This meeting will be English, but Johnny and I are all fluent in Mandarin. If you need Chinese slides, or you want to ask questions in Chinese, please go to MOPS to download the Chinese version of the slides. You can also write down your questions through the room message function. Or you can use the raise hand function to press the button, and we will take your question in the Q&A session. This video and the audio content will upload to MOPS about 2 hours or 3 hours after this meeting. Let me introduce our CEO, Johnny Shen, for the opening and his report to the investors.
Good afternoon, ladies and gentlemen. This is Johnny Shen, President and CEO of Alchip Technologies. Thank you for joining our investor conference meeting. We appreciate the opportunity to share our 2022 Q4 result and also the whole year result, and provide a future business outlook for this year. In case some of you are not too familiar with Alchip Technologies, allow me to provide a brief company update. Our company is founded in 2003, and went public in Taiwan Stock Exchange in 2014. The current headcount is about 600 people. The majority of our employee are engineers for three products. Since we have founded company, we've been successfully tape out more than 408 design, all in leading-edge technology. The revenue number, last year, we are achieving TWD 460.
Last year, we are concurrently support more than 20 designs. 80% of our revenue coming from the HPC and AI area. We are one of the TSMC VCA members. We consider 2022 a reasonable year. With a record-breaking number in all category. Revenue at TWD 460 million. Operating income, TWD 77.5 million. Net income, TWD 61.5 million. Comparable with the EPS about TWD 25.7. Alchip grow quite a bit compared to a year before. Theoretically, we couldn't have a much better result without the following limitations. Capacity. From Q1 to Q3, capacity shortage from supplier, especially on the ABF substrate, limited our mass production shipment. Geopolitical tension. The BIS adding more sanction and apply new regulation to China IC companies.
It does slow down our China business quite a bit. Fortunately, our customers future demand remains very strong. Without the capacity limitation this year, we are expecting tremendous revenue growth from now to 2025. Alchip continuously hold a great position in leading-edge technology business with 20 tapeouts and many design won last year. We have successfully diversified our business way from China to other regions. In year 2022, our North America revenue contribution already exceeded China's. Majority of 5-nanometer design also coming from US region. In terms of China leading-edge business, we are taking a more cautious approach working with major foundry partner and IP partners closely. We are carefully reviewing customers background, end-user, and design spec before accepting the projects. We still believe in and support China business as long as they comply with the rule and regulations.
Another highlight for last year is our penetration for automotive business. The area we are focused on is ADAS L2 to L4 type of ASIC application. We truly believe the most high-end car maker will need to provide driving assistant or even FSD solution in the future. The outstanding car maker will develop their own ASIC solution to differentiate them to others. In addition to high growth HPC and AI areas, automotive application will be another key business driver for us starting from May 2024. Furthermore, the automotive business has a lower chance to be affected by geopolitical factors. Major supplier and partners are very positive and supportive for this application. Last but not least, I would like to emphasize Alchip's mutual position and diversify business condition again.
Similar to our foundry partner, Alchip will never make a product to compete with any customer. We have a fully diversified and well-balanced business from origin. In terms of headcount, we increased quite a bit recently. In addition to China, we also implement a very aggressive hiring plan to increase our engineering headcount in Japan, Taiwan and United States regions. We also plan to open additional office in Southeast Asia. Yeah, this effort will provide more sufficient and cost-effective solution to meet our customers' requirements. Overall, we have the confidence to say 2023 will be another outstanding and record-breaking year for Alchip. Thank you.
Okay, the following section I will introduce the fourth quarter financial results and the breakdowns of Alchip. Of course, our business outlook.
For the fourth quarter last year, the total revenue, you may already know, we already published the numbers already. The total revenue for the fourth quarter last year is TWD 148.3 million, which is a 26.2% quarter-on-quarter, and 66% year-on-year growth. For operating income, the operating income for the fourth quarter last year is TWD 20 million, which is a 7.5% quarter-on-quarter growth and 34.7% year-on-year growth. The net income for the fourth quarter last year is $16.4 million, translating into EPS of TWD 7.16 .
For yearly PNL, the total revenue for 60.5%, as just mentioned, which is 22.7% year-on-year. Operating income is 77.5%, which is 18.8% year-on-year growth. The net income is $61.5 million US dollars, which is 15.6% year-on-year growth. The whole year EPS is TWD 25.7. For the revenue breakdown by application, you may see, again, the HPC remains the majority compositor of our total revenue. For the fourth quarter last year, the HPC related revenue accounts for 78% of our total revenue, while Niche market accounts for 7%.
Networking, related application accounted for 9%, and the 6% is for the consumer product. For 2020, I'm sorry. You may be using the wrong files. Well, so I'm using the wrong file. Sorry. I'll share the correct one. Okay. Sorry. My mistake. It's kinda embarrassing. For the fourth quarter last year, HPC accounts for 85% of our total revenue. While the Niche market accounted for 8% and the networking 3% and the consumer 3%. For 2022, the whole year, HPC accounted for 82% of our total revenue, while the others are made up by consumer, networking, and the Niche market.
For the process technology, I think we are still the leaders among our industry. 71% of our total revenue came from 7-nanometer or even advanced technology nodes. The 16, 12 accounted for 16% of our total revenue in last quarter. The others made up the rest. For 2022 as a whole, the 7-nanometer or more advanced technology node related revenue accounted for 68% of our total revenue, while 16-nanometer and 12-nanometer accounted for 20% of the total revenue last year. For the regional breakdown, I knew that many of you are pretty concerned about our China exposure. In order to make it consistent, we didn't separate the China into a single category. I will explain it later.
For last quarter, 2022, revenue from Japan accounted for 8% of our total revenue. The Asia Pacific, which includes China and Taiwan, accounted for 34% of our total revenue. Revenue from North America accounted for 45% of our total revenue, while the others, including the Middle East and Europe, accounted for 13% of our total revenue last quarter. For 2022, the whole year, the Japan accounted for 14%, Asia Pacific accounted for 38%. North America accounted for 39%, while the others accounted for 9%. Among the Asia Pacific, the total revenue exposure to China accounted for 27% of our total revenue last year.
For our 2022 review, as mentioned, our sales, to be honestly, lower than our expectation, given the supply shortage of ABF, mainly ABF substrate. Which caused us the AI chip shipment to our North American customers greatly impacted by this supply issue. Even so, the company, Alchip, still managing to deliver the record-breaking top and bottom line and strong NRE demand for both North America and the China region. Although the China IC industries was impacted by the geopolitical issue and of course, the BIS sanction list. The demand, the design demand from this region is still strong.
The NRE revenue last year accounts for around 40%-45% of our total revenue, while the rest was the production orders and the ASIC revenue. For the gross margin, I know many of you also pay a lot of attention to the gross margin. For 2022, the blended gross margin was 32.3%, which is a little bit lower comparing to the 34.2% in 2021. For the fourth quarter, the reason of our relatively low gross margin in last quarter, the main reason is because first of all, we have pretty high percentage exposure to the production revenue last quarter. The production revenue last quarter exceed 60% of our total revenue.
For the NRE in the fourth quarter last year, there are some big milestones, delayed or slipped to 2023. We don't see great risk for those milestones. It is just a normal business operation that we try to cooperate with our customers for the design process. For the operating expense, we are controlling it very well, at TWD 71.1 million for last year. I believe it is slightly lower than the guidance, my previous guidance to the investors. For this year, we still believe the operating expense of Alchip will be under control. For the business outlook, as I mentioned, HPC demand from North American market grows even hotter.
Alchip currently is engaging in multiple AI-related projects from North America hyperscalers and, I would say the demand from AI applications of US customers keep on increasing for both NRE and the production. We expect triple-digit growth for the ASIC revenue this year to North American customers. The physical design turnkey demand for HPC gets stronger and stronger. The project pipeline is stronger than ever now. In addition to the HPC and AI related area, we expect the automotive related NRE could be the seed for our another future growth driver. The process node migration keeps on moving for North American market, as Johnny mentioned. The majority of our 5-nanometer or even 3-nanometer projects in our project pipeline are coming from the North American region.
However, this migration, the process node migration is kind of slowing down in China because of the geopolitical reasons. For this year, in addition to the numbers of our P&L, another great task for us is to do the diversification. Not only for the sales, also for our design engineering resource. The company has managed to shift business focus to North America. Even we expect this year we, our China sales exposure will probably less than 20% of the total revenue. The revenue to the North American market will account for more than 60% this year. As I mentioned many times to the investors that, we are aggressively diversifying our design engineering resource.
We are expanding our Japan team, we are expanding our Thailand team, we are also planning and doing the expansion in Southeast, the Singapore and Malaysia. The company has already secured the engineering resource outside in Malaysia, meanwhile we will gradually build up our own team there. I think those concludes our 2023 business outlook. The following is the Q&A session. Please use the raise hand button or write down your questions through the Zoom message function to us. Thank you. Charlie, Morgan Stanley, please.
Thank you. Good afternoon, gentlemen. First of all, congrats again for your great results. I think there should be some common questions from investors, right? First of all, your next generation AI accelerator project with your big US customer. Can you please update the timing for the decision? What are the critical factors to win this project? If you win the project, when could be the timing for the NRE revenue and also the turnkey revenue? I hope that's clear for you. Thank you.
Okay. Charlie, to answer your question, for the business to the, our current North American hyperscalers. The next generation of our 7-nanometer chip, inference chip, the vendor selection will most likely to happen in the, in the late second quarter and to kick off in third quarter this year. That's the current schedule we received from our customer. To be honestly, Alchip is pretty confident that we should be ahead of our competitors for the next generation for the next generation design. Because this project is scheduled to kick off in the third quarter this year, most likely we may not see the production to happen before 2026. Because of that, the current 7-nanometer inference chips life cycle will extend it to 2025 for sure.
That's the current scheduling for the most important project of Alchip. Got it. Let me add to a little bit. Just like Daniel mentioned, that the decision-making is keeping delaying, I think, due to many reasons. As we all know, most many North American customer are doing a lot of cutting. The budget cut and also resource cutting. The advantage for us is like the current product will be prolonged. We consider we have a higher chance, more and more chance to do the well preparation and winning the next design. Currently, we've been working very closely to this specific customer, try to meet all their requirement.
hhI think, since we are incumbent, for two generation already, I still believe the chance for us to win the next generation will be very high.
Okay. Got it. Yeah. Some investors are concerned that the delay of a decision may suggest some potential risk. I think you explained that quite clearly. Next common question, I think could be the so-called generative AI. You know, whether it is a hype or not, right? I hope Alchip can explain from your company's perspective, number one, whether there's any concrete ASIC projects for generative AI. Secondly, if there are any projects, when and whether Alchip can really, you know, enjoy some project wins. Thank you.
Okay. Let me try to answer that.
To be straight, LT has a very high relationship to the AI application. A few years ago, when AI just both inference and training introduced to the market, we consider we are one of the winner. No matter the project from Japan, China or US, we win a lot. Unfortunately, after we taping out the project, there is not too much production. To be honest, it's a little bit disappointed. Recently, the wave would change quite a bit. We've been keep receiving more inquiry from our existing customer, asking about the latest wafer price and potentially they are planning to place a big order to us. In additional to that, They are talking about the new customer and also the existing customer talking about the next generation. The recent ChatGPT become very popular.
Most of our customer consider their solution even better. Anyway, that's it. We are waiting for the new application booming. In the past, as long as any application has more user require more compute power, eventually that will be the ASIC opportunity. I think similar case has been proven over and over again. It's, yeah. As long as AI start booming, I think LT for sure is one of the winner. If you pay attention for even our slogan, we consider we are silicon power of AI.
Okay, one question from the message. Ryan asked, there is some rumor that for the current generation 7-nanometer ASIC to the North American hyperscalers may be at risk of being insourced. Can you please clarify? Is the rumor unfounded given Alchip should be already have signed the contract with the customer for the current generation, it is up to the company to decide how much to ship in the next few years since. Okay. For your question, it is impossible for the current generation 7-nanometer ASIC. The contract is pretty clear. We were providing, and we have been providing the turnkey service to our customer. The business model is fixed. For the shipment, for the scheduled shipment, it is they are all conclusions by our customer in the Alchip.
I don't know why the rumor comes out, but, to me, it is impossible, for the current generation that our customer to take back the production. Next question is from Jeffrey Kvaal, I think. Jeffrey, please.
Yes. Thank you, Daniel. Can you give us any kind of numbers on your number one client last year as % of sales and maybe this year forecast and maybe for number two client as well?
Okay. I would say for last year, the number one customers of us accounted for close to 30%. Close to 30% of our total revenue. Last year.
Any thoughts on this year?
This year. This year will be like, I would say 40%-50% maybe.
Okay. How about your next biggest customer, you know, roughly this year and last year?
You mean the second-largest?
Yes.
The second-largest, I believe last year should be around like, 10%, high single digit. For this year, I have to check the detailed numbers. I don't have it in my right now.
Okay.
I'll get back to you later. Yeah.
Jeffrey, I think the number one customer are much higher than the number two, but between number two to number five is much closer. We don't have a clear number two customer.
Okay. Last question before I, you know, let others jump in is, can you talk a little bit more about the automobile-related? You know, whether it's. You can give us more info on geography, and, you know, 10 type of scale, maybe potentially. Thank you.
Okay. for automotive related projects, we already won several projects. Not only one, several projects from almost all the major region like North America, China and Europe, indirectly or directly to the car makers.
Okay. Thank you.
Thank you, Jeffrey. Charlie, please.
Okay.
Sure. Since you're answering my previous question and also, just wanted to follow up Jeffrey's question about automotive.
Mm-hmm.
Just wanted to get a sense about your strategy about the front-end design. I know the company are very, very focused on back-end design service, right? I remember mentioned, also mentioned that for automotive customer, because it's kind of a new territory, right?
Mm-hmm.
How do you work with customers to provide the front-end design service? Thank you.
Okay. Yeah, Charlie, you are right. I think for automotive, I think it's, we can say it's a totally different compared to other SoC design. Most of our car maker need additional support from us. Sometimes not even front end, but even also including the software or even the EMS, PCB. We already built up many partnership to front-end partners. In fact, we are sometimes, for few particular one, we are even invest on build a front-end service company. Within the Alchip, I always consider the neutral position and independent position is very important. We were not doing architecture related design for any customer, but we were using many partners.
Yeah, because it's very difficult for me to believe I can design customer one's architect, not leverage it to the customer two. Independent position will be very important. Just like I mentioned, I never make a product to compete with my customer. Working closely to the partner complete the front end solution. Front end, if you look into front end deeply, there will be a lot of category. We don't touch architect, but we can help on the verification, we can help on the ASIC generation or synthesis, those kind of work. We still consider that as independent. Yeah, to answer your question, we already built up many partnership in order to provide a more comprehensive solution to the carmaker. Different carmaker has a different requirement.
Yeah, for example, the T company from US, they pretty much have all the team member ready. They need the design, they need the service from us. It's, I think it's a very straightforward. For many carmaker, especially in China, they never make a chip before. They need a lot of support from us. Yeah. Through the automotive business, we can say we expand our service scope by a bit and touch the some front-end partner and front-end IP, also on the software side and also on the PCB side.
Got it. Thanks, Johnny. Given the very lengthy qualification for car industry, when do you think that can contribute meaningful revenue? Can you quantify, for example, revenue contribution percentage from automotive...
Mm-hmm.
HPC in this year and maybe 3 years down the road? Thank you.
Okay. For this year and next year, we don't expect very high % contribution to our total revenue because they are all NREs. Although the NRE may be much bigger than the ordinary project. Given our sales scale could reach, our sales scale could grow quite a bit this year, not any given NRE alone will contribute a lot of the % on total revenue. It is a fact. If you are talking about the significant revenue contribution or let's say the revenue driver, I would say starting from 2025, we estimate per chip, if the chip is used in the car, the per chip revenue contribution per project for automotive will be ranging from TWD 50 million-TWD 80 million, kind of a yearly range.
That's the potential contribution. If you are talking about 2023, 2024, we expect combined with these 2 years, per project, the NRE contribution could be about, if less 7-nanometer, like the range is wide, $20 million-$40 million, $20 million-$50 million.
Mm-hmm.
Per project. Yes. Just like Daniel mentioned about the revenue dependency on production, I think most likely it won't happen until late 2024, meaning 2025. NRE, I think that's a pros and cons situation. The NRE from the automotive total NRE will be much higher than the conventional SoC design HPC, but automotive design period will be longer. If we can pay about 1 HPC design within a year, like 8 months also. Automotive, the scope, I think bigger, combined front end and back end and many security check, all the check. The design cycle will be longer, at least like 1 and a half year per chip.
Got it. Just to clarify, the, $50 million-$80 million per project, you said NRE revenue or this, entire life cycle?
NRE-
Oh.
Yeah. If the scope include the front end IP.
Oh, I see.
At the end. Yeah.
Okay. Yeah. I got a other questions, but I will let the other ask and back to the queue first.
Thank you. Okay. Jeffrey, please.
Yeah. I guess you also mentioned, you know, ABF shortages last year impacted, your shipments. Earlier in the year, you also talked about the yield rates for ABF were also lower than expected. Has that changed-
Mm-hmm.
over a few quarters now in terms of yield rates?
Yes. The supply situation right now is much, much, much better than the same time last year. For this year, we will have 3 substrate supplier. The yield rate right now is quite stable. Not very high, but quite stable. We have room to shifting or balancing the orders to different suppliers this year. The situation is totally different for the substrate side. For the CoWoS side, CoWoS, TSMC already gave us a full commitment to this year's demand of ours. The yield rate for the CoWoS right now is pretty high. It's pretty much more than satisfied for now. For this year, I won't say there will be no problem.
For example, there may be minor corrections. For example, in the February, the revenue, the reason for the revenue posted month-on-month decline is because our customer to revise its testing program. The shipment missed in February will ship out in March or April. The situation is like this. It's not, it's no longer the supply shortage issue for this product.
Okay. Maybe related to that, you know, whether it's ABF substrate, foundry or anything else. Any cost drops that are helping margins or...
to be honestly, this project is cost-plus, is cost-plus margin, pricing scheme. The higher the cost, actually we maybe benefit. Yeah.
Okay. Then maybe last question-
Right now.
Sorry, go ahead.
Right now, yeah, yes, there is room for negotiating better pricing, but it's all in progress right now.
Okay. One more question before I jump off back in line. HBM, just high bandwidth memory. Can you talk a little about projects there and how that's going? Thank you.
Jeffrey, I am not so sure about your question for the HBM. Since we are focusing in the HPC area, the majority of our new project right now within 5 nanometer or even significant part of our 7 nanometer project are all using HBM.
Okay, great. Thank you.
Thank you. Charlie, please.
Sure, yeah. Maybe I switch gear to the China business.
Mm-hmm.
you know, first of all, I think people also care about the HPC business development, right? Given, ongoing, you know, not a restriction, right? Those are interrelated events of, whether your foundry supplier, change their stance or business strategy to engage with the Chinese customer, especially for the HPC side. How that impact your 2023 outlook. Thank you.
Okay. Yeah, like I mentioned before, every time when we, when we interface with a new customer, we are working with the foundry partner very closely. There will be kind of a SOP related checking. Check the company's background, their end user and also the application. Make sure there's no violation to the current regulation. Once everything goes through, to be honestly, I think the foundry partners, they are very supportive on the China business. Also we still believing a lot of business will provide a certain volume. I think to answer your question, yes, it will be more effort to do the cooperation checking and also the post design ECCN kind of applying.
Once we go through this thing, I think the business itself is still very sexy. The NRE, the percentage of NRE and gross margin from China customer is still higher than United States. Yeah. As long as they comply with all the regulation, I think we still are willing to reserve a certain resource to take this business.
Okay. In general, because there is already, some,
Mm-hmm.
criteria, right? Regarding the, computing power, for those.
Right. Mm-hmm.
Yeah. CPU, GPU chip, right? Do you feel like, does the Chinese council become more passive, right? If there is such a kind of restriction, right, they would never compete with the foreign suppliers or opposite, right? They become even much more aggressive.
Uh.
you know, for the HPC design.
Okay. Charlie, let me answer your question. I would say the BIS new regulation, the restriction on the specs, actually, for now, for China IC makers, they won't try to risk their future to go beyond the limitation. Otherwise, TSMC won't support the project. That's the reality. If you are talking about a competition, I would say the China local IC market, there are some marketplace belongs to the government purchase. I would say, it's quite special. The government purchase market in China is relatively much bigger than the other countries in the world. It is, for this market, you, of course, you can understand it is not a fair fight. They will choose the local suppliers, first, no matter the performance will be. Yeah, I guess that's the current reality.
Those I.C. makers will still have some room for them to survive.
Mm-hmm. Okay.
I think there will be the fixed restriction for them on the IOPS and total compute power, and so does their competitors. Yeah. As long as China still has a market, I think there will be few winners.
Gotcha. I think last year you also mentioned some opportunities in a more kind of consumer type, right? Like ASP or ISP for smartphones. Supposedly it was the big growth drivers, right? What's the status for just the consumer China projects?
Okay. The reason why it seems delayed is because, actually, some of you may know that this project is from a company which is a joint venture, between two different companies. They are switching the ownership, during the past days. Right now, the ownership is switching to one of the owners. The project, the project will resume, and will use it for, some major, handheld devices.
Mm-hmm.
Just for your information, project already paid off. We expect to get the silicon back very soon. Hopefully we are working with Japan, their joint venture company to do the order in the future. To answer your question, we still have a high expectation on that area because everything is proven, also the customer already have a certain market share.
Okay, great. Yeah. Lastly, from my part, really just the financial guidance. Maybe Daniel, can you give us some.
Okay.
guidance about, you know, top line, gross margin, especially OPEX, right? You're increasing the resource.
Okay.
get some comment, please?
Actually, by regulation, I'm not allowed to do the numerous guidance, but I will say it this way. I knew that some research reports have the revenue forecast for us this year. For LT this year, ranging from TWD 700 something million to TWD 800 something million, or even more aggressively. To us, we will say TWD 800 million to us this year is not a very difficult target to achieve. That's for the revenue part. For the gross margin, yes, the increasing revenue exposure to production will drag down our gross margin, but we are still believe we can deliver high 20s % gross margin this year, even the production revenue grow significantly this year.
For our operating expense, OPEX, last year, as I mentioned, I guided to you that for last year is about TWD 70 million-TWD 73 million. The actual number turns out to be TWD 71 million. For this year, we are targeting TWD 85 million, TWD 84 million, TWD 85 million for the whole year. I think we have really high confidence to achieve this target.
Okay. That's super helpful. Yeah, actually, when I look at this number, especially OpEx, right? Two questions come to me. You know, first of all, how come, you know, you're spending overseas operation, but the cost increase just very minimal. Maybe second question to Johnny, right? If you look at your business model, you only spend like less than $100 million and can play such an important role, right? For the future as a custom chip design. Why? There are many much bigger companies than Alchip, right? They can spend $100 million easily. Why cannot duplicate this business model, no matter internally or externally?
We are super efficient.
Okay. Yeah.
I think that's our, that's our gift. To be honest, I think Alchip is a pure independent company. We don't have any so-called rich father, rich mother. We're doing everything on our own. Control the cost to provide the more efficient service to our customer. I think that's our company's it's building that, I think, for the past 20 years. OpEx is the key for service company. Yeah, there's a many way to control the OpEx. I don't need to mention too much. I think, put the right people on the right position and try to utilize more resource from the junior engineer and increase the senior to junior ratio and balance from all region and make a customer satisfaction.
I think those kind of things, you can control OpEx. Also, put the incentive on the future, and do not control the salary and costs, and put little expectation on the stock option, those kind of stuff. I think we've been doing quite well. Yeah. Overall, even though our OpEx is low, but if you're thinking about the turnover rate compared to most of our competitor, we are much lower. Yeah, executive level, almost zero turnover. Management level, I think the turnover is very little. Yeah. Hopefully that answer your question.
Okay. Johnny, for you, another question. The expansion of our human resource this year is kind of flexible. We are committed to expand our overseas design resource, for sure.
In China, we may do our resource plan very conservatively. That's the reason for the OpEx.
Okay. Mm-hmm.
Yeah.
Maybe just to follow what TSMC is providing to investors, right? If you compare, I don't know, right? The engineer cost overseas versus in China, what was the cost gap, right? We can do some calculation by our own.
Right. Yeah. The area we try to build out the resources from our existing subsidiary, Japan and Taiwan. Also we mentioned about the Southeast Asia, Malaysia or Vietnam. Yeah, honestly, it's four region compared to China, the costs are even lower. Yeah, it's not like our foundry partner try to get the resource from North America. I think that's a totally different story. Yeah, China is not the... Honestly, China is not the cheap place. Yeah, even we diversify the China design resource, try to open more subsidiary in other region, I think the overall cost will not increase significantly. There might be some one-time costs when we build out a cloud server and also the office. Eventually, I think the costs are even more stable. Yeah.
This question come from one of the investors before, right? The question is, like, you gonna send the subsidies from China governments, because that you had a very big operation in China, right? Now, if you are expanding outside of China, can you still enjoy those, the, you know, no matter tax benefits or government subsidies from China?
Yeah. To answer your question, yes, we do receive some subsidy from China, but honestly, it's not so significant. Yeah, just a minor. Yeah. We still continuously receiving this support, yeah, from the local government. It doesn't change. The support is not related to the head count. Yeah. It's related to the business enabler, especially for the leading-edge technology.
I see. I see.
Mm-hmm.
Okay. That's all my questions. Yeah, those are very helpful. Thank you.
Thank you.
Sure.
Okay. Investors asked from message that given your biggest North American customer also does business directly with TSMC. From Alchip's point of view, how does this customer decide what projects to outsource to third-party design service vendors?
Is it cost, proprietary IP, volume, or something else? I'll answer this question first and then maybe Johnny can add colors on it. First of all, yes, our biggest North American customer does direct business with TSMC. As I mentioned many times to investors, I would say if ultimately our customer is kind of partnership relationship. Our customer has its own in-house resource, engineering resource on how to allocate their internal resource efficiently. We believe by partnering with the outside support by our customers is the right direction. The things has been proven it is a good choice. As for you are asking about is it the cost of proprietary IP or volume or something else?
I think it is, it is a consideration and decision from many, many reasons, not only cost or IP or volume. I would say the decision around time, the many, many, many things. It's not decided by some specific reasons, for our customer must outsource or insource. Okay. For another question from Message. Could you please give us a sense of how gross margin will trend this year as well as how much OPEX will grow? Thanks. I think I just gave the guidance to you that we are still targeting high twenties for the gross margin this year. Questions from investors. Can you please also talk about the other potential opportunities at the other North American hyperscalers? What are the applications? DPU, Arm CPU, or AI accelerators? Johnny.
Okay. Yeah. In additional to our current number one customer, yeah, we are approaching to many others. Yeah. All of them are tier one hyperscaler kind of a customer. The application they are pursuing, I think, quite similar, is AI and HPC related. Yeah. In fact, for few of them, we already stepping to the last stage. Yeah. The diversify the concentration from a single customer is our, one of our goal. Yeah. The starting from next year, I hope there will be more company will contribute more significant revenue, yeah, in additional to our tier one customer.
I'll say this way. We are engaging in discussion. We cannot disclose the details about the project negotiation or the discussions. But I can tell you that we are engaging in project discussions with almost all the major hyperscalers in North American market. Oriental Securities. Alan, please.
just wanted check some details. You just mentioned about the hyperscales customer, the second generation product. You just said you will kick off in the third quarter and contribute the revenue in 2026. Is that right?
I'm saying that's the schedule. I'm not saying actually kick off the project. The vendor selection is not decided yet.
Will it contribute our revenue in next year?
We don't know. The MR. Okay. As I mentioned, the vendor selection, which means, we are not winning the project yet.
Okay.
You are asking about if there is revenue contribution.
Yes.
I cannot answer your discussion. Yeah.
Okay. About automotive customer.
Mm-hmm.
How's the contribution in the next year? Is there any TWD 20 or TWD 9 contribution in the next year?
I would say this year we will. We already have the revenue from automotive related projects already.
Okay. I'm sorry about that. I just mentioned about the United States, the tier one customer. Will you contribute any revenue contribution in the next year?
Tier one. I really don't know who are you referring to?
Okay. The EV customer.
We have multiple EV customer, and we all consider they are tier one car makers.
Okay. Okay. That's all. Thank you.
Thank you, Alan. A question from message. In the beginning, Johnny mentioned there will be FSD-related chip for auto customers. Is FSD for a specified specific client or it is just a general function for various auto clients? I would say this way, the FSD usually is considered ASIC. It's not a general chips be used by different automakers. As at least for now, we are our FSD related projects is almost all ASIC type of business. Right? Yeah, why I'm mentioning is because the solution we are providing either is just pure driving assistant, but some of the customer I think is pursuing the L3 to L4 is full self-driving, this kind of function. We said FSD. Okay.
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