Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Semiconductor First Quarter 2025 Earnings Conference Call. Today's call is hosted by Dr. Peng Bai, President and Executive Director, and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Please be advised that your dial-ins are in a listen-only mode. However, at the conclusion of the management's presentation, there will be a question-and-answer session, at which time you will receive instructions on how to participate. The earnings press release and First Quarter 2025 summary slides are available to download at our company's website, www.huahongrace.com. Without further ado, I'd like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Thank you.
Good afternoon, everyone. Thank you for joining our Q1 2025 Earnings Conference. Today, we will have Dr. Peng Bai, our Executive Director and President, make some remarks on our first quarter performance. Afterward, I will walk you through our financial results in detail and offer guidance for the upcoming quarter. We will then open the floor for a Q&A session. With that, I turn the call over to President Bai.
Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. First quarter 2025 sales revenue for Hua Hong Semiconductor was $540.9 million, and the gross margin reached 9.2%, both in line with our guidance. Overall, performance has continued the trend from 2024. Sales revenue maintained steady growth. The product portfolio has been continuously optimized, and the utilization rate has remained at full capacity. The capacity ramp-up of the second 12 in production line is in line with our expectation, which has positive implications for subsequent revenue growth, product portfolio optimization, and enhancement of the company's core competitiveness. From a market perspective, customer demand and competitive landscape have essentially continued the trend since the second half of 2024.
However, due to recent changes in the global environment and related policies, the entire semiconductor industry will face greater uncertainties in terms of the customer demand, procurement costs, and the supply chain landscape. In the face of such uncertainties, Hua Hong Semiconductor would adhere to its strategy of continuously accelerating effective capacity expansion, enhancing its R&D capability, actively exploring marketing opportunities, timely managing possible disturbances from the supply chain, intensively reduce costs, and improve efficiency to reduce risk while achieving better performance. Now, I would like to hand over the call over to our CFO, Mr. Daniel Wang, for his comments. Daniel.
Thank you, Dr. Bai, for your inspiring remarks. Now, let me walk you through a summary of our financial performance for the first quarter, followed by our revenue and margin outlook for Q2 2025 before opening the floor for the Q&A session. First, let's review our financial results for the first quarter. Revenue was $540.9 million, 17.6% over Q1 2024, primarily driven by increased wafer shipments, and 0.3% over Q4 2024. Gross margin was 9.2%, 2.8 percentage points over Q1 2024, primarily driven by improved capacity utilization, partially offset by increased depreciation costs, and 2.2 percentage points lower than Q4 2024, primarily due to increased depreciation costs. Operating expenses were $97.1 million, 23.7% over Q1 2024, primarily due to increased engineering wafer costs, and 12.2% lower than Q4 2024, primarily due to decreased labor expense, partially offset by increased engineering wafer costs.
Other loss net was $8.3 million compared to other income net of $3.8 million in Q1 2024, primarily due to increased foreign exchange losses and decreased interest income, partially offset by increased government subsidies. The loss was 79.5% lower than Q4 2024, primarily due to decreased foreign exchange losses and increased government subsidies. Income tax credit was $3.2 million compared to $19.8 million in Q1 2024, primarily due to decreased reversal of dividend withholding tax. Net loss for the period was $52.2 million compared to $25.3 million in Q1 2024 and $96.3 million in Q4 2024. Net profit attributable to shareholders of the parent company was $3.8 million compared to $31.8 million in Q1 2024, and net loss attributable to shareholders of the parent company of $25.2 million in Q4 2024.
Basic earnings per share was $0.002 compared to $0.019 in Q1 2024 and minus $0.015 in Q4 2024. Annualized ROE was 0.4% compared to 2% in Q1 2024 and minus 1.6% in Q4 2024, respectively. Now, let's take a closer look at our Q1 2025 revenue performance. From a geographical perspective, revenue from China was $442.5 million, contributing 81.8% of total revenue and an increase of 21% compared to Q1 2024, mainly driven by increased demand for superjunction, other power management IC, flash general MOSFET, smart car IC, and logic products. Revenue from North America was $56.4 million, an increase of 22% compared to Q1 2024, mainly driven by increased demand for other power management IC products. Revenue from Asia was $25.8 million, an increase of 9.4% compared to Q1 2024, mainly driven by increased demand for MCU products.
Revenue from Europe was $15.2 million, a decrease of 30% compared to Q1 2024, mainly due to decreased demand for IGBT, smart car IC, and general MOSFET products. Revenue from Japan was $1 million, a decrease of 62.1% compared to Q1 2024, primarily due to decreased demand for super junction products. With respect to technology platforms, revenue from embedded non-volatile memory was $130.3 million, an increase of 9.3% compared to Q1 2024, mainly driven by increased demand for smart car IC and MCU products. Revenue from standalone non-volatile memory was $42.9 million, an increase of 38% compared to Q1 2024, mainly driven by increased demand for flash products. Revenue from power discrete was $162.8 million, an increase of 13.5% compared to Q1 2024, mainly driven by increased demand for super junction and general MOSFET products.
Revenue from Logic and RF was $66.8 million, an increase of 4% over Q1 2024, mainly driven by increased demand for logic products. Revenue from Analog and Power Management IC was $136.8 million, an increase of 34.8% over Q1 2024, mainly driven by increased demand for other power management IC products. Now, let's turn to our cash flow statement. Net cash flows generated from operating activities was $50.2 million, 23.4% over Q1 2024, primarily due to increased receipts from customers, and 83.7% lower than Q4 2024, primarily due to decreased receipts of government grants and increased payments for materials and income tax. Capital expenditures were $510.9 million in Q1 2025, including $478.2 million for Hua Hong Manufacturing, $18.4 million for Hua Hong Wuxi, and $14.3 million for Hua Hong. Other cash flow generated from investing activities was $16.6 million in Q1 2024, mainly including interest income.
Net cash flows generated from financing activities was $59.1 million, including $861 million proceeds from bank borrowings and $13.1 million proceeds from share option exercises, partially offset by $811.2 million of bank principal repayments, $3.3 million interest payments, and $500,000 lease payments. Now, let's move to the balance sheet. Cash and cash equivalents was $4,079.9 million on March 31, 2025, compared to $4,459.1 million on December 31st, 2024. Other current assets increased from $604.2 million on December 31st, 2024, to $648.8 million on March 31st, 2025, mainly due to increased value-add tax credit. Property, plant, and equipment was $5,059.7 million on March 31st, 2025, compared to $5,859.1 million on December 31, 2024. Total assets decreased from $12,415.1 million on December 31, 2024, to $12,286.8 million on March 31, 2025.
Total liabilities decreased to $3,406.1 million on March 31st, 2025, from $3,508.5 million on December 31, 2024, primarily due to decreased payables for capital expenditures. Debt ratios decreased to 27.7% on March 31st, 2025, from 28.3% on December 31st, 2024. Now, finally, let's discuss our outlook for the second quarter of 2025. We expect revenue to be in the range of $550 million-$570 million, with a projected gross margin of 7%-9%. This concludes my financial remarks. We'll now begin the Q&A session. Operator, please assist. Thank you.
Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star 11 and wait for your name to be announced. To cancel your request, please press star 11 again. Please stand by while questions are being collected. First question comes from the line of Le ping Huang of Huatai Securities. Please ask your question.
Okay. Thank you for taking my question and congratulations for the good result. The first question, Dr. Bai, you mentioned in your opening remark, you mentioned that there's a recent change on the business environment. Can you further explain, elaborate what are the impact of this new tariff on your Chinese and non-Chinese customers, and what's your plan to react on this recent change on this new tariff environment? Thank you.
Thank you, Le Ping, for asking the question, and good to, I guess, hear you online. I think your question relates to the recent tariff that they announced. That throws a lot of things into somewhat of an uncertainty, definitely increased some uncertainty. After months, we did a lot of analysis. We looked at our business situation. I would say the conclusion is that the tariff does not seem to have a meaningful impact to us at this point. We still monitor the situation very closely, and we will actually take all the necessary measures to basically minimize the impact to us. To answer directly your question regarding our customers, if you look at our customers, about 80% of customers are domestic design houses, and most of the product is consumed in China, in the domestic market. We do have 20% of international customers.
I have special concerns on the U.S. customers. Right now, the U.S. customer, their product mostly are sold in China as well. If you notice in our Q1 report, if anything, their revenue has actually—the revenue we get from the U.S. customer has increased because there is a very minimal impact to them as well because their product was manufactured in China, but they were also sold in China. It is now very little impact. On the supply chain side, clearly, there can potentially be some impact if there is no relevant policy that alleviates those. So far, I think we have not seen much of an impact. Whatever the impact there is, minimal is very much manageable.
Okay. Yeah. Thank you. It's very helpful. The second question is that I noticed that your analog and power sales grow—I think if I calculate it correctly, it's 11% Q on Q in the first quarter and 33% year over year, and it continued to grow consecutively for quite a few quarters. As the largest specialty fab in China, where do you see this localization trend of the analog device in China now, and how big is the business opportunity for Hua Hong in terms of the analog business? Thank you.
Okay. Thank you. I think you actually made a very important observation that the analog and power management platform, the technology platform that Hua Hong has is actually one of those platforms that is growing reasonably fast right now for us. I think there's probably a few factors. One is that our offering in this space actually is quite competitive. We're at the sweet spot of the market in terms of our technology and the capability of our technology. That's the first factor. The second factor is the fact that our customers, the design houses in this space, are already largely domestic, but also have international customers there as well. Their business is growing quite well. I think there is probably a trend that in this space, a lot of the product will be designed by domestic customers.
Therefore, since they use a domestic manufacturer like us, that it will give us a growth. It's another factor for our growing business. The third factor I also want to point out is that some of the analog product we make in this space are associated with AI applications, and AI applications continue to grow pretty fast. Some of the analog we make for both domestic customers as well as international customers, especially probably international customers, they have a strong position in the growing AI application. I should point out that the AI application for analog, although they are all analog, but it does have some newer type of products that drive some of the growth. I think those three factors conspire together to make our analog and analog area to be a noticeably growth area for us.
I expect this trend to continue in the rest of this year. If anything, we're looking for ways to expand our capacity because we're a little bit short of supply here. We cannot satisfy all the demand we're getting in this area, which is a good problem for us to have, but we definitely want to get into more of a balanced situation by increasing our capacity. As I said in my introductory remarks, we continue to expand our capacity, and this is going to be one of the considerations where we expand our capacity in some of those growing areas for us.
Okay. It's collecting. A follow-up. Will you adjust your CapEx plan for this year or maintain the terms? Yeah.
No. I think we'll be buying large the same plan that we have. Here, we're just talking about the mix, how we manage to optimize the mix of the capacity expansion so that we can have more flexibility or more emphasis on the platform that is a growth platform.
Okay. Thank you very much .
Thank you for the question. Our next question comes from Ziyuan Wang from Citic Securities. Please go ahead.
Thank you for taking my questions. Congratulations on our continuous growth on the revenue side. I have two questions. The first one is about the selling price. As we can see, the current average wafer price is still at a relatively low level in the past few years, but the capacity utilization rate remains at a full capacity. Under this situation, is there any possibility of the price increase for the product, and how receptive are the customers to price increases? Also, we can see after the tariff war, some materials' prices, such as silicon wafers, are they affected by the tariff? Will this cost of materials rise due to the supply and demand, and will the company pass on this cost increase to customers? Thank you.
Okay. Thank you, Ziyuan, for asking the question. Let me try to answer your basically two large questions. First, on ASP, I would say there we probably want to distinguish between 8 in and 12 in. On 8 in, the pricing pressure is still there. We think it's stable. It's not decreasing, but we don't see appreciable increases either on the 8 in front. On 12 in front, the price is gradually going up, clearly not as fast as I would like, but it's definitely pointing to the right direction. There, as you mentioned, the question is, are customers going to accept the price increases? No customer likes price increases, but when we get into a situation where the demand is higher than supply, I think some of the increases are warranted, especially coming from 2024, which I consider as a low value in terms of prices.
I think I do expect that the price will continue to go up gradually and should continue to go up gradually. The question is how fast we can do that. That is the answer to your first question. The second question is on the tariff impact on the supply procurement cost, right? I think you probably understand pretty well about your specific ask about silicon. I think there is a—I would say there are quite a few ways we can manage the tariff situation. One is we have always continued the effort to utilize non-U.S. suppliers for some of the ones that are subject to tariffs. Originally, there is a domestic supplier capabilities coming up. A lot of switching has been taking place, and also we will continue to go in that direction.
In this case, for tariff, even if the domestic capability is not there, you probably just need to avoid the U.S. origin. Other places do not have much of a problem. That is one way to do that. On the silicon side, most of the silicon, the issue is going to be resolved. There might be one or two articles that are very specialized in the power device area, or it will take a little bit of time to find a replacement. The impact is going to be minimal with a small amount. We have stocked some before the tariff hits and probably that gives us enough time to manage through that. Also, during this time, we are still doing some sourcing work to find alternatives. In general, I do not think even on the direct material, we are going to see much of a meaningful impact from tariff. Thank you.
Okay. Got it. Can I have a quick follow-up? We noticed that the gross margin in the Q2 guidance decreased by about 0%-2% quarter on quarter. What are the main considerations on this? Thank you.
It is a straightforward answer, which is, as we said, our second 12 in line started coming online. In fact, Q1 2025 is the first quarter we are getting revenue contribution from the second line of the 12 in fab, the Fab9. Okay. As you know, ramping new fab will put pressure on the gross margin because the depreciation started to show up, and you are never going to be able to ramp fast enough to overcome that. Our goal is to minimize this ramping period so that we get up to the full capacity, full loading as capacity increases. During this time, the gross margin will basically suffer. That is just how the semiconductor fab works. That is the reason that the second quarter gross margin guidance is going to be slightly lower than Q1.
This pressure is going to be there in the subsequent quarter as well as the Fab9 ramps up towards its full capacity.
Okay. Got it. Very clear. Thank you, Dr. Bai.
Thank you for the questions. One moment for the next question. Our next question comes from Tony Shen from SPDB . Please go ahead.
Thank you, management, for taking my questions. This is Tony from SPDB International. I've got two questions here. The first question is about, can you give us some outlook into the second half of this year in terms of end demand from different areas like consumer, industrial, which one is better, and which one is weak from the company's perspective? This is the first question. My second question is about the capacity expansion pace. Can you give us some color on how the capacity will be by the end of the second quarter and by the end of this year? How do we see the utilization rate in the second quarter? These are my two questions. Thank you.
Thank you, Tony, for the question. In terms of the customer demand, as I said, we expect 2025 to kind of continue the trend from the second half of 2024, which is a gradually recovering. Right now, first quarter more or less is aligned with our expectation. We do expect the second half will continue short of anything drastic happening on the power sale or tariff front. That is the uncertainty we can say for sure right now. I think if you just look at the market dynamics, we think 2025 is not going to be worse than 2024. If anything, it will be slightly better. The question is how much better. Second half should continue this trend. In terms of the segments, in general, the consumer side is still the weaker of the two.
If you just divide it between consumer and industrial, I think I would say the new application area AA-related is growing reasonably healthy, reasonably robust, but still the cars continue to grow after some inventory correction. I think that will pick up. The consumer, that's the bigger question mark, but I think it's not going to be worse than 2024 if it's probably going to be a slight positive. The second half of your question, I'm trying to remember now that. Oh, capacity. Yeah. Capacity expansion, first of all, we have had the capacity expansion plan. We're more or less on that plan going along pretty well. The one we're expanding, the Fab9 is where we're expanding capacity. Q1, as I said earlier, first quarter, we started to get contribution from Fab9.
By mid of this year, the capacity will be in a—it's changing fast, so it's going to give you a range in 20,000-30,000 per month type of capacity. By end of year, we should be north of 40,000. By Q1 next year, we should be at a full capacity of our phase one for Q1 expansion, which is about close to—side. Okay. It's about between 60,000 to—no, the phase one is about 60,000-ish. Then we have a phase two that was still in the procurement period. That will probably get into the mid of 2026, we get the full Fab9 fill up, which is going to be 70,000, yeah, plus minus 70,000. That's the pace we're on. Okay.
In terms of capacity expansion, in terms of utilization of the new capacity, so far, we managed to basically, as the capacity comes online, we get loading on them. That's because we have the benefit of having fab 7 next door to Fab9. In fact, those two fabs are connected. We built it like a mega virtual fab. They're connected. A lot of NTO, a lot of R&D NTO, we actually took full advantage of fab 7 next door to get them done. So when the Fab9 capacity comes online, we can quickly fill up. This is along the same line I said earlier that we have this goal of trying to get up to try to get Fab9 capacity built as fast as possible. But it's not just building the capacity.
You also need to be able to fully utilize it once they are in place to get them utilized as fast as possible as the goal that they get to the full capacity in 2026. That is the current situation. I would say this part we are doing quite well, and we are pretty happy with our progress here.
Okay. Perfect. Perfect. Thanks, Dr. Bai.
Thank you for the questions. One moment for the next question. Thank you for holding. The next question comes from Ziyi from Guotai Junan Securities. Please go ahead.
Thank you for taking my question. My question is about the competition. On the one hand, we can see AI and even demand is strong. Just now, Dr. Bai mentioned the price will go up gradually. On the other hand, we can see a lot of new foundry, especially in power electronics and power management. What are price and technology strategies for the intense competition in following quarters? That's my first question.
All right. Thank you, Ziyi, for asking the question. This is actually a good question. If you look at the landscape or the competitive landscape we're facing, there are places, clearly, there are places where there's a lot of capacity coming online that theoretically compete with us. On one hand. On the other hand, we do see that there's a growth in demand in some of the areas. I think it's probably boiled down to how competitive is your technology, whether you have the scale and capacity, for that matter, to satisfy customer needs. I use BCD, the power management area, as an example. On one hand, I see, as you do, that there's a number of small players. They also claim to play in this role. I would say BCD as a technology is not that easy. You have to get to be pretty competitive.
Also, you have to have the right sweet spot in terms of the technology offering to satisfy the volume segment of that particular market segment. Also, the PMIC product requirement for reliability, especially once you get to industrial applications, are pretty high. Although you see a lot of the capacity out there, and there are competitors of ours who are willing to use price to get into the market. Even that, I think there are certain things they just do not have what we have. I can confidently say that in terms of our technology offering, in terms of our scale, the kind of capacity we can offer. Sometimes, there is definitely a premium to the technology and the scale in that area. There is an obvious balance.
There are some products we just will lose to those price competitors, which is fine for us because right now we have enough demand. For the big ones, the ones that are the premium customers, the ones that are willing to pay a higher price, that is just how we think we can have a little bit of a price increase. The choices are still very much limited. Basically, we are still ranked very high on that list where they can go. I do not know if I explained this well to you.
Yeah. Thank you. I got it. Also, we have covered the top players. We believe our price and also technology is among the top in the China area. Another question is about the trend of the mature process. Will it move to more advanced nodes or integrate the process, such as integrate the BCD plus the eFlash platform for lower cost and higher integration product? What is the trend of the mature process?
Okay. Good question again. I would say Hua Hong's position is always going to be Hua Hong HH Grace, I should say, not the entire Hua Hong Group. But HH Grace position will be on specialty technology at mature nodes. Now, I have to quickly follow that statement with the disclaimer that the mature nodes do evolve over time. Right now, we are already at 50, 40 nanometer as the most advanced node where we do our specialty technology, where we build our technology platform. We do intend to continue to do node migration, go to 28, 22 nanometer because those nodes are also now becoming mature nodes where we're going to build all those specialty technologies. In that regard, we will move toward more advanced nodes to do specialty technology.
We're not going to get into HH Grace is now planning to be in the advanced node where most of the high-compute products are manufactured. That you need to be in the 14 nanometer and below. That's now our plan and our intention. We're still going to be doing the specialty technology at the mature node. With time, we move with market because specialty technology is really market-driven. Some of our market area, like MCU, already is moving toward 40, maybe a few years down the road, 28. Some of the CAS, the sensor area, they are also getting to there. We will move where the market is, which is some of the platforms will naturally go into more mature nodes.
Another question I have is, do we have a technology offering where we try to combine some of our platform, get into a higher degree of integration? The answer is yes. I'm glad you asked that question. We actually have a BCD plus flash technology combination. That is a higher degree of integration type of approach, a new platform where you have both BCD and flash. This is, in a way, a somewhat unique advantage we have because we have multiple platforms, and not all our competitors have both BCD and flash, and not all of them have very good BCD and flash. We do actually have good BCD and flash. We try to offer a combination. There are certain classes of the product that can be better optimized using a higher degree integration approach to some of the products.
We are already in the NTO stage on some of the BCD and flash combination platform, integrated platform. I'm glad you asked that question. The answer is definitely yes. We will look for those opportunities to further increase the value of our technology offerings.
Thank you. Thank you, Dr. Bai. That's all my questions. Thank you.
Thank you. Our next question comes from the line of Jian Kuai from Orient Securities. Please go ahead.
Hi, Dr. Bai. Just now, you talked about the tariff impact from the material procurement. As we are expanding our capacity, do we see any tariff impact to the new equipment procurement as well as the old equipment maintenance? That's my question.
Okay. You're asking the impact of the tariff, right? That's what you're asking.
Yes.
Okay. For equipment, we do not see much of an impact, even from the U.S. company because a lot of the manufacturing is actually outside the U.S. The country of origin depends on where the manufacturing takes place. In that way, that can naturally avoid it. Even the big U.S. equipment supplier, their manufacturing base is actually in Asia. For the few items that they might—I do not know—they might have a U.S. component, but they get routed so many times to the rest of the world that when they reach our doors, they are not considered U.S. equipment anymore. In that regard, as I said earlier, we do not see amongst the three things that we buy to expand the capacity. Equipment, not much impact. The components is also not much of an impact.
The raw material, the silicon, I answered earlier, there might be some special article that will take a little bit of time, but that's a very small amount, and it's not very meaningfully impacting us. Again, I don't think we don't see at this moment there's much of an impact. I just hope that things will not get worse if the restrictions get too pervasive. Who knows? That's the uncertainty I cannot predict. Okay.
Okay. Thank you, Dr. Bai. My second question is about the power device. As some of the global IDMs, they are saying they see some kind of demand bottom of the power device. From our perspective, how do we see the demand cycle of power devices?
The power devices is, first of all, it is one of our platforms, our five big platforms that we make our revenue from. We will continue to do our best to increase that segment. Second point is that the power devices have a long history. Originally come from 8 in, now they're 12 in. Also, a lot of the new capacity is on 12 in power devices. There is definitely strong, fierce competition in terms of the supply of the power devices. In that regard, we have a pretty good presence because, again, in power devices, because Hua Hong has a long history, has quite a bit of accumulation of the knowledge of the technology, like super junction, high voltages. That's where we are basically focused more and more of our R&D effort because we think those areas we can still distinguish us from our competitors.
It is true that some of the power devices' entry level is reasonably low. That is why a lot of the newcomers, new entry into this market, because it is relatively easy for them to get into there almost as a capacity setter. We still have a reasonably high expectation or are reasonably confident that in this area, through our scale and our technology, and also some of the new development we are doing, technology development we are doing, to continue to have a very good presence. This is also one area I want to also say that we have some European customers where they have this China for China strategy that we are also collaborating in the power devices. It is one of the areas where we have some collaboration for the China for China strategy.
That also gives us confidence that we can continue to make a pretty good living out of in this power device area.
Okay. That's all for the call. Thank you, Dr. Bai.
Thank you.
Thank you for the questions. Our next question comes from the line of Timothy Wong of Oriental Asset Management. Please go ahead.
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Thank you, Timothy, for the question. I think there's always a discussion in the industry on some of the demand uptick, if you will, whether that's a short-term stocking behavior because they worry about the tariff-related uncertainty, or there's the reflection, whether they reflect the true end-user demand increase. That debate is probably going to go on as long as we have this uncertainty. I take your point. I think we are all very aware of that. I do think I still believe that because of 2024, the assessment of 2025 was based on the 2024 situation. That was probably before the tariffs come online, that most people were believing that 2025 will be better. That is point number one.
Point number two, right now, is probably the most important thing is as long as the tariff situation does not disrupt too much of the market dynamics, the market logic too much, we still expect 2025 will play out as we originally expected. Now, as we said earlier, uncertainty is increasing. That is definitely part of uncertainty is we do not know whether that uncertainty becomes reality. Your concern, I share your concern, but the current assessment still, as I said earlier.
Thank you.
Thank you, Bai Zong.
Thank you for the questions. One moment for the next question. Next question comes from Alex Chang from BNP Paribas. Please go ahead.
Thank you, Dr. Bai. I have a quick question regarding Hua Hong revenue by region. Can I clarify that the sales to North America, is this based on the customer's origin or based on customer's location?
It's based on where the company is registered. It's basically a U.S. company or considered a Chinese company.
Okay. Understood. My question is that we see the first quarter, the revenue from North America increased 22%. This is much better than the previous quarters. Could you please give more color on this? Which kind of technology platform or the product is a major driver for this North America sales?
It's mostly in the power management IC.
Okay. Understood. For this kind of, for example, for the power management IC, I believe you also have some orders from local customers. Is there any price difference between the North America customers and the Chinese customers?
In terms of what price they get from us, there's really no—whether you're domestic or international, it's not much of a factor. That's not to say all the customers have the same pricing because there are other factors: volume, how long we have been in business, and whether each product has a little bit of a customer relation, technology customer relation. Based on all those factors, you will see the prices are not identical even for the same platform. It is not based on whether you're international or domestic, if I explain this well.
Sure. Sure. Understood. Apart from this power management IC, can you comment on, for example, the analog order from North America customers? Do you see any other trend changes from these overseas customers?
When you say analog, basically, PCD is kind of like an analog circuit. In general, it's a big area: analog, PCD. They will group them together. We think this is the area that—
Okay. Understood.
Sorry. Yeah.
Okay. My second question is about there has been some considerations to acquire the foundry assets from Hua Li Group. Can you give us some update on this timetable of the potential strategies regarding this acquisition?
Yeah. It's true that in 2023, when Hua Hong Semiconductor went public in China, in A-share, there was a commitment that was made that within three years from that time that the overlapping business between HS Grace and Hua Li will all be bought under HS Grace's umbrella. That's still the plan. We are like a second year from the original day. That means that within next year, basically, we still have about a year for a little bit more than a year for that three-year period commitment. Within that period, we expect that we will fulfill that commitment.
Okay. Sure. Sure. Thank you, Dr. Bai. I have no further questions. Thank you.
Thank you for the questions. We'll now take the last request from Qin yuan Lin from Bernstein. Please go ahead.
Thank you, Dr. Bai and Daniel, for the introduction. My first question is around the gross margin trend. I think, Dr. Bai, you explained pretty well around the pressure on ASP did not increase as well as we expected, and then the depreciation started kicking. When do we expect the gross margin to bottom? Do we see the third quarter will continue the downward trend, or will we start to see it pick up?
Hey, Qin. How are you doing? This is Daniel. I think the goal is to continue to, as Dr. Bai said, we try—there's some pressure in the 8 in space on pricing, overall pricing. Our goal is to try to improve gross margin over time, not only just in the 12 in as well as in the 8 in as well. We're working very, very hard. That way, we can make sure that the overage that we—the benefit we get over time—that we'll be able to offset the fixed costs, the huge fixed costs that basically is driving the—basically, the negative manufacturing cost from the second 12 in fab.
I will add a little bit to what Daniel said. I know we probably did not answer specifically your question, but I think it is good to add a little bit of color to this. For gross margin, when you have a new capacity online, that depreciation is just a fact of life. You just cannot avoid that. The hope is to rapidly get up to scale so you do not lose anything on the scale. Just because they are running fewer wafers, that gives you a disadvantage. That is one. Another one, if the market situation is better, pricing is better, it will definitely help. A third factor, which we have not talked too much about, which is probably a good time I bring this up, is that we also have a huge effort within the company to cut the cost and improve the efficiency.
That's not going to solve all the problems, but I do think there's room that we can do better there that can help us offset some of the depreciation, the fixed cost aspect there. I think it's going to be becoming a bigger story as we go into this rest of the year and even 2026. I think we do making some structural adjustments to get our cost structure to be a little bit lower. All those efforts plus getting the higher pricing, I think a 12 in naturally will happen a little bit. 8 in or the pricing pressure will be very high. 8 in, if we can get the cost down a little bit, even if we don't—we're not growing 8 in capacity. The pricing and cost is everything there in terms of the gross margin.
We definitely have quite a few balls that are actively playing with them and try to get the overall situation. I am cautiously optimistic that you're not going to see too much of a degradation.
Yeah. I mean, I think Dr. Bai is absolutely correct. We have a goal. We want to improve pricing on the 8 in. I also initially said we want to move it from 30% gross margin towards within 12 months to 16 months towards 40% when the market demand gets better. It is also true for the first 12 in fab. The first step, make it positive and then move towards 10% gross margin. That way, we can cover some of the fixed costs that will basically come out from the—especially from now until for the next, I think, 12 to 24 months in that period, that the cost that would get generated from the—basically, these are fixed costs while the fab was ramping up, will be ramping up during that period of time.
I see. Very clear. Thank you. My second question is around the embedded Non-Volatile Memory platform. We talked a little bit about the other platform, but this is the MCU side is actually a very unique advantage of us. But it still looks quite weak quarter over quarter. The share of MCU continued to drop from 25% to 24%. Do we see it's actually a cycle issue or anything around sort of the kind of the China demand or inventory kind of still big? What was kind of leading to that weakness for embedded Non-Volatile Memory?
You have a very good observation there. Embedded Flash is an area we want that to grow faster for us. If it does grow faster, it should represent a higher percentage of our revenue. I think right now, you will see that rapid changing the next couple of quarters, next few quarters, I should say. I think it's very down to our offering, the timing of our offering. We are still, we're moving from 90 nanometer to 55. That's happening really fast. Once that happens, it will give us a boost. Plus, we're getting the 14 nanometer also ready pretty much by second half of this year. That will also give us a boost in terms of the revenue. I don't think it's an end market issue. We just have to match our offering to where the sweet spot of the market is.
Right now, I think it's 55 while there, and very quickly, we'll go to 40, and we're going to be there. I wish we were a little bit earlier on this, but I think right now, we're still more or less a pretty good match to the time market demand. You're correct. The last couple of quarters, if you just look at MCU, our share hasn't changed that much. I don't expect—I don't like that. I also don't expect that to continue in the next three quarters.
Very clear. Thank you, Dr. Bai. Thank you, Daniel. These are all my questions.
Ladies and gentlemen, that's all the time we have for questions. I'll now hand the call back to Mr. Daniel Wang for closing remarks.
Thank you all for joining us today and for your thoughtful questions. We appreciate your continued support. Both Dr. Bai and I look forward to speaking with you again next quarter or even during now and then. Wishing you all stay safe and healthy. We look forward to meeting many of you in person soon. Thank you.
Ladies and gentlemen, thank you for your attendance. You may now disconnect.
Thank you.
Good. Very good.