Mordechai Yavneh

Founder & CIO

myavneh@focuscapitaladvisers.com

MOI Global Best Ideas Conference 2022 — January 13, 2022

We focus and concentrate our time, energy, and resources on a
few select opportunities — allowing us to achieve superior
returns.
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really understand the company we are investing in
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pick our best ideas
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every investment
Leading Merchant Supplier of
NAND Flash Controllers
1. One-Minute Overview
• Highly profitable
• Extreme growth (~70% growth in ’21, 30%–40%+ in ’22)
• Secular growth market
• Gaining share within the market
• Competition diminishing, ceding the market to them long
term
• Fortress balance sheet (14% of market cap in cash, no debt)
• Ultra-cheap valuation (P/E only ~17, ex-cash P/E ~15)
2. NAND Flash Controllers
 What is NAND Flash and What is a NAND Flash Controller?
NAND Flash — the memory used for storage on smartphones,
tablets, most modern computers, data centers, and
increasingly ubiquitous in all sorts of devices
NAND Flash Controller — manages the NAND Flash and
optimizes performance; all NAND Flash uses a controller
• Efficient reading and writing • Hardware-level encryption
• Wear leveling • Prolonging memory life
• Error correction • Weak block detection
• Garbage collection • Optimization for specific use cases
 NAND Flash Market Overview
Market segmentation
Customer:
• Flash Manufacturers
• Module Makers
Silicon Motion is benefiting
• OEM Programs from “double” growth —
growing their share in a
Product:
growing market
• eMMC, UFS
• Client SSDs
• Enterprise SSDs Growth depends on unit
• Legacy removable storage growth and actually
benefits from declines in
End Use Market:
• Smartphone
NAND Flash pricing
• PC
• Data Center
• Etc.
3. Divisions
eMMC+UFS Client SSD SSD Solutions Legacy
Embedded memory SSD drives (in place of Integrated SSDs (NAND Removable storage
hard drives) flash + controller)

Mobile (smartphones, PCs, game consoles Ferri (industrial and auto) SD cards
tablets) External drives Shannon (Chinese USB keys
IoT Some data centers subsidiary for
Chinese hyperscalers)

~40% of revenue ~50% of revenue ~7% of revenue ~3% of revenue

4. Financials
Silicon Motion 2013-2021
80%

70%

60%

50%

40%

30%

20%

10%

0%

-10%

-20%
 Evolution of Guidance
February 2021
• Three-year plan to reach $1 billion in sales in 2023, with 50% gross margin and 30% operating margin
• Close to double 2020 revenue, with net income growing meaningfully faster, in just three years
• Excluding new customers and enterprise SSD initiative
May 2021
• Expecting to reach $1 billion revenue goal sooner (i.e., 2022)
• Order backlog for 2021 exceeds $1 billion, if not for tight foundry capacity
July 2021
• Expecting to reach $1 billion revenue run-rate by Q4 2021
• Expecting sales in 2022 to exceed $1 billion as they add meaningful incremental foundry capacity
• 2022 order book today exceeds $1.5 billion; expecting to have much higher backlog by end of year
• Confident to grow 2022 revenue by fair amount of percentage, still gated by foundry capacity
October 2021
• Achieved $1 billion revenue run rate in Q3, one quarter earlier than projected, due to successfully tilting mix to higher
revenue products
• 2022 order book well in excess of $1.5 billion
• Continuing to expect demand to exceed supply, but expecting very strong revenue growth for 2022 regardless
• Not expecting 50% increase in foundry capacity, but can increase revenue further than increase in foundry capacity by tilting
mix to newer technologies, i.e., PCIe Gen 4 and UFS 3.1
5. Diminishing Competition
 Competitors

Internal controller teams – Samsung, SK Hynix, etc.

• Historically, this has been the main threat and fear

Merchant controller companies – Phison

Marvell
Smaller players:
Realtek, Maxiotek, etc.
 What Happened in 2021?
Chip shortage
• Crucial to ecosystem, better access to manufacturing capacity
• Still could not secure enough wafer supply to match demand
• Despite lack of supply, increased revenues by 70% (!)
• Supplier prices (TSMC, packaging+assembly, substrate, etc.) all raised; customer prices mostly contractual
• Despite temporary price “squeeze”, operating margins expanded (!) by 35% (20% → 27%)
Texas freeze (February 2021)
• Samsung’s Austin fab (their main fab for controllers) shut down for more than a month
• Samsung decides to exit eMMC controller market
• Leaves Silicon Motion as essentially the only significant supplier of eMMC controllers, a long-tailed market
which is still growing significantly due to low-end smartphones and IoT
Captured more slots due to scale
• Sticky business — customer roadmaps extend out years
• Significantly increased presence in OEM programs — higher value, higher volume, and stickier business
Permanent step-up in revenues and margins — unlikely to reverse share gains, with more
growth to come
 What Happened in 2021?
eMMC
• With Samsung exiting the market, Silicon Motion is basically the only major game in town
• Exclusive supplier for SK Hynix’s eMMC division
• Supplies a slew of Chinese module makers for eMMC, who have been selling eMMC throughout
the chain
UFS
• Lost SK Hynix UFS business in 2019, but did extremely well as exclusive supplier to Micron’s UFS
business
• Added second UFS customer in 2021
Client SSD
• Supply about 70% of module maker merchant controller needs
• Historically only about 30% of OEM contracts, but increasing share
• OEM: 25%-30% (PCIe Gen3) → 40% (2021)
• Growth both from customers gaining share and adding new customers
• 1 NAND Flash customer (2020) → 2 (2021; first iteration of PCIe Gen4)
 More Growth in the Bag
eMMC
• Samsung’s exit from the eMMC controller market paves the path for future growth for eMMC segment
• IoT is a long-tailed and growing market, despite eMMC being “legacy” technology
UFS
• Going from 2 UFS Customers in 2021 to 7 in 2022, basically guaranteeing further growth for UFS segment
• UFS moving from flagship smartphones to mainstream
Client SSDs
• Estimating OEM design share win to reach 50% in 2022 (PCIe Gen 4, fully ramped by early 2023)
• Going from 2 NAND Flash customers in 2021 to 8 in 2022 (second iteration of PCIe Gen4)
Ferri
• Auto industry adding lot of content that needs NAND Flash and controllers
• Infotainment, telematics, assisted driving
Enterprise SSDs
• Greenfield opportunity for them (competing against Marvell, whom they successfully competed against in client SSD space)
• Beginning in 2022, but may start really contributing in 2023
Shannon
• Never reached its potential
• See it as a free option to break into the Chinese hyperscale market (Alibaba, Baidu) in a major way
 Competitors Exiting
Marvell
– Unsuccessful in competing in Client SSD space and pivoted to focus on enterprise SSDs in 2018,
ceding Client SSD space to Silicon Motion
Kingston
– Used to exclusively use Phison controllers; was major shareholder
– Began using Silicon Motion controllers in 2019, ramped up through 2020 and 2021, with Silicon
Motion continuing to gain significant share with Kingston
Samsung
– Exiting eMMC controller market
Internal Controller Teams
– Increasingly outsourcing controllers to Silicon Motion, both for UFS and Client SSD
– Only small portion of overall Flash costs; makes sense to leave to specialists and focus on their
Flash manufacturing
– Merchant suppliers can spread development costs over greater volume than captive teams
– Main long-term risk substantially reduced
 In much of the market,
the flash controller wars are over
and
Silicon Motion has won
6. Valuation
 Price (12/31/21) — $95.03
Market Cap — $3.3 billion
2021e Net Income — $193 million
P/E — 17.2
Cash — ~$450 million (14% of market cap!)
Debt — $0
P/E ex-cash — 14.9
Dividend — 2.1% (raised in October by 43%)
7. Thesis is Simple
 Extreme Growth

70% Revenue growth in 2021

30–40%+ Revenue growth for 2022
Years of growth to come
Net Income growing even faster than Revenue
 Highly Profitable

Highly profitable, in both better times and “tougher” times

Gross margins holding steady (~50%) even with increased
volume discounts and temporary pricing “squeeze”
Operating margins expanding significantly with increased
volumes
Expect operating margin to approach and possibly exceed 30%
 Reduced Risk

Main risk was always internal captive controller teams freezing

them out of the market
That risk proven unfounded as more and more NAND Flash
manufacturers and OEM programs turn specifically to
merchant controllers and Silicon Motion to fulfill their needs
Multi-year customer roadmaps de-risk future growth as Silicon
Motion has good visibility into design wins
 Cheap Valuation

I challenge you to find such a combination of high growth and

high profitability with low risk at a P/E of just 17 (P/E ex-cash
of just 15!)