Dear analysts, portfolio manager, and investors. Welcome to our Alchip Technologies third quarter 2020 institutional investor conference meeting. This meeting will conduct in English. In the meantime, we welcome Chinese when we do the Q&A session. This meeting will divide into two parts. First of all, we will still do a short introduction of Alchip Technologies and the third quarter result, and our outlook, and operation update for fourth quarter this year and next year. After that, we will do a session regarding to our recent things decided by our board meeting, this board meeting, the GDR offering, and our investments. After that, we will do the Q&A session. If you have questions, please push the raise hand button, and I will unmute you, and you can freely ask questions to me and to our CEO, Johnny Shen.
You can write down your questions and message me through the Zoom message function. We will answer your questions right after we receive it. Okay. Now we would like to have our CEO, Johnny Shen to start the meeting.
Okay. Thanks everybody for coming. Yeah. This is Johnny Shen, the CEO and President and Co-founder of Alchip Technologies. Daniel, please go to page three. Yeah. In case you are new to our portfolio, let me make a very quick company identification and also update again. Page three.
Okay.
Okay. Our company is founded in 2003, IPO in 2014. Our current headcount is over 480 people. Yeah, within 480 people, more than three-quarter are engineer. By the end of this year, we will be over 500. Yeah, company is still aggressively increase our headcount and also design resource now. Since we found the company, we've been successfully tape out more than 420 designs, all in leading-edge technology. Our last year revenue is $140 million. Yeah, obviously, we're doing much better this year. Even the first three quarter, our revenue number is over $170 million now. Yeah, we are one of the TSMC VCA member, so-called Value Chain Aggregator. We officially help TSMC to distribute their technology, even for the most leading technology like 16 nm, 7 nm, or even 5 nm. Next page, please. Alchip is doing the ASIC business since we found the company.
Honestly, a few years ago, not too many people understand or buy in the ASIC market story. Now, ASIC become very popular. Actually, the market size is way beyond what we predict before. ASIC market is growing, yet demand is much more than supplier. Only a few limited player has a track record and experience to do the leading-edge technology ASIC design. Within the ASIC market, we are focused HPC and AI area. We consider these two area has a higher entry barrier. Since the design are huge and complicated, always require the most leading-edge technology. For this year, HPC and AI occupy more than 70% of our total revenue, and we truly believe HPC and AI application will continuously grow and sustain. Okay, the later few slide, I would like Daniel to share more detail with everybody.
This is the result of our third quarter 2020 quarterly income statement. It is pretty straightforward. Our revenue is almost record high at $67.7 million for the third quarter, which is 23% quarter-on-quarter growth and 132% year-on-year growth. For the operating income, because the third quarter, we have the major growth driver is the mass production revenue. The gross margin is relatively lower than the second quarter. The operating income is $9.4 million for third quarter. It's a 8.6% quarter-on-quarter growth and 174% year-on-year growth. For the net income is $7.9 million for the second quarter. The quarter-on-quarter growth is 22.7%, and the year-on-year growth is 111%. Translating into EPS, our single quarter EPS for the third quarter is TWD 3.78. The third quarter revenue can actually be higher than we previously expected.
The main reason is the CPU shipment to our China customers is stronger than we expected, especially for the biggest customer, both the server and the notebook use the CPU shipment is quite strong in the third quarter. For the NRE, which means the design service part, all the milestone came as expected. We have multiple tapeouts in third quarter. For third quarter's total revenue as a whole, I would say everything is pretty good from the company's standpoint of view. For the operating income, the third quarter operating income is $9.4 million, and the gross margin is 31.5%, which is a decline on quarter-on-quarter basis as I mentioned, because we have higher mix of production revenue in third quarter. The percentage for the production revenue in third quarter is about 60%.
Of course, HPC related application remains our major contributors to our third quarter, both top and bottom line. Our operating expense, if you look at the numbers, which is grow smoothly because we are continuously develop our, expand our people, our design resource, and our business. For the revenue breakdown, as usual, I'll start from the application. For the quarterly application, you can see the HPC now account for 73% of our total revenue in third quarter, and the networking account for 10%, and the consumer now only account for 4%. The other 12% is contributed by niche market. Sorry, I guess I'm sharing the wrong file. I'll upload the file again. Sorry. Gosh.
That's fine. It's cool.
I'm sorry about it. There might be some issue.
Got it. That's okay, Daniel, we can just use this. Not a problem.
Okay. Okay. Let me go back to Okay. I guess, on the right-hand side should be the yearly breakdown. It's a wrong file. I will try to fix it while we finish the institutional investment meeting. All in all, the high performance computing accounts for the highest percentage of our total revenue, no matter for the quarter or for a year. For this page, it's the revenue breakdown by process node. You may see, again, I'll fix the mistake here. There's no numbers on the 12 nm and the 7 nm. But for the third quarter alone, you may see the 7 nm and the 16 nm, these two accounts for about 80% of our total revenue. You may see the 16 nm contribution grow from 29% from second quarter this year to 41% third quarter this year.
That's mainly due to the CPU shipment to our biggest China customer. You can also see for the year, the 2020, this year, the advanced technology node already accounts for 92% of our total revenue. I think, from the process node breakdown, Alchip is definitely the leader among the back-end design industry. For the revenue breakdown by region, for the third quarter, again, because the strong shipment for notebook and server used CPU. The China contribution account for about 70% of our total sales. The second largest is Japan, account for 13%, while Taiwan accounts for 6%, and the other region total combined accounts for 11% of our total revenue. For the yearly, it's pretty straightforward.
For this year until the third quarter, revenue from China accounts for 62% of our total revenue, while Japan accounts for 16% and Taiwan accounts for 5%. The other region, which is mainly the North America and the Europe, accounts for 17% of our total revenue. This page is about the industry and the company outlook. I would like to invite Johnny to do-
Yeah. Let me continue. China HPC IC demand, we can say it remains very strong. Yeah, demand from major China customer keep increasing their orders, not only for mass but also for NRE. All our existing customer has a next generation, in addition to that, we do have a lot of new customer from U.S., from Europe, and also many startup company in China who are using the most leading-edge technology, like 7 nm. China CPU shipment, for both 16 nm and 7 nm, still expected to be a major driver for the next quarter and also for part of next year. Next year, in addition to this CPU design, we expect to see some AI chip shipment from China and also from U.S. NRE demand right now is, we can say is stronger than ever. Yeah, our design capacity is more than 100% now.
Yeah, in fact, it's 120% or more. Two capacity become our biggest business dependency. One is our design capacity. The other is a TSMC 7 nm wafer capacity. AI chip sequentially tape out Q4 and also first half of next year. We have a lot of design win recently. Based on current schedule, most of our design will be tape out starting from Q4 this year. In the other word, NRE for starting from Q4 and Q1, Q2 next year, in terms of total NRE amount, I think we expect grow quite a bit compared to this year. In addition to CPU project, our AI tape out in North America and Europe, and some of them only has a mass production plan. Another significant win, we have another 5 nm design won in Israel area. I think the contract already signed.
They also have a very aggressive design and mass production schedule. Yeah. Next page, please.
Okay. I guess, many of the investors will be very interested in our just announced GDR offering. I would like to tell everybody what the company's thinking about the reason why we want to raise money through GDR offering. We plan to raise about $100 million by 10% plus issuance of the new shares.
Yeah, again, the purpose, because this involves the company's strategy, I'd like Johnny to explain this part to the investors.
Okay. Yeah, last board meeting on Friday, we approved the GDR and two other investments. Let me share more detail and purpose of a GDR fundraising. First of all, we will press the trigger only when we consider the share price is within a reasonable range. Currently, based on how we all think, we are undervalued. GDR entire procedure takes some time. Board meeting just approved. We're going to have a shareholder meeting. Later on, we are going to get the agreement from Taiwan authority. The actual timeframe, I think, will be Q1 or even Q2 timeframe. We hope during that time we will have a more reasonable share price in order for us to press the trigger. Another purpose is to attract long-term and more stable foreign investors. The banker we are working with has good confidence to attract a few ideal target investors.
This GDR offering will be very quick and specific with a little discount. They have a confidence to attract a few of them. Another purpose to raise the funding is to prepare strong mass production growth in the near future. As we can say, this year, our mass production closing rate is a lot. To be honest, next year, the momentum is even stronger. We need to prepare enough cash in order to take capacity. Nowadays, capacity is very limited, not only from TSMC standpoint of view, but also for the substrate. You need to prepay in order to get the capacity. You need to have a more realistic plan with the prepay. This year, we encounter some problem with customer. We are waiting for customers' money before order to TSMC.
Starting from next year, we are working with TSMC more closely, has a more realistic plan. Once we can do the prepay. Also, right now, as I mentioned before, the supplier is much, much shorter than demand. We need to aggressively expand our design resource and solution. Design resource need to increase aggressively in order to keep our winning position. Some customer, especially the new startup company and some customer in U.S., not only need the design resource, but also need some solution, like a front end, like IP. Like I mentioned before, I don't intend to do this in-house, but we can do invest, working with suitable target partner in order to complete our solutions. The other purpose is to secure and forming the strategic partnership with the customer and supplier.
Nowadays, the relationship between customer and supplier is very dynamic, not only for a pure business standpoint of view, but strategic partnership is very important. They consider you are the good service provider. Sometimes they also consider you are their investor or partners. With a little investment, can make our relationship between supplier even tighter. That's another purpose for this GDR offering.
Okay. As Johnny mentioned, to solidify our relationship with customer and the suppliers and to explore more business opportunity, I will take our investment cases for an example. First of all, the ASICLAND. We are intended to invest ASICLAND. This company is TSMC's VCA member in Korea. Actually, currently, there are two VCA members in Korea doing the backend design service business. One is ASICLAND and the one is Global Unichip Corp. We had done business with Korean customer before, but the Korean market is very special. The local IC makers or system providers intended to work with the local suppliers. For the leading-edge technology node, there is no local backend design suppliers who can provide such kind of service.
Through this investment, it makes Alchip to tap into the Korea IC market through this strategic alliance with the local sales channel and the engineers of ASICLAND. We expect this joint force will win leading-edge technology node projects from very notable customers. Maybe most of you already understand that there are business opportunities in Korean market from not many, a few very sound name customers, such as Samsung, such as SK Hynix. By doing this investment to form the alliance with ASICLAND, we are in high hope to win the business from those customers. The second thing is the KQ, Kunshan Semiconductor Technology Industrial Fund. For this investment, the main purpose is, there are many notable and sound names of the semiconductor and IC companies are the general partner of this fund.
Of course, for the limited partner, for the LP, there are also many strong IC makers and mega VCs on the list. Through this investment, the amount of the money is that big. We can get a close relationship with those people and those companies. To build out this strategic alliance with these professionals, we may explore more business opportunity from our customers, especially in China. As Johnny mentioned, for now, the market is quite dynamic. With this strategic alliance, by building up the capability of doing the investment and other things, we think for Alchip's future business development in China, for doing this is quite important. Those are the examples for our capital raising purpose. Then I guess this is the presentation session for today, and thank you for joining us. Now we are open to the question.
Please use the raise hand function and I will unmute you, and you are free to ask questions. One more thing, we very welcome the questions in Chinese, so don't be afraid to ask questions in Chinese. We can do both English and Chinese without a problem. Thank you. Please, is there any question?
Charlie.
Okay, Charlie from Morgan Stanley.
Hello. Hey, Johnny. Hey, Daniel. I guess two questions from me. First of all, it's about your next two to three years outlook. It seems like your capacity is now very constrained, if not considering the potential capacity increase from your future strategic investments. With that, how big you can grow your business in the coming two to three years? Or at least, can you give us some revenue guidance or targets for 2021? Thank you.
Okay. Johnny, do you want to answer this question?
Let me take it first. You can add on later. Okay.
Sure.
Okay. Charlie, to answer your question, first of all, I have a confidence to meet or beat the major analyst's forecast, like you did. The reason we need to increase the capacity, because we see the demand is much more than we can digest. We have a chance to grow even bigger. After consideration and all the current situation, because before we are only thinking about existing customers' product and their next generation. Right now, it's so many opportunity. It's much more than we can digest. All of them are very sexy. Aggressively increase our capacity, I think, is one of our main goal.
The GDR offering will help, also working with a partner or even more aggressively working with potential partners, I think is absolutely we should do. To answer your question, In terms of revenue, we have a confidence and quite in sync with your forecast, we have a confidence to meet or beat.
Okay. Thank you. Thanks, Johnny. My next question is about the recent market's concern about more competition for the China CPU market. I know you have a very strong partnership with Phytium and that company seems to gain lots of traction in the China local markets. If you look at not just next year, but for 2022, I guess there are two questions. First of all, whether the China CPU addressable market can continue to expand, meaning today it's only for the government PC or SOE's PC. Do you think two or three years later you can penetrate to the consumer markets in China? Secondly, there seems to be more projects going on. For example, VIA Technologies sold some IP to Shanghai Zhaoxin. Also, a Taiwanese company called Jinyihe claims they can gain a lot of China CPU projects.
I wanted to know your observation about the future market size and also the competition. You would be very helpful. Thank you.
Okay. Again, Daniel, let me go first. You can add on later. In terms of China CPU market, based on our customer and also the market analysis, Arm related CPU still the major player. Before, Huawei HiSilicon and also our customer, I think occupy about around 70% of the CPU market. Recently, as we know, the Huawei, we can say, is out of this market. That's why our customers demand increased quite a bit. China also sense if they put their future, their CPU demand all on Arm-based, they will bring certain risk. Other opportunity increase and start to kick off.
Based on our customers, as mentioned, they have a confidence to win most of Huawei, which is their competitors in market. Next year growth, I think, VIA case, I think that's another opportunity. I think other than Arm, other CPU opportunity also will increase as expected.
Daniel, do you want to add?
First of all, Charlie, to answer your question about the outlook for the fourth quarter and next year.
For the fourth quarter this year, which is the next quarter, we believe we can still post a quarter-on-quarter growth. Since the base, the third quarter revenue is quite high. Higher than we previously expected. The fourth quarter-on-quarter growth will likely be single digit.
High single digit or low single digit depends on, first of all, the milestone kicking in and of course, the capacity support.
I would say it this way, the fourth quarter will still be a good quarter for us.
For the next year, I know that the market consensus about our top line is about $ 300 million-$ 320 million.
Based on our current understanding, we are pretty confident we can beat this forecast, this expectation, for sure. For the bottom line, or say, the operating income for next year, we are still doing the budgeting and yeah. All in all, of course, you understand our business model and our financial structure.
The revenue increase for some revenue, for example, production revenue, which is average revenue, the profit will go down directly to the operating income. I would say our operating income growth rate was even better than the revenue growth rate.
Okay.
For the CPU market, I will say it this way, for the self-control and the self-made CPU market, it will still be dominant by Phytium. Because, for the x86, again, the issue remains x86. This architecture structure is still controlled by U.S. company.
For those company doing the x86-based CPU, I would say it can penetrate into some government market. For the, I will say it this way, the low level, like the county government, like the village government, they may not have the ability to acquire enough Arm-based PC.
I would say this could be the market for x86-based machines. For the normal or ordinary individual market, I would say, for example, you and me, we won't buy Zhaoxin CPU inside machines since we can buy Intel inside or AMD inside. I would say, for this market, it will still dominant by the U.S. players.
For the future, yeah, I think the trend is good for the local suppliers.
For the government, which means the self-controlled market.
I guess Phytium will still be the number one supplier.
Okay, got you. Thank you. It's very helpful. Thank you.
All right. Thank you.
Another question from Szeho Ng . Please ask question.
Hey, hi, Daniel. It's Szeho from China Renaissance. My question would be regarding for next year, the company will be facing some bottlenecks in two areas. One is the engineering resources, and the other would be the wafer capacity support. How are we going to deal with these challenges next year?
Johnny?
Okay. Yeah, capacity, first of all, there are many way to increase our capacity. Of course, we continuously try to improve our design efficiency. Try to use less people to support more project.
In the meantime, we're doing a lot of aggressive hiring.
We are working with partners. Sometimes we're doing some insource, inviting some partners engineer, working some project in our facility.
Yeah, we can use that to handle the surge business. Gradually increase our headcount, improve the design efficiency, and working with the partner. I think that's the way handle the resource.
Yeah, in terms of capacity, we need to aggressively, very closely, working with the TSMC, better understand our customers' outlook and forecast. Also, the most important thing is, when TSMC provide a capacity, we need to take immediately.
That's why GDR also help a lot. Once they have a capacity, we have enough funding to grab, yeah, immediately.
Okay, good. Also, regarding the GDR proceeds you get, when are you going to put it into the investment of ASICLAND?
Yeah. Daniel, do you want to answer?
Sure. Okay. As you know, money is money. Money doesn't have names.
Of course, currently we have cash in hand, we have certain money in hand, and after the GDR offering, we will have more money.
For the investment amount.
putting ASICLAND is not significant.
There will be no issue for this investment.
I see. Got you. Yeah.
Right.
Also, last question from my side, before jumping to the queue again. Will be the engineering headcount you are going to grow next year, any update?
Okay. By the end of this year, for sure 500, and next year, based on our hiring plan, I think we try to meet, current target is at 700.
Wow.
Yeah.
Okay. The majority will be from China, right?
Majority is still in China region. Yeah, you are right.
Okay. Wow, that's aggressive. Okay. Thank you very much.
Okay, the next one is from Yvonne Tsai. I guess she's from UBS.
Hello, can you hear me?
Yes.
Yes, please.
Hi. Thank you for taking my question. Because I think Johnny just mentioned that HiSilicon used to have 70% market share in, is it China local CPU market? Is it for public service market, or does that include commercial market? Are you, say, have confidence to, I mean, for Phytium to take over HiSilicon's share in this market?
Yeah. Let me correct a bit. Now, HiSilicon is at 70%, combining Phytium and HiSilicon have a 70% of the market.
Okay. Okay.
Yeah. Of course, the distribution between Phytium and HiSilicon is a majority.
Okay. You're quite confident that Phytium can get this 70% market share?
Right. Based on Phytium's justification, the market already there.
Yeah.
They are lacking of the supplier, so it's by natural, it's very easy for them to take over this market.
Okay.
The only dependency is the software. Right now, I think their software, both of software are Linux based. They can be, adapt, like very easy. They have a confidence to grab this market.
Okay. This, just to clarify, this is the public service, like government and SOE market, right?
Government or even commercial, they have some.
Oh, okay.
On the laptop and notebook business, they also put a very high expectation. The ARM-based laptop can work with a mobile device very closely. As you know, the older cell phones are made by ARM-based CPU. The handshaking between ARM-based notebook and ARM-based cell phone will be very good, very smooth. That's why you can see even Apple start to make ARM-based Mac computer. You can see a lot of mobile application can running in the laptop. Even right now, Phytium's notebook, like cell phone application, including game, including ByteDance, a lot of application. Personally, I try, it's quite amazing.
I expect this market will be very good. For the Intel base, they cannot run, they cannot translate mobile application. Yeah, on Arm, I think it's no problem for them to do this.
I see. Okay, thank you. Thank you so much.
You're welcome.
Okay, next one is Chi Ho Wong.
Hey, hello. Yes, hi, Johnny and Daniel. This is Chi Ho from Dymon Asia.
Hi, Chi Ho.
Congratulations on the good quarters. Can I ask a question about, maybe give us some overall statistic about the 5 nm, 7 nm tapeout, number of tapeouts you have done in 2020, and maybe some of the pipeline you can see for 2021, in terms of the more advanced NRE project. The second question related to that is maybe for the tapeouts that you have done this year, what kind of mass production volume can we be expecting in 2021 for these newly tapeout projects? Would you have any color for contribution in 2021? I feel that from your opening remark, there should be quite a lot of volume coming from the newly tapeout projects this year. I guess it's also skewed to the 5 nm.
I think the TSMC situation is well understood, maybe talk a little bit about outside of TSMC situation. Thank you.
Okay. Daniel, want to go ahead first?
Okay, sure. Chi Ho, sorry for that. We are not discuss the project by project into detail because our customer has some issue with confidentiality. We no longer provide the exact tapeout schedule for our projects. The thing I can say about our 7 nm, and the 5 nm project, I will say this way. For now, we haven't tapeout any 5 nm projects. The tapeout schedule for the current project we want, which are two projects. One is for test chip, one is for full mask. The tapeout schedule will be, I would say, the end of next year or the early year 2022, because the design is quite complicated. For the 7 nm project, actually we tapeout many 7 nm project, this year. You may see it from our contribution.
Since the 7 nm production revenue until now is not that high, because all of them are just tapeout or just into the mass production phase. For the next year, or fourth quarter, we will sequentially tapeout 7 nm projects, both in artificial intelligence unit, AI chip, and the HPC. For HPC, we have several projects from our biggest customer, Phytium, and the second largest customer. For the second largest customer, the first 7 nm project enter the production phase now. You may see the contribution starting from fourth quarter, and very good contribution in the first half next year. For the AI chips, I guess the tapeout schedule will still in the late this quarter or the first half next year. We expect some of them, the production revenue will start from the second half next year.
We also have high expectations on some AI chip projects because the customer is very aggressively to promote, to try to sell their AI chips onto their system or onto the general purpose AI market. That's what we can say about the tapeout schedule and the tapeout situation right now.
Okay. Thank you. Thank you, Daniel.
Thank you, Chi Ho.
Okay, the next one is Jeffrey. Jeffrey O. Wheeler. Yeah. Jeffrey, can you ask questions? Excuse me, Jeffrey? Jeffrey, we cannot hear you.
In that case, we let next to ask a question first.
Okay. Charlie, please.
Okay. Yeah, maybe I try to fill the void. Sorry for the belated congratulations to your company. Very good execution. My follow-up question is about your GDR. One is more, kind of concern, because you also mentioned that there could be some strategic investment or partnership with customers. I thought no matter for foundry or design services business model, you want to be as independent as you can, right? How do you deal with this kind of deeper relationship with customers, but it could trigger some conflict of interest with other customers? I guess that's part of question. Second question is easier, your timing for the GDR. Thank you.
Okay. I think, Charlie, that's a very good question. We've been discussed that internally many times. Yeah, obviously we will avoid any conflict of interest. Yeah, to be straight, our investment amount will be very insignificant compared to our customer and also suppliers situation. Yeah, right now, China, as you know, so many people, the customer fundraising is not a issue. New startup company can do the fundraising, I think, immediately, as long as they are willing to issue their share. We're working with the customer and supplier, the reason we need to involve for this kind of investment because people are building some alliance. Yeah. Once they see you have a solution, you have a power to make an investment, I think our winning chance will increase quite a bit.
Just for your information, one typical example, when we compete one of the cases, and once they know, they sense we have a GDR opportunity, they immediately give us the opportunity. This kind of a situation, I think, is quite common in China. I think, to be specific, I think I can share more specific example. Of course, for sure, we will avoid. Our company's goal still remain independent. Our independent position is the most important and the highest asset for the company. We won't compete with our customer. Customer can do the chip with our chip to compete each other. Our chip will not be their competitor. Yeah.
Okay.
Daniel, do you want to add some?
Okay. Charlie, for sure. First of all, I would say, as Johnny mentioned, the investment amount will be not significant compared to our customers' market status. Secondly, the major principle is business as usual.
I would say at least way, our investment could be a signal to comfort our customer. As you know, currently, the backend resource is kind of a treasure in the market.
Our customer also worry about they cannot secure the design resource from us.
I would say it's a mutual understanding. It doesn't involve any, like, we choose the customer, we stand on some certain customer's side.
That's our main purpose.
Okay.
To answer your second question. Based on our estimation, the fastest way to execute the GDR without any problem, I think you need approximately 60 day minima.
I think, like I mentioned before, I'll wait for the right timing when our share value return to certain reasonable range to press the trigger. Right now, the fastest time frame is 60 day later after the shareholder meeting, assuming everything goes smoothly. I would say, Q1 or maybe Q2 time frame.
Okay. Fair enough. Yeah. Because, I think over weekends, some investors are also asking why not just use the credit line because now the interest rates are very low, and then maybe if you want to introduce some strategic investor, you can just use a private placement. Yeah, maybe you don't need to force it, right? If the market is not right, maybe you can just use other vehicles. Yeah. Because I agree with your most part of the strategic investments, but GDR sounds a little bit complex here. Anyway, just a small question, and I will get back to the queue. Now company's revenue profile seems to very skewed to China CPU customers. Another big growth potential segment should be AI, right?
I think other analysts also ask about this topic, but can you quantify, this year, how big is the revenue contribution from AI, the percentage, and how big that would be, for 2021?
Okay. Yeah. Daniel, why don't you go first?
Okay. Sure. For the AI contribution, I would say roughly, because for some project, you are quite difficult to identify if it is an AI or it is an HPC, because some HPC chips can also do the AI thing. Roughly, I would say the current contribution from AI related chips accounts for about 15% of our total revenue. For next year, and of course, I will say this way, both our customer and Alchip believe. For the 7 nm AI chip. The shipment volume will grow significantly compared to the 16 nm ones. We all understand that for the AI topic, this topic has been hovering around very hard for quite a while. Like past one to two years, everybody is talking about AI.
Except NVIDIA, there is no major AI chip suppliers on the market, or the shipment volume is not significant. I think that's because for the AI users, when they use the AI chip to build up their system, they have to make sure that the system is stable, the system is work, the system is efficient. They have done a lot of testing. Yeah. For the 7 nm, for the 16 nm, I think is mainly for the testing purpose. For the 7 nm, we expect the volume will be quite good compared to 16 nm. Otherwise, maybe AI will not be a hot topic anymore. Yeah.
Okay. In terms of revenue percentage next year, could it be more than 15% or?
Of course. Definitely.
Okay.
Definitely.
Okay. Great. Thanks, Daniel.
Yeah, the growth rate is quite promising, but I don't know, maybe the CPO also grow very fast.
Other than China, we expect AI shipment in U.S. will increase significantly. Yeah.
Okay.
One of our two major customers, I think they put a strong forecast.
Okay.
Yeah. As you know, one of them just acquired by another giant company.
The 7 nm is in the mass production right now. We expect good shipment on that specific chip.
Okay, great to know. Thank you. Thanks, gentlemen.
Bye.
Okay, Jeffrey, can you hear me?
Yeah, I can hear you. I changed my microphone. Hopefully this is better.
Oh, much better.
Yes. I can hear you clearly.
Okay, great. Thanks. My question is, you talk about potentially prepayments to foundry and maybe substrate. I guess, can your customers actually do the prepayments, or why does that fall upon you guys to have to do those prepayments for capacity?
Of course. They can prepay, but there's a gap. For example, TSMC recently used to have, for example, 500, 1,000 piece of wafer. They asked us, "Do you want to take?" If we want to take, we need to place the order immediately. In the meantime, of course, the customer is waiting to prepay, but there will be some gap before place the order to supplier and receiving money from customer. Because of that, we are losing some capacity. Looking forward for the next year, we see a lot of opportunity, especially in 7 nm capacity fight between old customer, I think will continuously sustain. We need to prepare ourselves to receive the order from them.
Okay, great. One more question.
Please.
Just on 5 nm masks, I guess you also include seven nano, but what's your approximate cost of a 5 nm set of mask, and when do the customers pay versus when do you have to pay for those masks?
Based on our business model, customer will pay for the mask. Yeah. Regarding the price, I think we are under NDA, we cannot share any specific pricing information. Based on our business model, customer will pay the mask.
Okay, great. Thank you very much.
Thank you.
Thank you. Next one is, there's no name on the system, it is Zoom user. Can you state your name and the company you are working with? Please ask the question.
Oh, hi, management. Could you hear me?
Yes.
Hi, this is Wen Chyi Tong from Public Mutual. Thanks for management to take in my question. Firstly, regarding to the GDR, have Alchip identified any targeted investors? If the answer is yes, could you share which country these investors are coming from?
Okay. Like I said, we do identify some potential investment target, for now, we are not allowed to reveal it. The example is, other than China, of course, we do have some potential investment target. For example, the ASICLAND, which is one of the investment target. For the other targets, since all the investment case need to get permit by the board. So far, we have candidate, we cannot reveal the name.
All right. Thanks. My second question is that, I think in the beginning of the presentations, you have mentioned that probably might be a good opportunity to tap from the Korea market. Has the company targeted any revenue percentage of contribution from the country in the next maybe two to three years?
I'll say this way, and Johnny can add some colors on it. The thing is, we do the strategic alliance through investment and the technology cooperation.
For the design portion, our partner, which is ASICLAND, will take the design, and we share the profit through the investment. For some project, like the 7 nm with huge shipment volume, our partner may not have the capability to handle it. For this portion, those production business will go directly to Alchip.
All right. Sorry, go ahead.
Go ahead.
Of course, for the foundry part, we will still be in the TSMC.
All right.
Okay, in terms of revenue expectation, I think Korea is very specific. Unlike other region, they have a small customer, very big. Once you win, we expect the very significant revenue growth. Yeah, I think after consideration, Korea is definitely a place we shouldn't give up. If we want to win the Korea business without the Korean people, I think it's very difficult. I think that working with the ASICLAND, the size is a quite match. They have a design dependency on us. We have some business channeling dependency on them. I think cooperation between these two company, I think, is quite helpful.
All right. Thank you very much.
Thank you.
Okay. Prior to next one, Szeho, I would like to answer a question from Message. An investor field is asking about the schedule of Phytium's project. As I mentioned, I cannot reveal the details of the single project. What I can say is currently we are shipping the 16 nm products to Phytium for server and for PC. For the next generation, for the server, we are in design phase. For the notebook CPU, the design hasn't kick off yet. The scheduled kickoff date should be around the first half next year. Okay. We go back to Szeho, please.
Yes. My follow-up question will be on the company's business model going forward. Would the company consider or be more open for those design-lite business or even a production-only business?
Yeah, of course. We are open for production-only business. For design, like. We have a four different business model. Yeah, we can take a design completely, and we can do partial design, and we can even do the production-only business.
Going forward with the weighting for production-only business to go up?
Honestly, yes. I think other than China.
Yeah. In other regions, for example, in U.S., we did see a lot of production-only or partial design opportunity.
Okay. Basically, you are indifferent. You are open for all kind of business opportunities.
Yes. Yeah.
Okay, great. Okay. Thank you.
Thank you.
The next one is Oliver Lee from BlackRock. Oliver? You have to unmute.
Can you hear me?
Oh, yes.
Oh, thank you very much. Yeah, I just wondering if I look at your balance sheet, you have about roughly $140 million in the second quarters. That is kind of support roughly $ 250 million revenue this year.
Does that mean, if you have additional, like $100 million, so that would be somewhere like $240 million? Can I use that ratio to project the size of your potential order?
Yeah. Oliver, I think our money is 100% for production, right? The ratio is a vary, but you need to discount a bit, right? We need to reserve the cash for operation, yeah, and for the investment, for the employee salary and benefit. Yes, you can roughly, yes. We expect mass production volume increase a lot, so we need additional funding. Precise the ratio, please try not to do that.
Okay, understood. Okay, thank you. That is only my questions. Thanks.
Okay.
Okay. Yuanta Securities Investment Trust, Mr. Guo, is asking through message that, he's asking about markets rumored that Phytium has military background. How does Alchip view these things?
Okay, that's a tough one, but expected. Daniel, want to go first?
Okay, sure. First of all, yeah, it is true that Phytium is originated from the National University of Defense Technology. It is a fact. Many, many years ago, Phytium already separate from National University of Defense Technology and then move the company to Tianjin. Originally, this company is located in Changsha, where the National University of Defense Technology located. Since then, Phytium is focusing on non-military purpose ICs. For the military purpose ICs, it will be done by the National University of Defense Technology itself. The separation is very clear. We cannot stop the rumor. I think for those rumors, everybody has their own opinion. We are not in a position to change their mind. To us, we will say this way, Phytium now is 100% a normal company. They are doing CPUs for server and PC.
Even though in the fully constrained scenario, even Phytium is considered to possibly on the sanction or entity list, I will say, for the sequence, it will be on the EDA tool and the IP ban first. If Phytium is on the list, we don't see too much impact to the business for Phytium or for the business we are doing with Phytium. For EDA tools and IP, there are solutions and, especially for EDA tools, we think the dependency from Phytium to Alchip will become even bigger, which we consider it is a good thing. Honestly, we do think Phytium on the sanction list is a low possibility thing. Otherwise, if Phytium is really doing the military background ICs, they would be on the sanction list already. Johnny, you want to add some color on it.
Okay, sure. Before, Phytium spent a lot of time to separate their business. The company is registered in Tianjin, is doing a pure commercial and specific usage. They will not touch any military-related application. I think this one already between us, TSMC, and Phytium, we have a consensus agreement. Whatever they do is a pure commercial, and we know their customer, we know their usage. They will not doing the military-related, using that for CRC, using Phytium, for sure. Just also add on to Daniel's. Potentially people thinking about since they are doing a CPU high profile design, due to any kind of reason, maybe U.S. will put them on the sanction list. Of course, not because of military, because of any strategic reason. Yes, once Phytium in the sanction list, we consider the opportunity and also dependency to Alchip will be even higher.
Because sanction list, they cannot acquire EDA tool, they cannot acquire IP. That's our fundamental business. We can help them to do the design. We can help them to prepare the IP and tape out. If we thinking about eventually Phytium will be like a HiSilicon, I think that will be long way to go. I don't think other than the HiSilicon, none of them are start production from TSMC. I think, even Phytium on the sanction list, I think that's good news for Alchip. Because they have a much tighter dependency for us. We all make sure whatever we're doing under NDA, there will be no military-related application involved, for sure.
Okay. For now, there is no raised hands. We leave the one more question for the Q&A session. If you have a question, please ask. Okay. Okay, I guess there is not. Thank you. We are closing our third quarter 20 institutional investor meeting right now.
Thank you all for your participation. Thank you.
Okay. Thank you very much. Thank you for your supporting. Thank you.