Okay, I guess it's about time to start today's meeting. First of all, welcome to our first quarter 2022 Institutional Investor Conference Meeting. This meeting will be hosted by our CEO, Johnny Shen, and me, Daniel. We will start this meeting from the company's first quarter results, and then the operational update, and then the business outlook for this year. After all this, there will be Q&A session for you to ask questions. Prior to the Q&A session, please remain on mute mode to let the meeting go smoothly. Please use the raise hand function on Zoom to ask questions. Prior to you asking questions, please let us know your name and the company.
Thank you. Again, as usual, this page is Safe Harbor disclaimer. This meeting will be English. If you need the Chinese presentation slides, please go to download the Chinese version. In addition to asking questions directly to us, you can also write your questions through the Zoom message function. We will answer the questions later on. This audio and the video content of this meeting will upload to the Market Observation Post System right after this meeting. If you miss something, you can also go to the website to download this meeting video. I would like to ask our CEO, Johnny Shen, to start this meeting.
Okay. 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 Q1 result and provide guidance for future business. In case some of you are not too familiar with Alchip, allow me to provide a brief company update as usual. Our company is founded in 2003. We went public in 2014. Current headcount is 500 people. 3/4 of our employees are engineers. Since we founded the company, we've been successfully tape out more than 480 designs. Revenue for last year, TWD 240. A year, sorry, two years before, it's 2014. Last year, it's TWD 370 something.
For the past three years, our revenue grow 50% year-over-year. The momentum still sustained for this year. In terms of business, more than 80% of our revenue is contributed by HPC and AI area. Among all the major competitors, we are pretty much the only company focused on leading-edge technology. Just recall what TSMC state on their conference meeting. We also see the high business demand from HPC area. We are one of the VCA members can provide worldwide TSMC service to our customer. Next page. We can say we have a fairly acceptable quarter, even though our Q1 revenue is kind of flat from quarter-to-quarter and year-to-year standpoint. Our bottom line numbers, including operating income, net income, and EPS, at quarterly record high for the company.
Our net income number is $16 million, and EPS is 6.32 TWD. The main cause for relatively flat revenue is due to capacity limitation. Our major product line are in a transition period from flip chip BGA type of design to 2.5D advanced packaging. The shortage of CoWoS and ABF substrate limits on our near-term mass production revenue. For the past months, Alchip work very closely to related suppliers. Fortunately, we got a reasonable commitment from them to ensure the future production. Even though the short-term revenue may suffer a bit, but we have a confidence to meet or beat the annual forecast stated during the previous conference meeting. Another significant highlight for our Q1 business. Q1 is business demand. We have received the most worldwide business inquiry this quarter.
To our own surprise, many demands are 5 nm. Yeah, with many 5 nm design wins. In CPU, AI, and crypto area, we expect healthy NRE growth until the end of next year. During the bad experience of a worldwide capacity shortage, many of our existing customers have placed committed production orders more aggressively. Starting from later this year or early next year, we expect to see more diversified mass production growth in addition to our current number one customers. Lastly, a quick update for current Shanghai lockdown due to the COVID-19 and Omicron outbreak. Fortunately, most of our design engineers are not located in Shanghai. Our employees in Shanghai are manning management function. We get used to rely on internet communication with the customers, suppliers and employees. Therefore, Shanghai work from home requirement creates no impact on our current business.
However, the citywide lockdown for about a month still create a certain amount of panic and hustle. Yeah, hopefully this situation will come to the end very soon. Thank you.
Okay. This page is our first quarter quarterly income statement. As usual, the first quarter revenue is TWD 33.5 million, which is 4.7% quarter-on-quarter increase, and 0.3% year-on-year decrease. For the gross profit, for the first quarter, gross profit is TWD 36 million. Translating into a percentage, I think it is this gross margin is around 38 point something%, which is among the highest quarter of our company's history. As a result, the operating income for the first quarter is TWD 19.6 million, which is 28% quarter-on-quarter growth and 10.8% year-on-year growth.
For the net income part, the net income for the first quarter is TWD 16 million, which is 26.1% quarter-on-quarter growth and 17.2% year-on-year growth. Translating into EPS, based on the concurrent FX and outstanding shares, the first quarter EPS is TWD 6.32. For the breakdown by application, for the first quarter, you may see Alchip is still HPC-centric. The revenue came from HPC accounted for 83% of our total revenue in first quarter. While the niche market, network, consumer account for 7%, 4%, 6% of our total revenue, respectively.
Since the first quarter is the only quarter for this year, you may see 2022. Here should be 2022. The 2022 breakdown is the same with the first quarter. For the revenue breakdown by process node, actually, Alchip remains the leader for the technological node of the physical design and the turnkey services. For the first quarter this year, the 7 nm or even more advanced the technology now, including 6 nanometer and 5 nmn. The revenue come from those nodes accounted for 60% of our total revenue. Revenue from 16 nm and the 12 nm accounted for 27% of our total revenue. The rest are constructed by 28 nm and the legacy nodes.
Again, for this year, the breakdown is the same. It's identical with the first quarter I just mentioned. For the revenue breakdown by region, the first quarter showed some change from the fourth quarter last year. In the first quarter, U.S. market, per your request, I isolate, I show the U.S. market revenue contribution, as a independent item. In the past, the U.S. revenue was hiding in others. Starting from this quarter, since the revenue from United States become more and more important. I isolate this as a single item for our breakdown.
For the first quarter this year, revenue from Japan accounts for 20% of our total revenue, while China revenue accounted for 27%, and the U.S. revenue accounted for 29%. The other region to make up the rest, the 24% of our total revenue. For the first quarter review, I think the revenue for the first quarter came as expected and as our guidance released in the last institutional investor meeting. I think due to the constraints of ABF substrate and of course the CoWoS, the 2.5D, 3D packaging limitation, the quarter-on-quarter growth is not promising but it is within our expectation and guided guidance. The design demand was very strong in the first quarter, especially for the HPC related applications.
Actually, we won several leading-edge technological projects from China, from both China and U.S. customers. For the profit margin, the profit margin in the first quarter is high. That's because the higher sales exposure to the design, to the NRE. The first quarter gross margin is 38.6%. The main reason is the very strong NRE sales. The NRE revenue accounted for more than 60% of the total revenue in the first quarter. The design wins, we have multiple HPC projects from China customers in the leading edge technology node for various applications such as GPU, CPU and the AI chip, the AI projects.
For our 2022 business outlook, I think many of you may know that the shipment to U.S. service customer is the major growth driver for this year. The production for this AI chip already started from fourth quarter last year. We expect the revenue contribution from this project to pile up starting in middle of second quarter. Currently, the limitations and constraints are still on the supply side. We mentioned many times that the CoWoS packaging capacity and the capacity allocation and the ABF substrate supply is the most challenging thing for us to grow our 2022 or even 2023 total revenue.
We expect revenue distribution to be like 40%-60% for this year. Again, as the shipment of the AI chip to U.S. customer to speed up starting in the middle of second quarter, we expect revenue distribution for the whole year will be like a second half heavy kind of pattern. For the quarterly revenue pattern, we expect sequential growth pattern from second quarter to fourth quarter. Which means, we believe we can deliver quarter-on-quarter growth for second quarter, third quarter and the fourth quarter this year. Supply chain management is the key to our 2022 and actually also for 2023. The CoWoS and the substrate capacity are critical factors for our growth in these two years. The current capacity allocation are far short from customers orders.
Which means if we can have some breakthrough for the substrate and the CoWoS, and substrate and the packaging supply, we may post upside potential on our targets or expectation. We do expect certain level of breakthrough for the supply side by the end of 2022, and more accurately, the first quarter this year. Since we have been working very hard with the suppliers, and we do get some result and commitment from the suppliers for the future capacity. I guess that's the business outlook for today, and we will go into the Q&A session later on. Thank you. Okay, again, please use the raise hand function for your questions. When I call your name, you can unmute by yourself. Chi Ho, please.
Oh, hi. Hi, Johnny and Daniel. I have two questions.
Si Ho.
Oh, yeah. Yeah, congratulations on a very great result. I have two questions. The first one, as we start to engage customer for 5 nm project, can you share with us the gross margin profile, let's say compare with 7 nm. Definitely the NRE contract value would go up a lot and also I believe the profit. I just wonder how about the margin.
I think the margin depends on not only the technology node but also the design itself and the schedule.
Many other reasons will be the deciding factors.
to the growth margin. Overall, I think the revenue we make or the profit we make per headcount
5 nm is definitely higher than 7 nm or 16 nm. For the gross margin front.
As you may know that, we based on our accounting principle that we capitalize the mask and IP. Overall, roughly, if you consider, if you assume the mask and the IP as COGS, the gross margin, the percentage for 5 nm may not be higher than 7 nm
Based on the current status, we really think that 5 nm project are good profit business for us, especially for the NRE.
Yeah.
Okay. Yeah, Chi Ho, let me try to add on that.
Oh, please. Yeah.
To be honest, in Shanghai or even in United States, for 5 nm we have a very, very limited competitor. Yeah. Not too many company can do 5 nm Yeah. As you know, the mask itself, plus IP, TWD 20 million-TWD 30 million, so no customer, like I mentioned before, no customer willing to take a big risk. Based on current situation, our capacity is almost full. So it doesn't make any sense for us to take a 5 nm if the project margin even lower than 7%. So the position is very strong at this moment. Yeah. Right now we already have many 5 nm. So far so good in terms of profit margin.
Good. Second question. Yeah. As you know, there's some players are trying to get into the leading-edge foundry, right? I just wonder for us, we are pretty close with TSMC. I just wonder if the company or some of our customers will be considering to use some other foundries for their leading edge.
I think for most leading-edge technology, like, 5 nm, 3 nm, 5 nm, 4 nm, 3 nm, honestly, customer has almost no choice. Only TSMC, honestly. But for a little bit mainstream, like a 12 nm or even talk about 7 nm, they thinking about using other foundry. They did. But unfortunately, the experience is not so good. I think majority, we can say more than 99% of our customer for 7nm and 5nm, 7nm or below, they still stick with the TSMC.
I see. Basically, we can say that we are not in a rush to diversify our foundry partners, right?
No, no. TSMC, right now, everything is all together. If you have a wafer, you need to prepare the 2.5D package, and also need prepare the substrate. Using other additional supplier, I think it will create additional work for us. It doesn't make too much sense at this moment due to the shortage, at this moment.
All right. I see. Okay. All right. Good. Okay. Congratulations.
Okay. Thanks, Chi Ho.
Okay. Cheers.
Charlie, please.
Sure. Thanks. Good afternoon. Johnny, hope you and your colleagues can get through this turbulence in Shanghai.
Surviving.
Yeah. Take care. Yeah. My first question is about your 5 nanometer CPU opportunity.
Mm-hmm.
It would be great that you can really repeat FEITENG's success, right? My concern is that how about the ecosystem, right? I mean, FEITENG, when we see that PC, it go with a Kirin iOS, right? It's a kind of total solution. You have a very specific buyer, right? Governments or SOE want to support that kind of local PC. For your coming, no matter three or five, local CPU customers, are they really mature for the ecosystem, you know, besides the CPU design?
Let me try to answer first. We have about 3-4 new opportunities focused on the 5-nanometer CPU, N2 ARM type of a design. No surprise, the core team are coming from a few areas. For example, the HiSilicon and also the Alibaba and some of the Phytium people. In terms of design experience, I don't think that's too much issue. Funding is also very straightforward, very fruitful. Software, they still use the Linux kind of approach. Some of them can use the Kylin as well. Kylin is not belong to Phytium. Kylin is another company.
I think the PC, the Chinese PC maker right now, all make China compliance. I don't think that will be the issue. People consider about the GPU has a lot of room because a high margin and bigger market. CPU, they consider, is already proven market. They used to provide a lot of volume from HiSilicon and also from Phytium. That's why more and more company focus on this area.
Is it fair to say that those are new customer, their target market remains to be kind of a government-related or public-related instead of consumer PC markets? My other question is that Phytium, I know the company already you know privatized, right? But I think the company still have a great relationship with government or Great Wall-
Mm-hmm.
group, right? Why not those 3-4 new China CPU customers address the consumer PC markets?
Yeah. The three 5 nanometer opportunities we took. Yeah, it's a focus on totally different areas. The three different areas which HiSilicon and Phytium focused before. Number one is institutional related.
Mm.
Number 2, the high performance computing data center related application. Number 3, the PC and laptop.
Mm.
Yeah. Phytium we can say is a unicorn kind of CPU new startup. It focuses on three different areas.
Mm-hmm.
Yeah.
Okay. Okay.
Yeah, that's great to know. Yeah, because yeah, I'm just wondering whether you know those. Because your resource is now very
Tight.
Very tight, right?
I just wanted to make sure whether you can get a similar volume or turnkey revenue, right? Versus two years ago when you do the CPU for Beacon. Are you confident that same kind of revenue contribution would happen on those new CPU customers?
Yeah. We still are optimistic for CPU related forecast. Yeah. Because the GPU story, I think. Recently facing some challenge about most of people in China still believe the CPU market will grow.
Mm.
Continuously grow.
Okay.
Yeah. Not only for laptop, notebook, but also desktop. I think the successful story from Apple create a very good example for the local PC supplier, so that it drive a lot of a chip maker because the inquiry from the PC maker, they wanna make-
Mm.
an ARM-based type of a desktop.
You know that even Apple start to support Windows system, right?
Are you aware any of those new customers will support either Chrome, Android or Windows iOS? Or they're required to use the Linux?
They use Linux. I don't think they were against to make a Windows compliance. I think they need to. They have a lot of work to do. Eventually, they do have this kind of plan.
Okay. Thank you. My second question is about the Japan business development, right? I appreciate the further breakdown by region. I'm surprised that Japan is still 20% of revenue. Can you kind of tell us what are those applications and whether you think Japan market can grow as well? For example, I'm particularly interested in two projects, right? You know, first of all, whether supercomputer project will come back again for a Japan customer. Secondly, your very long-term partner-
Mm.
Sony.
Mm-hmm.
Are they still doing ASIC for those consumer product like a TV and we're helping them to design those ASIC for TV or PS right now?
Okay. Daniel, do you wanna go first? Or I can go first.
Sure, sur e. For the breakdown, I'll answer the breakdown.
Mm-hmm.
For the first quarter this year, the reason for relatively higher percentage exposure for Japan market is because we took two cryptocurrency projects from Japan. Just as you mentioned, actually, not only Sony, we keep on doing projects with Sony. Sony is our very, very long-term customers. The previous high performance computing customers, maybe you have memory, PEZY. Actually, PEZY was back. We are starting to receive projects from PEZY as well. For Japan markets, of course, because of the cryptocurrency projects, the first quarter revenue is pretty good. In the long run, I think the difference between Japan from other region is, in Japan, most of the end customers or the customers are relatively mature.
The potential shipment volume could be quite stable compared to other regions. Like in China, there are too many startups. We don't even know which one can deliver very good production volume. In Japan, usually when we do a good project, later on, the production contribution is expectable. It's kind of different. In Japan, we won't say this market will deliver very good growth outlook. For the customers, actually, they are mostly good customers to us. Johnny, would you want to say something?
Yeah. Let me try to add to that. Japan, we're seeing the business in three different kind of category. Number one, just like you mentioned, Charlie, is Sony. Yeah, Sony TV related business. We still consider, from long-term relationship, I think we have to take. Yeah, as I mentioned before, the company established the first 10 years, Sony is our number one customer. We have a very, very tight relationship. Whatever the project provided by Sony, yeah, we have to take. Sony TV and ISP related business every year still contribute certain amount of revenue. Number two category is the supercomputer. Yeah, even though the volume is not so big, but we can learn a lot from Japan supercomputer business.
They always get whatever the project we are working with the customer, always receive the high ranking, number one in terms of Green500 or number one in terms of TOP500. They will give us a very good position and reputation in order to win other region. Japan still have many supercomputer makers. Once in a while, not every year, but every other year, each of the company will come to us to do the supercomputer type of design. Number three category is a kind of a niche. For example, as you know, using pachinko business as example, yeah, we are working with a Y company. For seven years ago, we produced a 28-nanometer design for them. Even until now, they still produce very reasonable about the revenue for us.
Daniel also mentioned about, because of the Metaverse, Japan start to focus on some kind of a crypto, cryptocurrency. It's not Bitcoin, it's not Ethereum, it's not Litecoin, it's another coin. They are interested a lot. We take this opportunity to prove the most leading-edge technology design turn around time. For cryptocurrency, I think, for us, the investment are much less because the design turn around time are very, very quick. Also the chip is EO insensitive because multiple engine can go on and off using software. Another highlight for Japan, we start to focus on this region because of resource reason. As you know, worldwide resource fighting sometimes is even worse than the wafer and substrate capacity. Suddenly, Japan become very competitive.
Before, Japan resource we can consider is the most expensive one. Right now, if you look at the senior level, Japan cost is very competitive and stable. Stable is the key. In China, they offer high rates every year, and Taiwan market also become very, very intense. We are starting from last year, actually two years ago, we already start to build the Japan resource. We also mentioned on the conference meeting. Right now, Japan headcount is also at a historical high, and we have a Japan resource can support multiple region, can support U.S., and also Europe or even Mainland China.
I see. Thank you. Thanks both. Daniel, financially, right? Can you give us a guidance of gross margin trend? Because this quarter seems to be pretty high, right? What's the normalized gross margin? Also, can you update the OpEx number for 2022?
Okay. For the rest of this year, the second quarter, third quarter, and fourth quarter, we do expect gross margin to go down because the production exposure is increasing starting from the middle of second quarter. For the whole year blended, we expect a year-on-year decline, but not significantly, slightly mild decline, from year-on-year basis. For the operating expense, I think, operating expense is not changed. Based on our previous guidance, our operating expense will be ranging from TWD 72 million-TWD 74 million for the whole year.
I see. Understood. Thanks, gentlemen. I will be back to the queue. Thank you.
Thank you, Charlie. .
Okay. Next one is, Bill Huang, Guotai. Please.
Yeah, yes, hi. Thank you. Thank you, Johnny, and also Daniel, for taking my question. Congratulations on the results as well. It's quite solid. My first question will be on your revenue mix on the regional basis, because from first quarter, we have been seeing a quite diversified region versus what we have been seeing in the past, you know, 4 years, 5 years. I just like to see what will be the revenue mix based on different region for this year and next year looks like, you know, going forward. Because I just want to get a sense as to which countries are actually seeing a better growth. You had mentioned quite a bit, like from U.S., from Japan earlier.
Just like to get a thought on that. Thanks.
Okay. For the geographic breakdown, I think this year will likely pose a significant change from last year because we have very big production revenue from U.S. this year. We expect the U.S. sales exposure to go over 40% this year. For China last year accounts for more than 70% of our total revenue. For this year, we think the China situation is like more NRE heavy year. Because we don't have too significant production revenue from any single customer this year. We expect the China revenue to account for about around 40% this year, but the majority of them will be NRE.
The rest, the 10%-20%, will make up by Japan and other regions like Israel or some European and the Taiwan customers this year. For next year, we do expect that U.S. will remain the major region for our total revenue exposure. For China, we also expect there are several projects to go into mass production phase next year. I think right now I cannot give you a very clear picture of the breakdown next year, especially there is still a swing factor not favored. In my mind, I will say next year we may see increased percentage exposure to U.S. market. For China, I think relatively maybe the same range.
Got it. Thank you, Daniel. My second question will be on your R&D expansion, because could you give us an update on the R&D staff that we have so far and what the expansion plan that we have for this year and next?
We are, as mentioned in our first slide, now we have around 500 people, and we will soon have 30, 40 new engineers to joining in next month in China region. All in all, we're still targeting to increase our total employee number from 500 to 600 by the end of this year. The majority of the newcomer, the new colleagues, will be engineer for design and, of course, for the production.
Got it. Sorry, my last question will be on your revenue mix for the NRE also for ASIC. You know, what will it be the mix like for this year, next year versus last year based on your estimation? Thank you.
Last year, NRE accounts for about 45%-50% of our total revenue. For this year, this number will go down to 40%-45%, and the other 50%-55% is the production revenue. For next year, we believe the NRE percentage will still go down because of the production revenue we expected from US and China will go up quite considerably. I don't have the number. I didn't do the numbers forecast right now, but I will, the number in my mind is I think for next year, the NRE exposure will be about, like, close to 40%, 35%-40%. Am I answering your question?
Yeah, yes. It's all clear. Thank you for your answers. I'll jump back to the queue. Thank you.
Thanks, Bill.
Mm-hmm.
Okay, next question from Stuart Arians. Thank you.
Yeah, just sorry, I apologize. I missed the first portion of the conversation. If my question is redundant, I apologize. Concerns Phytium. April last year, you halted operations with China's Phytium-
Mm-hmm.
Since it was blacklisted by the United States.
Mm-hmm.
I'm wondering, I know you've been working hard to alleviate that situation. I'm curious to know if it's possible that will be alleviated this year. More to the point, though, is if you were able to do business with Phytium, would you be able to do all of that business, or has Phytium been able to find an alternative supplier, or customer? Well, they're the customer, but an alternative supplier, let's put it that way, for some of that business.
Okay. For your question, we do have some breakthrough for the CCAR application for Phytium's project. We have agreement among Alchip, TSMC, and Phytium. We cannot discuss the progress in detail right now. I think, for the whole thing, TSMC is the key. The principle for the Phytium thing is every party follow the regulation and the law. If everything is lawfully good to do, we can do it.
Yeah. Stuart, to answer your second part of your question, yes. Yeah, this kind of flow and regulation is not only for Phytium, it also for all other company who being put on the Entity List. As long as we follow the rule, apply the from BIS, apply the classification numbers and proven the technology dependencies to less than 25%, I think we can. All the customer who on the Entity List can be our customer as well. Yeah.
Yeah.
Yeah. I don't think that's a problem.
Yeah.
Mm-hmm.
Specifically, the business you have with Phytium, is Phytium able to substitute someone else to supply that business instead of Alchip?
Uh-
That's the essence of my question.
No.
Okay.
I think that would be very difficult. That's almost impossible.
Yeah.
Unless they decide to using more mainstream technology and go through other foundry. Otherwise, I think.
Yeah.
They don't have other choices.
Okay. No. I thought that's the case. I just wanted to clarify. Thank you very much.
You're welcome.
Okay. Chi Ho, do you have other question?
Yes. Actually, for Lloyd. Could you give us some guidance regarding this year's OpEx?
OpEx?
I'm sorry, operating expense.
Mm-hmm. Okay. I guess I just said the full year OpEx will be ranging from TWD 72 million- TWD 74 million.
Oh, okay. That's not much change from last time. Yeah.
Mm-hmm.
Also, I'm not sure if you can share with us the Q2 and revenue outlook, since we are already halfway of the quarter?
Okay. In our last institutional investors meeting, we said that at that time, the consensus is about TWD 480 million-TWD 500 million for the whole year.
Mm-hmm.
We were very confident we can meet the outsider expectation. For now, I think the expectation is still at about TWD 500 million for the whole year. We were still very confident we can meet or even beat the market consensus. We think TWD 500 million for this year is not a difficult target to achieve.
Sure. This year. How about Q2, and any clarity that you can share with us on the call?
For sure. I said we will post the quarter-on-quarter growth for the second quarter. I don't know what the outside expectation is. Somebody told me 30%, somebody told me 40% quarter-on-quarter. I will say this way, that the substrate and the CoWoS packaging are still the issues for the second quarter, sales performance. All in all, I think the expectations for 30% is relatively, I would say reasonable, but I cannot guarantee a number for you because there are still some uncertainties. For the whole year, I have higher confidence level for the numbers.
For the second quarter, it is kind of. If I give you a range, the range, the meaning of the range is it doesn't means a lot, right?
Yeah. That's true. Yeah.
Yeah. I think that's the answer. I try my best to give a guidance to the outside investors. Yeah.
Oh, I see. Fair enough. Yeah. Okay. All right. Thank you very much.
Yeah. Chi Ho, let me try to add to that .
For mass production, yeah, just like Daniel Wang mentioned before, we still facing some uncertainties. To tell you news, we already commit to our end customer for a yearly delivery.
Whatever we cannot deliver on Q2, it will happen on Q3 and Q4. The number already committed, which is, we already get a buy-in from supplier as well. I don't worry about the overall yearly number. As for the near term, it really depends on the yield and capacity allocation. Based on current trend, our NRE doing very well. Q2 ensure like, just Daniel mentioned, about 30% growth. Overall, I think the mass production, we're going have a great year. If it happen, not happen completely, not happen in Q2, some of the volume will ship to Q3 and Q4.
I see. All right, great. Yeah. Maybe I try to squeeze a last question, yeah. In the past you mentioned that the company, like, would also consider some design like business. Is this something we are still going forward?
Yes. Johnny, I think Chi Ho is referring like the PD2.
Okay, got it.
Yeah.
Yes. Uh-huh. Go ahead, Daniel. Yeah.
Yeah. Actually, yeah, everything is ongoing for the PD2, which means partial turnkey business. We already have some projects who are PD2, which means we do less effort on a physical part. Yes, we do have projects.
Right now, Chi Ho, the reason we are kind of focused on PD2 because they are. We do have a few advantage. First of all, as you know, our resources shortage.
It's very precious, so we don't want to spend too much on resource. But for P;roduction business, because we have a very tight relationship to supplier, for Alchip, we are representing more than 30 customer. So the pricing and capacity we receive are much better than the customer, individual customer. So that's why a lot of our customers are willing to do the production owning type of a business with us. For us, as long as the gross margin are reasonable, I think, we are not against to take this kind of business.
Okay, great. Yeah. Thank you very much.
You're welcome.
Okay. Charlie, please.
Thanks for taking my follow-up question. Actually just some industry cross check. You mentioned several times about the CoWoS as the issue. I'm surprised that TSMC already break through 3 nm. How come advanced packaging they keep having this issue? Can you share your observation whether this is temporary or is it something really structural and will continue to be the risk for next year?
Okay. What I'm going to say only represents my own opinion.
Sure.
Things involved with TSMC is kind of risky. TSMC is very, very good in doing wafer business. For packaging, actually, I think the Packaging business is driven by demand by their customer. For the CoWoS packaging, to be honest, the yield rate is kind of struggling, but it is not only because TSMC. It has so many factors like the yield rate of the substrate and the design difficulty, something like that. From our point of view, we think that in the future there are some possibilities. First of all, TSMC has some breakthrough for their CoWoS yield.
Secondly, maybe there are other players other than TSMC who can provide the 2.5D or 3D packaging to us or to other customers. We are still looking for the possibility. Hopefully, this kind of capacity issue will be resolved starting from maybe the end of this year or the early next year. As I know, there are many other players trying to do so. I believe these kind of actions will be welcome by TSMC, 'cause the core business of TSMC is still wafer business. More 2.5, 3D packaging capacity is actually a good thing for TSMC doing their wafer business. That's my thinking.
All right.
Okay.
Let me add to that. Yeah.
Sure.
Let me add to that.
Yep.
Uh.
Yep.
Yeah, right now, like I mentioned earlier in this meeting, the 2.5D, that kind of advanced packaging using CoWoS are totally different compared to flip chip BGA. Number of layer are totally different, and size also totally different. That's why the yield, we cannot using the same yield rate for flip chip to the CoWoS. I believe TSMC already doing a wonderful job. That's why, OSAT, not too many, only couple of OSAT try to do this kind of a 2.5D, 3D and package. I was told the situation are even worse.
Mm-hmm.
That's why the package-related yield go down. It's a surprise to everybody because we only compare with the rigid type of a design. It's a CoWoS. I think that happen quite usual. I do the cross-check to the most leading edge technology player, like, A company and also N company in U.S. I think they also suffer this kind of the package yield loss. I think that's quite normal. People will get used to it. Yeah. Daniel also right, because TSMC, the main business is wafer. We also discuss with them.
If it's especially the OS, CoWoS part, I think TSMC still prefer to doing by themselves. OS portion, yeah, if we can find an outside supplier taking care of the substrate and taking care of the final assembly, they're not against this kind of approach. Yeah, more and more different angles, cooperation between us and the major supplier.
Who take the yield risk? Is that TSMC or Alchip or customers? Right. We-
Depends on the business model. Yeah, beginning of the project, because the yield is not so stable, and for your project, I think the customer itself has to take most of the yield loss.
How about Alchip?
Our margin is not so thick, so we cannot take this kind of yield related, especially on the final test. All our customers - major customers are buying into this story. They agree. Yeah, we don't have any problem.
Okay.
Okay. Finally, because I remember you still have some exposure to AI speaker and some smartphone in market, I think it should be Xiaomi.
Yeah, you know that investors are very, very concerned about the consumer part. Do you see any kind of forecast cuts or, you know, postpone of those consumer related projects?
Daniel.
I think for the smart speaker, let's say first thing, no matter it is a smart speaker project or it's a handset ISP project, the shipment volume or the revenue contribution is not comparable with the FPC to those major hyperscalers. That's for sure. The smart speaker project are actually still ongoing. I haven't heard feedback from sales about the ISP project for a while. In the same time, we do have a new project related to the image signal processor. Because this customer is quite high profile, it is a joint venture by a China company and Sony. Based on our information, the new project will apply to associate with maybe Sony CMOS image sensor.
Maybe in the future we will see some high-end models building this AI type ISP chip into the cell phone. So far, any impact from the weakness of the handset market, we don't have too much feeling from that.
Okay. Okay, great. Thank you.
No problem.
Next question is from Marco. Please.
Hi, Johnny and Daniel. Thank you for taking my questions, and hope all is well. My question is that if I calculate the expectation of your second quarter and using the first half second half contribution is four and six, your revenue is actually having some upside versus the previously mentioned or the consensus of around $500 million. I'm just wondering, are there any upside in terms of like ABF you got in this year? How much is it likely to contribute to your this year revenue? You're actually having some breakthrough also in the demand side and would like to hear you mention more color about it. Thank you.
Okay. For the demand side, there is no problem. Actually, I mentioned that the demand right now is much more than supply. As long as there are extra supply from the substrate customer, all the customers are happy to see it. For the upside for this year, the situation right now is like we may have some extra, which means not in our forecast. We may have some extra substrate support from new vendor. We are still discussing the schedule, and I cannot 100% guarantee you that we will have upside from the substrate supply. Most likely, fourth quarter, we may have some room for it.
Since it is already the fourth quarter, I think the upside to our original plan is not too much. For next year, I think it is very good news to us that this new capacity could bring in more than TWD 100 million upside potential for our growth.
Sorry, more than TWD 100 million is all in fourth quarter, or it's actually fourth quarter and also next year?
No, for 2023.
Oh, okay. Understood. Since I think we're heading to the mid of this year, just wondering would you share some of the color about next year in terms of the growth potential, also on the, like, capacity in ABF you got, or capacity in the main foundry you got, and the growth driver for next year. Thank you.
Okay. I would say this way, for 2023, I haven't done the forecast now, until now. I do have a picture that I deeply believe next year will still be a record-breaking year for revenue. Since first of all, the shipment to US hyperscaler customers will increase, and increase a lot. There are some production revenue to kick in from China customers next year. The most of them are from leading-edge technology nodes, like 7 nanometer, 6 nm or 5 nm All in all, the foundation, the TWD 500 million or 500-something million foundation, in 2023 will not change.
On top of that, we have more orders from U.S., and we have multiple more projects into production, and some of them are high volume projects. Next year will still be a very promising year for Alchip. I guess Johnny can add some colors for next year.
Sure. Yeah, like I mentioned earlier in the meeting, yeah, because of a bad experience of the capacity shortage, other than this particular U.S. customer, many customer already placed, committed the PO to us, yeah, in order to ensure the capacity on wafer, on substrate, and also on CoWoS. I'll be very optimistic for next year because we see the NRE trend. Before thinking about the mainstream, for us it's a 7 nm. Yeah, suddenly we see 5 nm opportunity, more and more 5 nm opportunity. Yeah, as you know, a 5 nm design, it take about a year to complete. Most of the revenue, major revenue will be recognized in next year. Also because the high demand for the MP forecast. Next year, I think I'm very optimistic for the next year.
Understood. Very clear. Thanks Johnny and Daniel, and congratulations on the good result. Thank you.
Thank you.
Next question from Hensley. Hensley, please.
Hey. Hi, Daniel Wang and Johnny Shen. Thanks for taking my question. I've just one question with regards to the more industry practice. Just wonder, to what extent we should be concerned that the rising macro risk on our customers' commitments on both NRE as well as the turnkey projects. Basically, just wanna know, in the more bearish case or more gloomy situation, like, what flexibility that our customer, our clients have in scaling down NRE or even mass production? Yeah. Thank you.
I think for your question, from our point of view, I think for the micro part, the risk is very, very low. Let me say this way, you may notice that, for every TSMC's earnings call or MediaTek's earnings call or other important company's earnings call, HPC remains a very high growth sector for more than, I think, four quarters or six quarters. Within the HPC industry, I would say, currently HPC is kind of like an infrastructure to the future internet or let's say Metaverse. Almost every hyperscalers, giant enterprises are investing a lot into building up the infrastructure. The ASIC, or let's say the HPC type of ICs is the bare bones of the infrastructure. We don't see too
I will say it this way, we see almost zero risk for the demand side from the HPC industry. Especially when the situation right now is the
Engineering is in critical shortage right now. Actually every customer is fighting for design resource and the supply.
All right. Got it. Thanks. This is very assuring. Thank you.
Thank you, Hensley.
The next question from Brian. Brian Oh.
Hi. Thank you for taking my question. My first question is on the substrate supply. Can you just elaborate a bit more on your arrangements with your existing suppliers for this and next year? How much more supply are they going to give you? And also for the new supplier, are you concerned that maybe sudden yield shortage or over yield risk during ramp as well, since that would be a new project for them?
Okay. For the ABF substrate supply, I will say the previous, our long-term and current supplier, the major supplier is Nan Ya PCB. We also have Kinsus and Kyocera. In addition to those suppliers, we do add new suppliers for our substrate. Because of the NDA and because of many reasons, we cannot disclose the detail of the supply status. Actually, from a year perspective, the new suppliers, we do have good confidence on that because they have very good track record. I will say from the schedule point of view or from the year point of view and for the commitment point of view, I think the capacity we can get for next year is pretty satisfied. Yeah.
Okay.
Does that mean you think you will no longer be substrate constrained by next year, or was this going to be an issue?
I would say I won't say constrained because we still have a lot of time prior to next year. We already placed orders and the deposit to ask our supplier to reserve some capacities for us. Will we have upside? Yes, we will. If you are asking if the capacity we got can fulfill the total demand of our customers, no. The demand is still much higher than the supply.
Let me add to that a little bit. Basically, we are working with the substrate supplier very closely. They seeing Alchip differently compared to most of our customer. Of course, they are not short of a customer, but from their side, they also want to diversify. Choosing Alchip, I think it will be the very easy way, because we are representing more than 30 customer. We make a business commitment. We can help them to diversify the business. Also, just like Daniel mentioned, we even prepay for the future capacity. It's not possible to cover all our customer need and potential need.
We can say the capacity we receive next year already can meet our next year growing target. Yeah. It's already very sexy for us.
My last question is for this year, what will be the breakdown in terms of end application for your Chinese customers?
You mean what breakdown?
The application, or what type of projects they'll be working on.
Okay. I would say the majority is still from HPC related, like CPU, GPU, GPGPU, AI GPU, or DPU, MPU, something like that. We also receive projects. We also won projects from, like I said, the image signal processor. Maybe we will win some projects from the automobile kind of type of projects.
Yes, HPC still the even in China or U.S., HPC still majority, contribute the majority of the in terms of application.
As a stress testing, if any of the customers there had to face similar constraints as Phytium, what do you think the impact is on your business?
Are all of them no longer relying on US technology?
Well, that's a million-dollar question. So far so good. Hopefully it won't happen, but just like I mentioned before, even if it happens, we know the SOP. We follow the rule or follow the regulation, helping our customer to resume production if it happens.
Thank you.
Okay. Thank you, Brian.
Okay. I think next question is from Hensley, and since we are getting late, this is the last question, I think. Hensley, please. Hensley?
Oh, sorry. I forgot to raise my hand.
Okay.
Okay Let's say we have one more question opportunity left for you to ask. You are so welcome to ask questions.
Mm-hmm.
Stewart Winchester here.
I know you commented earlier about the situation in China. Just from you, because of your long-term relationship and business dealings there, perhaps you just describe on a some sort of scale as to how concerned you are with what's happening in China and the ability to do business there relative to any time before. You can describe it in terms. I'll help you with this answer, with a scale of 1 to 10, with 10 being just very difficult and 1 being very easy.
Johny, you want to answer?
Uh, you mean the-
Philosophical question.
You mean during the geo-
No. Just what you see now.
Uh-huh
versus what you've seen in the past, just on a relative scale.
Okay. You mean during the lockdown or because of?
Yeah, well, that's one of the. It's a far-reaching question. It's not just the lockdown. It's just, you know, you're doing business in China.
Right.
How do you see it right now?
Relative to other challenges that you've had during the time you've been doing business over the many, many years?
Okay. Well, that's a big question, but honestly, that's a good question. Yeah. In terms of trade war, in terms of a geopolitical concern, yeah, I know the fighting between U.S. and China will continue, sustain. It create a lot of difficulty for us. For example, Phytium and GoKe facing some challenge before. Thinking about the bright side, because of this competition, it create more and more opportunity for us. Funding in China in the past is not an issue. We see more and more startup company open and focus on leading edge technology. In terms of NRE, I don't think that will go down.
Yeah, we will see more and more opportunity. Yeah, in order to diversify our risk, that's why we are focused U.S., yeah, especially production-related business more in U.S. At least, for the short term. Other than this number one customer, we also find out a couple of high production business in U.S. We are not giving up the China production because they were most of our customer, a lot of customers, they all give us a strong forecast. Maybe in the later when the customer hitting high volume, they will facing another challenge. We need to diversify overall entire situation. Overall, U.S. for mass production, more for stable mass production, and China for leading-edge opportunity. I think that now will be the current focus for us.
Yeah, in terms of lockdown, we already anticipate this kind of problem. Two years ago, the lockdown area even more. Five subsidiary all lockdown. This year, only Shanghai. We're doing a big investment on the cloud computing. Even during the lockdown work from home, the impact for us is very insignificant. The problem for us is, business side and supplier side, usually the face-to-face kind of meeting, chance will be getting less. In terms of project delivery and winning the repeat customer, I don't think that's an issue.
Yeah. No, a very pragmatic answer. Thank you.
Thank you, Stewart.
Okay. Thank you all for joining us today. Thank you for your support. We see you next quarter.
Thank you very much. Thank you for supporting us. Yeah, please trust us.
Thank you, gentlemen.
Thank you. Thank you.