet Summary (as of Dec 31, 2024) | Metric | Amount (US$ Thousands) | | :--- | :--- | | Total current assets | 794,873 | | Total assets | 1,031,336 | | Total current liabilities | 199,504 | | Total liabilities | 259,052 | | Total shareholders' equity | 772,284 | Consolidated Income Statement Summary (Year ended Dec 31, 2024) | Metric | Amount (US$ Thousands) | | :--- | :--- | | Net Sales | 803,552 | | Gross Profit | 368,765 | | Operating Income | 90,889 | | Net Income | 89,249 | Notes to Financial Statements Notes to financial statements detail customer concentration (57% from four customers in 2024), $6.1 million in 2024 inventory write-downs, ongoing office building construction in Taiwan, a 16.9% effective tax rate with $43.6 million in unrecognized tax benefits, and significant legal proceedings - Customer Concentration (Note 2 & 17): In 2024, four customers (Micron, Kioxia, PHISEMI, AFASTOR) each accounted for more than 10% of net sales, aggregating to 57% of total net sales[420][515] - Inventory (Note 5): The company recorded inventory write-downs of $6.12 million in 2024 for obsolete or unmarketable inventory[466] - Office Building Construction (Note 7 & 16): The company is constructing a headquarters in Hsinchu, expected completion June 2025, and another office in Taipei, targeted completion mid-2029[473][503] - Income Taxes (Note 12): The effective tax rate was 16.9% in 2024, with unrecognized tax benefits totaling $43.6 million at year-end[479][487]