Dear investors, portfolio managers, and analysts, welcome to our institutional investor meeting for the year 2020. For this meeting, since we have the investor conference meeting for the first three quarters last year, this presentation, this meeting will focus `on our fourth quarter results and 2020 recap. In addition, in this presentation, I, Daniel, and our CEO, Johnny Shen, will also cover the 2021 outlook. After that, we will enter the Q&A session. For the Q&A session, please use the raise hand function by room. Please click the button and I will unmute you, and then you can ask the question. By the way, the video and the audio content of this meeting will upload to the MOPS after the meeting closed. It may take several hours. You may watch the video or listen to the audio of this meeting.
No energy.
By in the evening today. Okay. I'll invite our CEO, Johnny Shen, to do the opening of the routine, starting from the company update.
Ladies and gentlemen, again, thanks for coming to the investor conference meeting again. This is Johnny Shen. I'm CEO and President of the company. Once again, allow me to do the quick company identification and update again. Our company is founded in 2003 and listed in 2014 on the Taiwan Stock Exchange. Current headcount, we have 450 employees. More than 75% are engineers. Since we founded the company, we've been successfully tape out more than 450 designs. For last year, we are achieving NTD 240 million revenue, and we are taking more than 30 designs in parallel, including projects already tape out, and also projects still in the middle of design. Companies that focus on HPC and AI. Through the quick calculation, the revenue from HPC and AI are more than three quarters. We are one of the TSMC VCA members.
In fact, only two VCA members has a worldwide TSMC distribution, PDK distribution, right? I think only Alchip and GUC can do the design service and production for all over the world. Next slide, please. I don't want to spend too much time to explain the IC market again. IC market is very big and growing. Our company is focused on the HPC and AI area. We consider the entry barrier for HPC and AI are much higher than most of our applications. Design is very big and complicated, and HPC and AI always require the leading-edge technology. For this year, as I mentioned before, more than 75% of our total revenue is coming from this field, and we truly believe the HPC and AI market will continuously grow and sustain, and also with a reasonable margin. Next slide, please.
Since this is the beginning of the meeting, let me do the quick company recap for last year. Obviously, our company was doing very well last year. We have a record-breaking number. We have a record-breaking year for all numbers, including revenue, operating income, net income, and also EPS. Capital market update. I think our share price performance is also very good. Beginning of last year, it's about NTD 200 something. By the end of last year, it's NTD 621. One of the major achievements, GDR, we successfully attract many famous ideal investors. The overbooking, oversubscribe rate are very high, 6x- 7x. Currently, we are achieving more than a $ 2 billion market cap right now, and sell-side coverage is also quite promising. They give us a very aggressive target price, already from NTD 780-NTD 1,180. We have a great position in high-end, leading-edge business.
Last year, highest MP volume, also with a strong forecast. We have the most new logo won and also ongoing projects. Multiple 7 nm in production right now, and one of the biggest achievements by the end of last year, we signed a contract to win our first 5 nm full turnkey design. Next slide, please. Yeah, last year, everybody suffered the trade war tension, but we always consider that's one of the advantage for the company. Trade war does accelerate the China IC industry. All the China IC maker has a higher dependency from the proven channel like Alchip. We have more opportunity and demand from existing and startup company. COVID-19, overall, we have an insignificant impact on project deliveries. The quarantine requirement favor the local supplier. To be honestly, we see last year, where we encounter much less competition from outside.
We rarely see any competition from India, from U.S., or even from Taiwan in the China market. Travel constraint does slow down our Japan and U.S. business. China capital market, we call stock market. That's a quick and easy exit for China IC companies. Stock market stimulates emerging IC market, we all know that, and we have a lot of more opportunity due to the stock market. That's a quick recap for last year. Yeah, Daniel, please go over the statement.
Yeah. I'll take over from the financial numbers on this page. On the page is our first quarter quarterly income statement. For the first quarter, our revenue reached $66.4 million, and while the operating income is $8.3 million. In fourth quarter last year, we have quite good non-operating income, which is mainly contributed by the China government subsidy to our China subsidiaries across Shanghai, Wuxi, Hefei, and Guangzhou. The net income for the fourth quarter is $8.1 million, almost $8.2 million, translating into EPS is NTD 3.8. You may notice that the net income for third quarter and fourth quarter are different, but the EPS is the same. That's because of the FX exchange rate impact to the EPS Taiwan dollar numbers. The total revenue for the first quarter last year, the year-over-year growth is 41%, and the net income year-over-year growth is 77%.
For the yearly P&L performance, you may notice that we have a very successful year last year. The total revenue is $239.5 million, is 71% year-on-year growth. For the operating income part, the operating income is $33.4 million, which up 138% year-on-year. For net income is more than double growth for last year, is $28.2 million for the whole year 2020, translating into EPS of NTD 13.6. For the revenue breakdown by application, you may see the HPC has become a dominant portion to our revenue. Last year, the HPC related revenue contribute about 76% of our total revenue, while the niche market contribute 11%, the networking 8%, and the consumer are down to 4% from 9% in year 2019. For the process technology, we are very proud that in terms of the process node breakdown, Alchip should be the leader within this industry.
You may see for last year, the 7 nm related revenue already accounts for 27% of our total revenue, while the 16 and the 12 nm combined contribute 53% of our total revenue. Of course, maybe most of you already know the major driver for the 16 nm node is our biggest customer, Baidu, the CPU for both PC and the server. The combined 28 nm, 16 nm, 12 nm, and the 7 nm, those related revenue already accounts for more than 90% of our total revenue. For the regional breakdown, you may see China now is our most important market. Last year, revenue from China customer accounts for 64% of our total revenue.
Japan last year, although the absolute number of the revenue grow at certain level, but the percentage contribution down to 15% from 18% in 2019. For the others, the others include the Europe and the North American market, which combined contribute 70% of our total revenue. We expect the regional breakdown this year to relatively keep the same. The Japan contribution in terms of percentage will go down a certain level. For the contribution from North America and Europe will go up. That's the revenue breakdown by region. For the business review. For last year, China CPU shipment is the major growth driver for our revenue growth. We keep on seeing strong demand from our major customers, extended from the second half 2019 to the whole 2020.
China and the U.S. tension, as Johnny mentioned, event stimulates greater demand of China IC designers to release their orders to Alchip or to start even more projects. All create more of this opportunity to us. In addition to the strong CPU shipments, I think the 7 nm project flow was another reason for a very good 2020. Those projects came from both the existing and the new customers. The second part is the AI. The 7 nm AI projects, many of them are in design phase in 2020. We expect we may see the shipment to start in the second half this year. Actually, two of our major AI chip customers will sequentially kick off the production, starting from, I think, late third quarter.
The 16 nm AI shipment last year is a little bit disappointing, because according to our customer, they consider this technology node, to them, will be a trial and a test purpose. The overall shipment volume for those chips are not quite significant. For last year, as Johnny mentioned, we won new AI 5 nm full mask turnkey project from a Europe customer. We already taped out the 5 nm test chip project for our North American customer. Sorry.
Yeah, that's okay, Daniel.
Johnny, can you see the slides?
Yeah, I can see the slide, but we don't have that page. Anyway, we can go to the Q&A section.
Okay. Let's go to the Q&A section. Please use the Raise Hand button. Si Ho, please. You can unmute.
Once again, you are welcome to raise your question in English or Chinese. Mandarin. Welcome.
Hi, Johnny and Daniel.
Hi, sir. Uh-huh.
Hey. Congratulations. Yeah, two questions from my side.
First, regarding the GDR, very good response. You turn out raising around NTD 95 million-NTD 96 million more than your target, right? NTD 100 million initially. What's your latest plan for the use of proceed?
That's my number one question.
Okay. Uh-huh. Let's answer sequentially. Daniel, why don't you answer first?
Okay. For the GDR, actually, the use of proceed, already announced last Board meeting and last institutional investor conference meeting. We will use the money we raised from the GDR, first of all, to purchase the mask, because the 7 nm and the 5 nm mask is quite expensive. We have to prepare the cash. Secondly, we want to use the cash to try to secure the 7 nm capacity. Until now, I would say for the first quarter and the second quarter, we have been doing pretty good. You may notice from our January revenue performance. For the first two quarter, I would say the 7 nm capacity is pretty much satisfied by both Alchip and our customer. For another purpose, there are a lot of opportunity on the market, especially in China right now, that we want to use the money to acquire some design capacity.
As I mentioned, or Johnny mentioned many times, that currently we are short of design resource. The business inflow is much greater than our capacity. We try to expand the capacity organically and maybe through some acquisition. Of course, we want to create a maximum design flexibility. It may also require some fund to do such kind of things to maximize our resource flexibility.
I see. Okay. Thanks. Second question. This year the focus will be more on the 7 nano and 5 nano, right? The NRE, the project value, will definitely grow up a lot. In terms of the design engineering input, would that grow in tandem with the project value, or would you be able to generate more efficiency, when you migrate to this model?
Johnny?
Yeah. Let me try to cover that. Increase the design efficiency is always one of our engineering goals. Currently, leading-edge technology requires a lot of resources. Let me just give you an example. For 7 nm design, in usual case, we need about 30-40 people.
Yeah, concurrently. I think the design cycle is about 8 -1 2 months.
Starting from last year, we successfully can shrink the design resource and also shorten the design period. I think increase our design efficiency is always our goal. As you know, the demand is much more than we can supply. We still aggressively try to hire more people.
Our current headcount is 450 people. By the end of this year, we are shooting for about 600. Hopefully, we can achieve. As you know, the resource, the fighting, especially in China, resource situation is very tight. Luckily, Alchip is doing very good and being very famous, and we are one of the only company doing the 7 nm and 5 nm design in China. Attracting talented resource, I think, compared to most of our company, we are doing okay.
Very great. Yeah. Let's squeeze one last question, a very quick one.
Okay.
In terms of the revenue mix, the NRE and also the production.
Have we started to change that from last year to this year?
Okay. Let's say it this way. For last year, the NRE revenue accounts for about 44%, 45% of our total revenue. For this year, because the NRE revenue is also strong, we don't expect too much decrease from the NRE in terms of percentage. We expect the NRE revenue will still account for around 42%-43% of our total revenue. Of course, it also depends on the production revenue growth. For the forecast, I think there is still swing factor for our production revenue, is the capacity allocation in the second half this year. For now, we project the NRE accounts for about 42% of our total revenue this year.
Okay. Thank you very much. Yeah, congratulations.
Thank you.
Thank you, Si Ho.
Thank you.
Charlie, please.
Hello, Charlie.
Yes. Hi. Thanks for taking my question. Good afternoon, and also congratulations for great execution again. My first question is about the China local AI and GPU trend, right? As you can see that your U.S. customers in this 3 Q is going to mass produce those AI chips. I think that the next leg should be coming from China. I'm curious, because from the recent news flow and research, for example Baidu, they want to do a AI startup. Their Kunlun chip is 7 nm, and several startups like Suiyuan.
They are doing a 7 nm chip. Those are all your clients or did we miss anything? Johnny, you just said that Alchip is probably the most competitive and probably the only design service provider in China. How do we think about the future opportunity for those China AI and GPU chip design?
Okay. Let me try to answer it, and Daniel, you can add later. Charlie, you are right. We see a lot of new opportunity in China. People doing the AI, people doing the GPU. A lot of companies acquire the talented people from NVIDIA, from AMD, from Qualcomm, and they start to make a startup company, and doing the AI chip or doing the GPU chip, and target for the most leading-edge technology, 7 nm. This opportunity has keep coming to us. To echo your statement, you are right. In China, we are pretty much the only proven service provider who has a 7 nm or 16 nm bit chip design experience. By default, when they establish this company, they only have two choices: Go to Alchip or try to do it by themselves.
Most likely, they choose the first one because put together the whole thing, including front end, back end, I think is very difficult for them.
Biggest challenge for us, because they are new.
The design cycle will be relatively longer.
Also the production. Their forecast, I think the actual compared to reality, there must be certain gap. We be hesitate to take too many of this kind of new project. Overall, since their funding is not an issue, we always receiving very reasonable NRE from this startup company. That's why we are aggressively hiring more people, try to take and try to satisfy all of them.
In fact, almost every month has a new company appear.
Oh, really? Okay.
Yeah. Daniel, do you want to add?
Okay. Charlie, the situation is like this. For the hyperscaler, you mentioned like Ali, like Tencent.
ByteDance. I think Baidu is relatively weak recently. For those service providers, we do have call with them for the projects.
As Johnny mentioned, for those players, they want to do the most leading-edge technology design.
At this time, we don't think their technology is 100% ready.
We really don't think the project they are talking to us, the production revenue will be good.
Most of the project we consider are trial and test purposes.
We have to use our resource smart. We intend not to take too many of them.
Because we do believe, given our position in China market, as long as they have certain technology breakthrough, there is no doubt they will look for us. For the current stage, I think those hyperscaler service providers are trying to do the chip. You may see quite long, the design turnaround time for their chips.
Okay. Thanks for all of those information. Yeah, I appreciate the company being selective, have some discipline in taking projects, right? It seems like according to those public information, for example, Baidu Kunlun II uses Broadcom's design service, right? Cambricon, they also use Broadcom.
I think there are still some competition in the radar screen, and like, Suiyuan, they just want to design by their own, right?
The Tianshu Zhixin, they seem to work with the EDA tool company. The opportunity is big, right? Does the company underestimate the potential competition here?
I think there must be competition, and we welcome the competition. Without competitor, a company cannot grow. I truly respect Avago, Broadcom, this kind of service. I think different company facing different challenge. Like I mentioned before, startup company is very difficult to complete their first project with international service provider. We've been working very closely to our customer, almost shoulder to shoulder every day. Can you imagine, the other service provider who has the most of resource outside of China?
Yeah, it's very difficult to understand and satisfy with the local company, especially they are first time or second time doing a chip.
Yeah.
Okay.
Also, our support and pricing structure, I think compared to this A company in U.S., we are much, much competitive.
Okay. Yeah. That's very helpful. Johnny or Daniel, put all those together, do you see any revenue contribution from those China AI GPU stuff in 2022? Can you quantify a little bit and also your global AI revenue in 2022?
Okay. Daniel, why don't you go ahead?
Okay, sure. For the GPU part, actually, we are doing three GPU projects. Two is the generic GPU. These two projects are all from China customers.
Another one is the AI GPU.
Also from a China customer.
Oh, really? Okay.
Yes. Currently, we have three projects in pipeline.
Of course, we will receive the NRE revenue this year, and hopefully, the production will start next year.
Mm-hmm. Okay. Thank you.
Yeah. To make a comment on the AI chip, I think revenue for this year. Daniel's presentation also mentioned about we have a very high expectation from our North American customer. That two particular customer give us a very aggressive forecast.
Hopefully, by the end of this year, Q3 and Q4 timeframe, we will see the very significant AI revenue. Good thing for this particular customer, we are facing less challenge on capacity support because they are also very strong, and they can come to TSMC directly.
Fighting for the wafer capacity together with us. Once they have a demand, I think I have a high expectation for AI, especially for that H company. Right now, maybe I company, they give us a very strong forecast.
Okay, thanks. Yeah. Just last one, it should be very quick, and I will be back to the queue.
Company is so confident, right? Can Johnny or Daniel give us the full year revenue target guidance and also gross margin? I know your NRE mix is going to be similar, right? Given the photo mask cost is going to be higher.
Do you see any margin dilution? Revenue guidance, gross margin, OP margin guidance will be great. Thank you.
Okay. For the whole year revenue guidance, I would say in last investor conference meeting, we told that the market consensus, which is about $32 0 million-$ 330 million, we are pretty confident that we can achieve it. For now, our expectation is higher. We have strong confidence that we can overachieve such kind of revenue forecasted by sales analyst. How high we can go, this really depends on the capacity allocation in the second half.
Since we cannot deliver a very clear picture for the whole year, for the first quarter, as the capacity already booked, we will say we will have a very good first quarter. The quarter-on-quarter growth will be, I would say Okay, Johnny, you can say that.
Okay.
For first quarter. Yeah.
Okay. Q1, I think, fortunately, we get all the capacity from TSMC. Of course, thank you very much for this major supplier. I think Q1, as Daniel mentioned before, we have a very confidence to achieve another record-breaking number. Yeah. Overall, conservatively, I think a minimum of 50% growth YoY.
No. Quarter-on-quarter.
Quarter-on-quarter, yes.
Yeah.
50% quarter on quarter?
Yeah.
50%?
Yes.
Yeah, 50%.
Whoa. Yeah, that is very big number. In that case, sorry, I promise, it's going to be brief, but I kind of think this is important. 50% quarter-over-quarter. Your full year guidance must be too low because should mean 2Q, 3Q, 4Q is going to be higher than 1Q then 50%.
No.
Charlie, we all know that. I think the TSMC capacity, that dictate the revenue number. Without this, I think we have quite confidence to deliver much higher numbers. Yeah. The Q1 capacity already is secure. I think the good thing is one of the giant company in China virtually out of the market. We get a lot of spare capacity on 7 nm. Hopefully, this trend will go on. We have much confidence to deliver higher number. Q1, Q2, I think the forecast is more accurate, especially Q1.
Okay. yeah, definitely. Yes.
I don't want to release too aggressive guidance to all the investors. For the first half this year, as I told to the investor many times, there is a special project. It's a data center project. It's a 7 nm shipment. The total size of this contract is very big. The shipment will concentrate into the first quarter and the second quarter. If you are talking about the quarter-on-quarter pattern, I think the quarter-on-quarter growth for the first quarter will be very good. For the second quarter to the fourth quarter, I think the quarter-on-quarter growth will slow down, will not as high as to, like, the first quarter. You know what I mean?
Yep.
Yeah.
Okay. Yeah. That's clear. Thank you. I will be back to the queue. Thank you.
All right. Thank you very much, Charlie.
Haas, please.
Okay. Thank you, Johnny and Daniel, for the very good results. Thank you for taking my questions. My first question is probably just a quick follow-up on your first quarter guidance. Which you guided to be up 50% quarter-on-quarter. I was wondering if you could provide more detail on your customer breakdown in 1Q. For your expectation for the HPC customer in China, you just mentioned that most of the shipment will be skewed to first half this year. Could you also give us some sense about, compare with 1Q, what do you think about the customer's contribution in 2 Q? For full year, are you still targeting that customer to be a $50 million-$100 million contribution for this year? If you think any upside from the customer. Thank you.
Okay. For the particular project, actually, for this customer, our second largest China customer, they have multiple projects in design or in production by us. For the first half, it's the shipment contributed from the first project, which is a data center CPU project. As you mentioned, we guided that the contribution will be ranging from $50 million- $ 100 million. I think the actual contribution will still be within this range. The peak of the shipment should be in the late first quarter and relatively flat in the second quarter, and then a little bit less in the early third quarter. That's the reason why I said the quarterly pattern, the quarter-on-quarter growth, for second quarter to fourth quarter, will not as high as to the first quarter.
Okay. Could you provide more detail about your customer or probably the revenue contribution by region, or customer mix in first quarter this year? What about your first or largest China customer contribution in first quarter? Thank you.
Okay. The first quarter is not finished yet, so I'm lazy. I didn't do the breakdown for the first quarter. Based on my memory, I would say for Phytium, the contribution in first quarter and the second quarter will be lower than our second biggest customer because of this special data center project. Let's say this way, you see our January revenue, which is already announced, is about $27 million-$28 million. We expect for the February and for the March, we may see certain growth in February, and we may see further growth in March. If you do a simple calculation for the first quarter last year, our total revenue last quarter is $54 million. I think for January and February alone, the numbers will be already higher than the first quarter.
That's why we are guiding a very aggressive revenue performance for the first quarter this year. Mm-hmm.
Okay. Just a quick follow-up clarification on your first quarter guidance. Is it up 50% quarter-on-quarter or at least 50% up quarter-on-quarter? Thank you.
Not up to, I think 50% quarter-on-quarter is relatively.
Conservative. Okay. Anyway. Yeah. One of the highlight for Q1, I think our U.S., I think revenue from North America, I think increased quite a bit compared to before. Yeah, we're shooting for there will be a 7 nm tape-out happening in North America, I think, based on current forecast.
Okay. Thank you. That's very clear.
Okay.
My second question would be regarding your GDR proceeds. I think you just mentioned the purpose for the proceeds from the GDR is mainly for the investment in China and also tape-out, and also some for the R&D capacity, and also to secure foundry capacity as well. Could you also provide us some update on the Korea ASIC LAND investment as well? Thank you.
For the ASICL AND investment, actually, it doesn't use too many cash. The total investment amount is not big. We already announced it, last four meetings . All the terms have come to the end, almost. We will proceed with the investment. We will complete the investment maybe by the end of this month.
Does that mean that you can start working with this company for some of the SSD controller business from later this month?
At this point, we cannot say too much because we cannot represent ASIC LAND, we're just an investor and partner. Based on our information, we can only say ASIC LAND has a good opportunity to win SK hynix projects and maybe Samsung projects in the Korean market. If those projects are 7 nm with massive shipment volume, ASIC LAND's current company scale is not capable of handling those productions. For those projects working with us, we provide the technology support for the 7 nm, and if the project won't happen or happened, we will handle the production. For now, we cannot give you a clear answer about whether we win it or not. Yeah.
Okay, got it. That's very clear.
My third question would be regarding, you just mentioned you have a lot of design opportunity in China and the U.S., while the capacity is still quite constrained.
Right.
Could you discuss more in detail if you can sign the contracts with your customers on a certain amount of the wafer production to ensure you have the operating leverage from the turnkey business, instead of just pure NRE?
Okay. For your question, I think I can tell you what I know, and I guess Johnny will be much more aware of this question. For the 7 nano capacity, it's not like we negotiate, not negotiate, we talk to TSMC alone about how many wafers we want. We have to tell them the reason why we want so much capacity. We have to tell them because our customer A needs this many wafers, and our customer B needs this many wafers. They will analyze, then they will make their decision to decide the strength of the support. There's nothing like we just tell TSMC that we want 4,000, 5,000 wafers without any backup reasons. That's the mechanism we discuss with TSMC.
I think the things always come down to what application you have and what the customer you have to try to get the capacity allocation.
Yeah, I believe, Haas, your question is toward the design capacity or wafer capacity?
Design capacity.
Oh, design capacity.
Your design capacity is quite constrained now.
Right.
Mm-hmm.
Yes, to answer your question, I think the reason they want to work with Alchip, I think it's mainly because of our design track record and design capability. Yeah, of course, if it's a production-only type of design, it's totally welcome. Just like Daniel mentioned, that's effortless. We don't need a lot of resources, we can enjoy the revenue. Currently, the demand is all toward the design. Yeah, we help them to do the entire backend implementation, plus production. We welcome the production-only design, but we refuse design-only type of project. No matter the company, how big it is, if they come to us, they only want us to do the design without production, we will refuse. Yeah. No matter how big the company is.
In the past, a few North American customers, in order to demonstrate our design capability, we do take a few design service-only type of project. Right now, at this moment, our company already made a decision. Using our design resource has to use our production channel.
Got it. When you sign the NRE contracts with your customers, at the same time, will you also sign a guarantee on wafer production?
Right.
As well?
Yes. We own the mask. Yeah, that's one condition. They have to do the production go through us.
Okay. There's some housekeeping questions I want to follow up on. Could you discuss more in detail about your subsidies from the China government in the fourth quarter? What is that for, and the expectation for their subsidies for your subsidiaries in China for 2021? Thank you.
Mm-hmm. Yeah. Daniel, do you want to answer that?
Sorry, I just received a message. I didn't hear clearly.
Okay. The subsidy from China.
Okay, the subsidy from China, I think there are different subsidy scheme from different local government. We recognize that. There are many conditions we have to meet to get the subsidy. For last year, my guess is the total subsidy will be around $2 m illion-$3 million. I want to clarify, I just received now, maybe I'm wrong about the fourth quarter numbers I just told. The fourth quarter numbers last year, the revenue is $ 66 million. Instead of I cannot remember it right, I guess I told $ 54 million.
Okay, there's no guidance for the subsidies you can potentially receive in 2021?
Right. Sorry. Fourth quarter 2020, the total revenue is $ 66 million. Forgive my calculation. I would say for the first quarter, the quarter-on-quarter growth is based on $ 66 million for the fourth quarter. I would say the quarter-on-quarter guidance will be.
Yeah. Daniel, the last year, you mean the quarter-on-quarter? I mean, YoY is more-
Yeah. Sorry. I was wrong. I think the 50% growth should be year-on-year.
Okay, that's very clear clarification on your sales outlook for first quarter.
Yeah. Let me add some comment on the subsidy. The China support, I think last year we received certain subsidy from China. Before, we consider the China subsidy is a one-time deal. Right now, based on the policy, and this subsidy, I can consider that's sustainable. We expect this year, we can get similar or even higher from China, because of many payback and also the revenue in China subsidiary.
Okay, thank you. My last question. I will be back in the queue for further questions. It will probably be regarding your OpEx outlook this year. You are going to expand your R&D accounts to close to 50% year-on-year this year. What should we think about your OpEx growth in 2021? Thank you.
Okay, we take a top-down approach. The year-over-year OpEx growth will be like, we currently plan to grow 20%.
Okay. Thank you very much.
Okay. Daniel, before you're taking the next question, let's do the forecast. I mean, the clarification on the Q1.
Yes.
We mentioned about last year, our Q1 number is $ 50 million. It will be over $5 0 million. For this year, we have a high confidence to achieve YoY growth more than.
Growth more than $ 50 million.
Okay.
Yes.
Okay. Let's take the next question.
Okay. Chi Ho Wong, please.
Hey. Hello Daniel, Johnny. Congratulations on the good result. This is Chi Ho. My question is regarding your employee number again. By 2019, you have about 404 employees, and 2020 you have 450, as you mentioned. You only grow your employee by about 10%, but when I look at your NRE revenue, you nearly grew the NRE revenue by some 30%-40%. That's a massive increase in employee productivity, right? My question is, did you use a lot of outsourced engineer last year, and that's why you need to expand your in-house engineer by almost 30% in 2021? Regarding the future employee productivity improvement. Like 10% employee growth last year resulting some 40% NRE growth, that's pretty amazing multiple. How should we be expecting this multiple to trend in the future?
If you grow your employee by 30%, will your productivity be even higher that will generate even higher NRE revenue growth? That's my question. Thank you.
Okay. Chi Ho, very good observation. I think you pay a very close attention to our headcount and revenue. Yes, our revenue increased quite a bit, quite significantly, but headcount doesn't increase too much. That's true. To be straight, we do use some insource. I'm not saying outsource. We invite some contractor working under our facility. Yeah, overall, but not too many. As I mentioned before, our design efficiency increased a lot. Before, we needed four people to complete one project. We can successfully shrink to about 30. One additional thing is, it's not healthy to be strained. Our engineers work extremely hard, day and night. Honestly, it's not healthy. Our company doing very good. Most of our employees benefit from stock options. They are eager to work long hours, including weekend, including holiday. This continuously to go through this straining is not healthy.
This year, we have to more aggressively do the hiring. To see the China cost structure, honestly, the entry-level engineer is not so expensive. We try to increase more college grads, not increase our OpEx drastically, but we can increase our capacity and increase our design efficiency. Chi Ho, does that answer your question?
Yeah. My question is probably going forward, maybe your NRE revenue growth will be more in line with your headcount growth. Is that what you're describing?
Not really, because as you know, that will be linear function.
Yeah.
You all know that the leading-edge technology, we expect much higher NRE.
30 people, we're doing 7 nm, exactly the same thing. Doing a 7 nm versus the 5, the NRE, 5 nm will be much higher. Even without capacity increase, the revenue still grows because the technology migration.
I see. Okay. That's a great answer. Okay. Thank you, Johnny. Thanks.
Thank you.
Okay. Jeffrey, please.
Yeah. Johnny, Daniel, can you hear me okay?
Oh, yes.
Yes.
Yes. Go ahead, Jeffrey.
Great. Thank you. My question is, first question, crypto prices pretty high recently. The question is, have you seen any orders come your way for that? What's your strategy for or not taking any of those orders over the next year or so?
Johnny?
Yeah. Jeffrey, which pricing?
I'm saying like the Bitcoin.
Oh, you mean the Bitcoin, the cryptocurrency?
Yeah.
Okay.
Yes. Just curious, are you guys seeing orders there, or do you plan on it?
To be honest with you, we see a lot of demand. To be straight, because our capacity is limited, we set a much lower priority to take a Bitcoin business. Does our major supplier. Their 7 nm design capacity is very, very precious. They don't want to give it to the Bitcoin provider. That's why we set a very low priority. To be straight and honest, many customers approaching to us, but we didn't take any of them at this moment.
Okay, great. Understood. Thank you. I guess the next question, in terms of your expectations for the AI customer in Europe and the U.S., where do you see the most upside for the turnkey business? Does that come from a U.S. customer or your customer over the next couple of years?
All the major giant social media company, they all start to make an AI chip. We already won an approach on some of them. For example, the biggest data center company is already doing a multiple generation with us. The I company just acquired one of our customer. They have a strong forecast and demand on the AI. The G company, which is complete a test chip. Hopefully, we can win their next generation design. Other than these three giant company, we also aggressively approach others. N company, F company. They all have a clear roadmap to making the AI chip in the future.
Great, thank you. My last question, I know you talked about revenues for this year. Can you talk a little bit more about the margins? Obviously, you have scale increasing, but you do have more 7 and 5 nm. How do you think the gross margin, operating margin trends versus last year or this year?
Okay. For gross margin, we still expect that gross margin should be above 30%, but it should be in the lower 30s.
Okay. How about operating?
Actually, I don't have the numbers in my mind, but as I mentioned, our OpEx growth target is 20%.
Okay.
Yeah.
All right. Great. Thank you very much.
Okay. Thank you, Jeffrey.
There are questions from the message. First question is, Fubon Securities is asking, "How should we evaluate the contribution from North American AI chip in the second half or even on 2022?" I will go for it first, and I guess Johnny can do some details. For the AI chip, since we have high expectation for those projects to the North American customer. We expect the contribution will start mainly in the fourth quarter this year. Of course, it still depends on the capacity allocation, although we do not worry too much, but there are still schedule risk. To be conservative, I would say the revenue contribution from these chips in the second half would be not that significant. The major contribution will happen in 2022 and for the whole year.
The reason why we are so optimistic is because we already received the PO and the forecast from the customer, for both the A customer and the for H customer. For the pilot run PO, the amount is quite significant.
Okay. To add to that, our internal goal remains the same. Right now, the North American earnings contribute about 50% of the total revenue. Hopefully, starting from 2021 will be around 30%. That's our goal.
Okay. Another question from the message that is also the thing I want to do. Sorry for the mistake I made. For the first quarter guidance, the year-on-year growth should be over 50%, five zero.
Not quarter-on-quarter. The year-on-year growth for our first quarter this year should be 50% or more.
For the whole year, we don't have a very clear picture because of the capacity allocation. For the previous guidance, about $320 million-$ 330 million for this year, we think we can definitely overachieve. How far we can go, I read some of the report that they are estimating our total revenue this year to be about $ 360 million-$370 million. I would say for these numbers, I think it's achievable. It's not impossible. If it is 100%, it depends on the 7 nm capacity allocation. And, Charlie.
Oh, yes. Thanks for clarification and also taking my second wrong question. Daniel, I know it is now the 50% Yo Y, but I assume it is based on the US dollars, right?
Yes.
Based on U.S. Okay, we should also consider the NT dollar appreciation to calculate your NT dollar 1 Q revenue.
Is that right?
Yes, of course. Our functional currency is US dollar. No matter internally or for the public information, we use US dollar as our functional currency.
Okay.
For the numbers translating into NT dollars of course it will be affected by the FX exchange rate. Given the growth percentage, I think the impact will not be that significant. Yeah.
Okay. Thanks for that. In terms of the GDR share dilution, when would that start? By how much?
The GDR, currently our total shares outstanding now is about six-
16 now
690 something million.
That's paid in capital, New Taiwan dollars.
That's after the GDR.
Right. Yeah. It's after the GDR.
Okay. Thank you. Let's switch back to some long-term focus. I mean, I really care about your 5 nm test chip with a North America customer.
Your main competitor, Global Unichip, also very confident that they can win this design. Just to give us some more details. I mean, why both of you are so confident? Are you competing with the same project? What you should improve to secure design? Sometimes there are still comments about your capability for those advanced packaging, for example, HBM2, et cetera. Can you give us some color on this competition? Thank you.
Johnny.
Okay. Yeah. Of course, the G company is a very respectful competitor. They are working with that particular company. I think for quite a long time. I think because of successful of other project, the G company grant us the 5 nm test chip. The result is, overall during the design, they are very satisfied with our service. Hopefully, we have a good position to win this project. I'm not saying where there's 100% chance, but I thinking about we have a great chance to take this opportunity because we already have a 5 nm proven test chip in our hand. Yeah, in terms of design capability for HBM, I don't know why they are always mentioning about that part, that weak part to us. In fact, we have many proven HBM design ongoing and also in production.
With the Israel company or with the China company. I think whoever has HBM 2, this kind of a question or customer, they can come to us directly. We can address accordingly. We have a production chip, we have a test chip in hand. HBM 2, this kind of a design capacity is not our weak spot. In fact, I think we have many, many cases and can do the demonstration. 5 nm full turnkey design win. We already have it. Earlier in the slide, in China, we have many 5 nm design opportunity.
Yeah. I would assume there would be a major project after this proven test chip, right?
Right.
When would that be? Is that totally confirmed, and is it a kind of zero-sum game between you and the GUC for that major chip?
Yeah. The test chip will be come out very soon, and we are sharing all the result with the customer. This particular customer is also very dynamic and to be straight, they are shooting for 5 nm, 3 nm , one of them. Yeah.
Oh, oh. Hmm.
Yeah. They even think about 3 .
Okay.
Very dynamic.
Okay. Got you. Next is also real concern from foreign investors, right?
We are glad that your customer, Phytium, is growing so rapidly. Maybe one day they will pursue the China IPO, right?
It's just hard to imagine that a company with $500 million or $1 billion revenue will continue to use design service. Are you confident that Phytium will continue to use that design service in the coming three to five years?
Yeah. In the recent year, I think if they continuously using our service or not, I always tell their general manager, Alchip need to provide the value in order to sustain the business. They all agree. Like I mentioned before, we two company grow all together. Yeah. They are our customer since 12 years ago. The dependency bonded quite tight. Due to a lot of restriction, and they thinking about, is the best way to work with Alchip instead of go to supplier by themself. That's exactly the wording f rom their general manager. Yeah, I'm not saying we will do their business forever, but in the near years, this year, next year, the year after, I don't think that's a problem.
Hmm. Okay.
Yeah. They don't have a direct contact to TSMC, and they don't want to.
That's it.
Okay. I'm not sure if you noticed that, it seems like SMIC very likely already get the U.S. equipment supply again.
Yes.
Yeah. Any kind of information you can provide? This may change the dynamic again, right? Meaning, if SMIC will be able to do 40 nm or even 10 nm, like what Haas shared last time, right? There were some business projects at SMIC's 40 nm. Do you think they will go alive again?
We also know SMIC may sustain their production in 14 nm. I think that's maybe the good news for many IC company in China. For Phytium, I think they are two major product, HPC and CPU, already start the next generation with a 7 nm design. I think the existing 14 nm, maybe they will use some SMIC as a production. I think that's a missionary kind of a task. Major product line, they already decide go to 7 nm. I think it will take some time for SMIC to establish their 7 nm design flow. Based on my understanding, they don't even have equipment yet.
Okay.
Yeah.
Okay. Understood. That's all my questions.
Okay.
Thanks for your time. Thank you.
All right. Thank you, Charlie.
Okay, Jeffrey, you still have questions?
No, not for me. Thank you.
Okay. Okay.
Hi.
Okay. Go ahead.
Yes, I have questions about the mask. What is your current mask portfolio? Is mask the largest cost of goods of your company?
No. Let me answer this question.
Okay.
Actually, we mentioned many times that since we own the mask, so our mask and the IP, the amount will be capitalized. The mask will be our asset. In the COGS, we have three capacitors. First of all, the tooling and some local support, the tooling cost, which accounts for very minimum percentage of our total COGS. The other two component is, one is the wafer cost, and another one is the mask and the IP amortization. The mask and the IP will go to this item.
Okay. For 7 nm, how many masks you have right now? How many you need to invest? How many years you capitalize the mask?
Okay, I cannot tell you the numbers. We didn't disclose how many masks we have and how many masks we are going to invest. That's because we have so many. Secondly, for the appreciation time period, it will based on the real product life cycle. For the principle, the mask won't depreciate over 18 months. The maximum amortization period is 18 months. For some special project, like what we did, the cryptocurrency, the Bitcoin, we will amortize the mask in six months. It all depends on the real product life cycle to decide the amortization period.
Is there a minimum quantity that needs to go into production in order to recoup all the cost of a mask?
Not to recoup because the mask, actually, when we discuss with the customer, the contract, we are discussing the total contract value, or let's NRE total value. The total value include the mask and IP cost.
I see. For the 5 nm and 3 nm, how much more expensive than the 7 nm?
We cannot reveal the price because of the NDA.
I see.
Alchip and TSMC. I can only say that 5 nm mask price is much, much higher than the 7 nm.
Okay. This year, can I ask the total CapEx for investing in the mask and IP?
Total CapEx. Actually, I can't give you a very clear number, but to be honestly, we will announce our yearly report, actually, maybe within one to two days. You may see the CapEx last year to this year will definitely grow quite a bit because of the 7 nm project tape-out. For the total numbers, I don't have a idea of the exact number because there will still be schedule risk for the tape-out.
Okay. My final question is that in your past experience, have you really experienced that some of the masks, you cannot really get a payback? That means that it failed?
I won't say it failed, for some cryptocurrency customer, they do decide to tape-out the project, which means the mask is already produced and the customer already paid the mask. There was no production. They decided not to get into the production phase. We have experienced many within the cryptocurrency application.
Oh, okay.
For the other normal project, usually, you can imagine, if you invest so much money into NRE, especially the mask, usually you will try to produce as much chips as you can to recoup the investment from the mask.
Can the customer share the same mask, or everyone has their own dedicated mask?
No, the mask ownership is belong to Alchip.
You can use that one, say particular one for several customers?
No, because actually the mask design is dedicated for a particular customer.
I see. Okay, great. Thank you.
No problem. Thank you. There is a question and I want to clarify as well. Someone is asking about the last investor conference meeting, Johnny mentioned the target employee numbers by the end of this year is 700. I guess it's a myth. I would say by the end of this year, we target the total employee numbers is 600, and we are pretty confident we can achieve it, because there are two major incoming new employees. In the March, April and another time slice after the summer vacation, the graduation. After these two massive new incoming, we think the 600 target by the end of this year should be no problem. Another question from the message, someone, the account [Zilin] is asking, there are some talks about potential competition in the China local CPU market from x86 CPU alternatives.
If we also consider software capability for x86 CPU is arguably still better for now, how does Alchip view the competitive landscape in the China localized CPU market? I think this question is asking about what's the competition status between x86 architecture, the CPU, and the ARM-based CPU. Johnny, do you want to answer it?
Okay, sure. Let me clarify. When we think about the CPU opportunity, of course, Phytium is our number one customer. They are using ARM-based design. We are not saying Alchip is not taking any x86 kind of a CPU design. In fact, we do have a few opportunities. They are talking to us. In terms of the market share and also the performance competition right now, I think ARM is favored a lot. As we all know, Apple, a few quarters ago, just announced their ARM-based CPU. They have completely outperformed their previous x86 type of design. Go through the ARM, I think ARM-based design is kind of a trend. We also say that I think our number one customer has the confidence to sustain their market share. In fact, we start taking some x86 design also. Daniel.
Okay. Is there any questions?
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If there any question, we welcome both English and Chinese questions. Okay, I guess no one raised their hand. If that's the case, thank you for your participation in our 2020 Institutional Investor Conference Meeting. Thank you very much.
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Thank you. Bye.
Bye.