Achieve a little bit more than TWD 140 million. We maintain 15% of our R&D investment, and we are one of the TSMC value chain aggregators. Next slide. ASIC market is very big and unique. This time, I'm not going to explain ASIC market business model and opportunity. Alchip is doing the ASIC business since we found the company. Currently, we are focusing on HPC and AI area. We consider HPC and AI area has much higher entry barrier compared to most of our applications. Since the design always require the most leading-edge technology, currently using 16, seven, eventually we'll use five nm or below. The chip itself is very complicated and big. Nowadays, generating and transmitting the data is no longer a bottleneck. Effectively extract useful data is still very challenging. Therefore, we believe HPC and AI application will continuously grow and sustain with a reasonable margin.
Next slide, let me explain our Q1 situation. Basically, we meet our internal revenue target, and with record-breaking numbers. Revenue Q1, TWD 50.5 million. That was the record high, historical high, quarterly revenue high. In terms of net income, TWD 5.78 million is also the record high, so does the EPS. We have a great position in HPC and AI business. Multiple design plan to tape out soon. In fact, Q2 and Q3 is our high peak tape out quarters. Other than this design we about to tape out in this quarter and next quarter, we have a lot of design in pipeline. In fact, our capacity is 120% full at this moment. Other than China, we also have a few significant business won. In U.S., we just new to the market, but we're doing very good.
We already have a few seven nm, six nm, even five nm design won. Japan, recently, there's a significant win on the game console business. Our company is very familiar with the game console business. About 10 years- 15 years ago, game console is our number one revenue maker. Many seven nm design is in the production stage, preparation stage. Another highlight for the Q1, we can say we're still doing very good on crisis management and control. We have no significant impact due to COVID-19. Other than Japan and U.S., most of the employees, they are working from home. The other region, we can say is almost 100% go back to normal. For the sales, still facing certain challenge because there's still the travel ban and quarantine requirement for China and for Taiwan. Overall, as for the execution and engineering world, there's no impact.
We continuously receiving benefit due to the trade war. Okay, Daniel, want to take over this slide?
Okay. This slide shows our first quarter income statement numbers. It's pretty straightforward. As Johnny mentioned, the revenue is record high, and the net income is a record high single-quarter profit. For the revenue, the first quarter revenue is TWD 50.5 million. 7.4% quarter-over-quarter, and 39.3% year-over-year. For the operating income, the operating income for the first quarter is TWD 6.9 million, almost TWD 7 million. It's 50.2% quarter-over-quarter growth and 88.6% year-over-year growth. For the net income, the net income is TWD 5.8 million. It's 25.2% quarter-over-quarter growth and 79.4% year-over-year growth, translating into single quarter EPS TWD 2.87. This page is about our quarterly application breakdown.
You can see in the first quarter, the HPC percentage reached 79% of our total revenue, while the consumer and the networking still account for not significant part, but 6% and 4% respectively of our total revenue. For the niche, I think the major item for the niche market application is the Yamaha machine, Yamaha pachinko machine. We expect this revenue will be steady this year through first quarter to fourth quarter. For the yearly, since we just have our 2020 institutional investor meeting, so the 2019 yearly mix is already shown in the previous conference meeting, so it's pretty straightforward. For last year, the HPC contribution accounts for 59% of our total revenue.
For the technology note, this quarter is pretty much similar to last quarter as the HPC, especially the CPU revenue, still accounts for the majority, but still be the majority element of our total revenue. Since this quarter is in 16 nm process node, so the 16 nm process node accounts for 53% of our total revenue in the first quarter. You can see the 7 nm category keeps on growing. We expect as the seven nm design will gradually tape out in the following quarters, the percentage of the 7 nm category will keep on growth. This is the regional mix of our total revenue for the first quarter. In first quarter, Japan accounts for 14% of our total revenue, China accounts for 62%, and Taiwan only 3%, and others 21%. The others include the Middle East, Europe, and North America.
We expect revenues from North American and the Middle East, and the Europe area will keep on growing in the following quarters. For this slide talk about the industry view. Honestly, since these two institutional investor meetings are close, so the view doesn't change too much. First of all, China CPU demand remains unchanged. Although there is the coronavirus pandemic, the customer's forecast of shipment for the whole year remain unchanged. Although now we are entering May, we are still watching closely to the possible forecast change from customer. So far, we don't see any changes from customer side. For the China CPU market, both our number one and number two China CPU customers are very aggressive on kicking off new NRE projects.
That's also the reason we will talk about later that, in the second quarter and third quarter, even though the mass production revenue will remain strong, but since the design demand is higher than we expected. We think the mix in the previous investor meeting, we guide the mix this year will be 40 % something for NRE and 50% something to 60% for mass production. We believe the mix will a little bit shift from more NRE. That's mass production. For the AI market, outlook is still good. AI projects demand from U.S., Middle East, and China is still good. For U.S., although the travel and the communication and the employee attendance is kind of limited because of the COVID-19 pandemic.
Overall, all in all, the feel of the demand and the future projects are still ongoing, so we don't see any changes for the trend, but the short term slowing down is foreseeable. We expect AI chip makers gradually enter the 5 nm phase in late 2020, this year. Currently, the existing project we are doing for the AI are mostly 7 nm. We are engaging with customers with the 5 nm projects, although we don't win a lot, but many talks between Alchip and the customers is ongoing for the 5 nm project. We feel that those customers, the motivation for them to moving from 7 nm- 5 nm is strong. The list page is about the 2020 business outlook.
As for the 2020 business outlook, in fact, we're just one and a half months from the previous investor conference meeting. Overall, we didn't see any big change. The only difference is a virus pandemic happened within this one and a half months. Fortunately, our customers, I think, do not change their production plan. Especially for the China CPU shipment, I think all the orders remain very strong. Currently, NRE order project, based on the payout schedule, no delay. Next generation also kicked in. Mass production orders are still quite promising. The only dependency is seven-nm design challenge. TSMC capacity is still very tight. Fortunately, we just received one good news from TSMC. They've successfully allocated some wafer to us. 7-nm production already start. 7-nm demand getting stronger and stronger, starting from second half of this year design into prototyping stage.
Q4 and early next year, we go to the high volume mass production. We've been continuously cautious about COVID-19 prevention. Right now, design stage, I don't think there's any impact, no delay, and new project keep coming. The only business-related impact is in U.S. and Japan region. Due to the travel ban, the frequency for visiting customer getting less. At the end, thank you very much for believing and trusting Alchip. For the past five quarters, we can see we always met and outperformed the guidance. Based on current 2020 forecast, we can say this year is going to be another great year. Q2 is going to be another record-breaking quarter for the company. Thank you.
Okay. Now we are entering the Q&A session. If you have questions, please use the raise hand function, and I can unmute you. Louis, please tell us your name and the company you are working with first. Thank you. Louis, I already unmuted you.
Okay. Thank you. This is Louis Chang from E-Spring Capital. My first question is, regarding second quarter, as Management just mentioned that it will be a record high quarter. Are we still expecting a minor, quote unquote, growth, or it will be a more meaningful, quote-unquote, growth in second quarter?
Okay. Johnny, I'll answer it.
Okay, go ahead.
For the second quarter, we expect the revenue growth will be minor. Will be slightly quarter-on-quarter growth. For the mix, we believe the second quarter mix, the NRE percentage will increase. Of course, because of the increased percentage of NRE, the gross margin, we believe, will be better than the first quarter. That's why we say, since the first quarter is already the record-breaking quarter. Now, when we look into the second quarter, the revenue could be slightly better, the gross margin could be better. We also expect the second quarter will be very good. For the whole year, we expect for the first quarter to third quarter, the quarter-on-quarter growth guidance will be flat to slightly. We may see more significant revenue growth in the fourth quarter.
Of course, as we mentioned, it depends on the 7nm capacity support by TSMC. Okay. Charlie, I already unmuted you.
Thanks, Daniel. Can you hear me okay?
Sure, no problem.
Okay. During your opening remark, you said that this year, probably the mix from NRE will increase. Does that mean you see some remission from turnkey, or there is absolute upside from your NRE business? Can you clarify a little bit?
Okay. Johnny, you want to answer it?
Okay. Yeah. NRE getting stronger doesn't mean our mass production order getting less. Basically, we can say NRE is under our control. Based on the design capacity, based on the people we have, we can easily estimate how many designs we can enable and how many designs we can tape out. For the mass production, 16 nm, I don't think that's a issue. Whatever the forecast, we should be able to deliver accordingly. For the seven nm, there's still certain dependency from TSMC.
Mm-hmm. Okay. Can I get a sense of which NRE projects see the kind of additional upside or is a kind of overall pull-in of the schedule?
Schedule. I think NRE's schedule remain the same. It's kind of very difficult to pull in the schedule because when we sit down with the customer, they already propose very aggressive schedule. The reason NRE increased, because of new business.
Oh, new business. Oh, okay.
Yeah. China, U.S., and even Japan, there's a lot of new business kick in.
Okay.
Thanks. I guess this related to my second question.
The company scales up very well in running as a 120% kind of utilization. Long-term journey, how big do you think the company can be? Meaning, in three years, five years, based on your current business model, do you think your business size can be 2x, and what would be the bottleneck?
Yeah, that's a very good question. The question is also very big. Let me try to answer. First of all, the most efficient way to increase the design capacity is increase our design efficiency. Yeah, I still believe with the same number of people, we can enable more project. Yeah. Also, company does have a growing plan. Yeah, right now we have 450 people. By the end of this year, we'll be for sure we are over 500.
To answer your question, right now our sales team be very selective to choosing the customer. It's not a bad news for the company. We've been able to choose the right customer, either they have a future, or they have existing production. By the end of this year, I estimate in the middle of next year, our capacity will increase 30%- 40%.
30%-40% this year?
Yes. Yeah. To the middle of next year.
Middle of next year. Okay.
Okay. If I may, one small follow-up. I think recently, there is some announcement from the U.S. government. They want to tighten the export of the semiconductor to China for military usage. I know the company and TSMC has been very careful on this one. This time, you also mentioned that even the end customers, civil entity, Non-English content ].
They can be considered as the kind of embargo list if the chip can be used for the military purpose. How can company manage these risks, right? Because I think for your China CPU customers, sometimes it's very hard to tell their final purpose, and it seems from your comments, they are very aggressive even in this kind of environment. Don't you think that there's some risk around these projects?
All right. Thanks, Charlie. Well, this is a very sensitive question. I try to answer accordingly. When we select a customer, we always be transparent to TSMC and to all the supplier, "This is a customer we are going to take." We will sit down with TSMC and sign on the three-way NDA before we doing the design work. For sure, there's no direct military usage. That's why both TSMC and us consider that's a customer we can take.
Yeah, just like Daniel always say, for example, when you're making a knife, it's very difficult for us to guarantee the usage.
Yeah. They are making the chip. There's all kind of application they can do.
Yeah. Based on our study, our customer also tell us, if for the military usage, usually the demand and also the number are very small. In usual case, that's a FPGA-related application. They don't need to make a ASIC.
Yeah. This is a overkill entire design. Right now, HPC and AI, BeiDou and Galileo, I think that's care for a specific military usage.
We can tell this obviously that's a cloud computing and also data analysis-related application. Yeah, TSMC also consider the same thing.
Okay. Thanks, Paul. I will give it to the queue. Thanks for your answers.
Okay. Thank you, Charlie.
Okay. Chi Ho Wong, I already unmute you.
Hey, hello. This is Chi Ho from Dymon Asia Capital. I have a first question, is related to your comment about the China number one, number two CPU customers are getting more aggressive in tapeout. Could you share with us why? What caused the sudden increase in design activity for the CPU makers?
First of all, not aggressive in tapping out, aggressive in open new project.
Okay.
Yeah. Okay, I will hand it to Johnny, because it is expectable. Of course, part of the reason is because of the tension rise between China and the U.S.
Those China companies who have the ability to develop the advanced technology node chip. Our firm is to become more aggressive in recent days. It's not an accidental thing. It's pretty expectable.
Okay. Understood.
Okay.
For the China CPU, I know that they usually have a tender every year, but I think this year we still have not seen the government tender on the global government or the government usage of PC. Is that something you have some clarity with your customers or any timeline, and does that impact our mass production volume for that specific customer?
Okay. Let me try to answer. Yeah, for sure. China is going to reduce the dependency from U.S., and that's their strategy, and that's a trend. For the CPU right now, I think everybody knows the huge dependency on Intel and also related CPU. China government does have a plan gradually replace the dependency from Intel CPU using their own design. We do receive some order. Actually, when we ship to the customer, we don't know where they ship. When we chat with them, they already mentioned some government-related business unit already being forced to use their design, and this trend will continuously grow. That's why the 16 nm CPU demand and also their next generation, they put a very, very high expectation and focus on that.
Okay. Understood.
Thank you.
Yeah, related to your previous comment about you are closely watching about any order change situation at your downstream customers. I'm just curious, which area are you referring to? Is it the China CPU, the Japan, or which area up and down, you are watching closely?
I think still China CPU, since their order size are very big, so we'll be watching very carefully, not only on the order, but also on all the payment stuff. Right now, I think the risk for us to take this project is very, very minor.
Yeah. It's almost a prepaid deal.
Okay. Understood. Okay. You mentioned the China number one and number two CPU makers are getting more aggressive. Are you referring to you are now a supplier of the both of them, or you are still just a supplier for the previous one that we always know about?
Yeah. For one of them, we can say we are sole supplier.
Yes.
The other one, they have multiple suppliers. We are one of them. Mm-hmm.
Okay. You actually are supplier for both now, one and two. Okay. Understood. My last question is just about, is there any change about your hiring plan? Because I think you previously talked about 520 employee by the end of 2020.
Any change about that? Will you be able to help me understand the split by different geography? I mean, you set up a new U.S. office, right? I'm not sure, maybe the additional 100- 115 new employees, how are they divided by different countries?
Okay. Chi Ho, you're really doing a good study for our company. Yes. Before I mentioned about 520, but today I'm revised to 500. Yeah, we did change hiring plan a little bit, being more conservative. Other than China, other region, for example, the U.S., Japan, we've been a little bit more conservative. Overall, we still expect to grow about 15% total headcount this year.
Actually you maintain your China hiring, you basically reduce a little bit-
Other region.
Okay.
Okay, fair point. Thank you very much, Johnny.
Thank you.
Thank you.
Okay. First of all, someone is asking about the game console thing. It's not a pachinko CPU. It's a game console chip. As I know, it is not a major chip for game console, but very good. The customer is a very sound game console maker worldwide. We don't expect a huge volume for this project. For the schedule, we are just winning the project, so most likely the mass production won't happen this year.
It will be next year. Sorry to everybody that my computer seems crashing.
If in the next moment, the Zoom closes, please log on again, because now my computer can only do the talking. We cannot unmute anyone. My screen shut down. I'm trying to fix it. If the Zoom connection is off, please log on again.
Daniel, does that mean we cannot take any question?
Okay, Jeffrey, are you there?
Yes. You hear me?
Yes. Now I can hear you.
Okay. Yeah. I guess there's not just two Chinese CPU design, right? There's several of them. Also you mentioned that one of your CPU customers is multi-sourcing. I guess the question is, who are you competing against for those back-end design businesses?
Excuse me?
Yes. The question is, you have two Chinese CPU customers. You said one of them is multi-sourcing. For that multi-sourcing customer, who is the other sources? For the other China CPU customers that you don't have, who do they go to for the back-end, whether it's in-house or are there other design service houses like Alchip that are competing for that business?
Okay, wait a moment. Okay. I haven't said that our customer has multiple physical design source. At least for now, Alchip is the only back-end design supplier to Phytium, our number one customer. For the number two customer, based on my knowledge, Alchip is also the solo back-end design supplier to them. Both of these companies have the back-end design capability in-house. The ability of doing a leading-edge technology node is limited.
Okay. Let me try to add more on this. Yeah, basically for this two CPU design, we don't have any competitor. To be honest, in China, there's no competitor who has the experience doing 7 nm or 5 nm design. Like Daniel just mentioned, customer does have a COT team. They can do their own design. For the mainstream design, for example, the 20A or even 16, they may tape out by themself. For the latest technology, seven or eventually five, they always want to tape out through us. There's a lot of dependency. First of all, we are the only one who has the experience and track record. Second, they may not be able to take the latest technology, PDK or the file from TSMC directly.
Okay. What about for the other China CPU makers that are not your customers?
They are all customers.
Jeffrey.
Because the China CPU definition is ambiguous.
Yeah.
Talk about China CPU, they talk about Phytium, they talk about Loongson, they talk about Zhaoxin, they talk about HiSilicon.
Right.
Based on our definition, the China CPU supplier to the government, it can only be ARM-based the supplier, which means Phytium and HiSilicon on the market.
Yeah. I see. Okay, great. Thank you.
Thank you, Jeffrey.
Okay. Oliver, already unmute you. Please ask questions.
Hi. Thank you for the presentation. This is Oliver from BriRock. You mentioned the TSMC actually give you some additional allocations for the 7-nm. Your incremental growth may be subject to the seven-nano allocation. Can you actually elaborate, how do you actually interact with the TSMC in order to get more allocations as seven-nano, is that possible actually to get more allocations? What is the key actually, TSMC would like to give you more? Is that the visibility of the project or the pricing, or can you actually elaborate a little bit?
Okay. Yeah. TSMC 7 nm, I think right now, officially, they do not make any promise to us, because their demand is much, much higher than suppliers, everybody know. Every time when we receive the order, we have to sit down with TSMC to explain the difficulty customer facing and also the potential of this design. In usual case, we can get some wafer allocation. At this moment, I think there's no guarantee from TSMC. I can say TSMC is very supportive for the company. In usual case, based on the past experience, they may not fulfill all our demand, but they always give us some in order to let customer doing a prototyping and doing a small volume production.
Okay. I see. If I quantify that.
Is that possible you ask 100, they give you 70 or something?
Now, if for this year, I'll be very happy, honestly.
Okay. Okay, thank you.
Thank you.
I would like to add something there. Okay. Usually TSMC, they decide the level of support depends on the application, the customers, and many considerations. For now, it's good for us that our major application is within the HPC area. This application, I think, TSMC now has high interest in this application. It is a very important area for them to grow. At this moment, we think situation compared to in the beginning of this year, the situation seems better.
Agreed, Daniel. Good comment.
Okay. Thank you.
Charlie.
Hey. I have some follow-up questions. In particular, your NRE upside this year. Johnny, do you mean that upside comes from all those regions you mentioned above, including U.S., Japan, and China? Is that from both of those, and if you can you please elaborate a little bit the application in the U.S. and also the application from China and their geometry? Thank you.
Okay. Yeah. Since our capacity become full, we being able to select the customer. The current project will be taped out. A lot of project will be taped out in Q2 and Q3. Based on our original plan, the pipeline project, maybe used to be 16 or 28, but we all swap to seven and some 16. That's why the NRE total contribution will be getting higher. Right now we can say, only if they have a huge volume, we will not take any mainstream design, like a 28 nm or below. We only take a 7 nm or few 16 or 12 nm design. NRE for the advanced technology is always higher than the mainstream. Even our capacity doesn't change. By changing the pipeline portfolio, our NRE number will increase.
Okay, it means the mix from the seven nm is higher. Is that the right interpretation?
Yeah. The 7 nm design application, I think, the project we take is either HPC or AI.
Okay.
Yeah. Sorry, I thought you said, for those NRE, those are milestone and schedule are pretty much determined, right? It seems you still have some flexibility to remove some trailing edge projects and squeeze in some leading edge, like seven nm. How should I think about this kind of disconnection?
Yeah. Go ahead, Daniel.
Okay. Let's say this way, when we release our guidance in the yearly additional investor conference about one half months ago. Our approach is very conservative. They say some of the upside come from when the days go by and we are become more and more confident on some projects.
Some of the upside comes from the confidence level increase.
And of course, some comes from new projects. As you know, we may sign new projects and we instantly can set up the schedule, the milestone payment for the next, the whole design phase.
There are little things combined together to create upside.
Okay. I see. Regarding your opportunity in China, I think when we met several months ago, your company seems to be want to allocate your resource, U.S. customers, except for Veoneer, because Veoneer has a big volume, right? For other China companies like BAT, Baidu, Alibaba, Tencent, you didn't seems to be very interesting. Whereas Alibaba, a week ago, announced a very huge CapEx increase, including developing their own AI accelerators. Do you reconsider to re-embrace the opportunities in China, meaning those big BAT companies?
Okay. I will ask Johnny to answer the BAT one.
Okay. Yeah. We will never give up the BAT. For Alibaba, we still continuously discuss with their key decision maker. Yeah, hopefully, in the short period, in fact, there's no surprise Alibaba will get into our customer portfolio.
Yeah.
Yeah. Also the U.S. business, similar size to the BAT and seeing they are still ahead of BAT right now. They have a fixed roadmap and also have a production plan. If capacity allow, we will continuously doing business for U.S. customer. We never refuse a BAT. In fact, we still have a dedicated team working with them very closely.
Okay. You guys already did a fantastic job, right? Just some very microscopic question, because one of your previous customer, Cambricon, recently disclosed that in their prospectus said that they changed their sensors partner to Avago, I think, which means Broadcom.
Can you explain the dynamic here? Meaning why there's such a change, and do you think other design service customers, competitors can also gain some share in China?
Okay. Let me try to take this question. I think the relationship between us and Cambricon is still very strong. When we doing their both 16 nm design, they already mentioned to us for the seven nm, due to the IP limitation. They would like to work with Avago.
Yeah. For a specific IP, I also give Avago a very good credit. They are outperformed, compared to other IP provider. Yeah, in usual case, people cannot afford this kind of IP costs. For me, it's not so cost-effective.
You will gain something. The ROI to use those IP, I think usually most of our customers do not consider that's a good investment. Cambricon is a different story. I think they plan to use the best of the best. Yeah. This doesn't hurt our relationship. Their current productions, they all go with us. Their next generation 7 nm go with Avago. That's true.
Okay, that's clear. Just to clarify, for example, your Japan game console project, which geometry is that?
It's more mainstream.
Mainstream。Okay。
It's not the most leading edge technology.
Okay, I see.
Yeah. We consider that a significant win. In fact, companies try to win this customer for the past 15 years. Finally, we did it.
Wow. Okay. I think it should be a huge win, because you already had a great relationship with Sony. I assume is other two game console vendors, one of them, right?
Right。
Okay. Congratulations. Thank you.
Thank you.
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OK, Chi Ho Wong raise the hand again. I think you have the second round question.
Daniel、Johnny， [Non-English content]
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Chi Ho?
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Charlie, I'm unmuting you. Do you have further question? Charlie Chen. No? Okay. Jeffrey, you raised hand.
Yeah. Can you hear me? Yeah.
Okay. You have further questions?
Yeah, one quick follow-up. You mentioned second quarter should be revenue flat, maybe up slightly because more NRE, gross profit margin should be up a little bit. What does that mean for OPM when there's more NRE? Does that mean OPM could also be up because gross margin's up? Does that actually mean OPM's down because mass production has higher operating margin mainly?
We believe the operating profit margin, compared to the first quarter, will be up.
Okay. Along with gross profit margin. Okay.
That's it.
Great. Thank you.
Yeah. Thank you. If anyone has further question, please raise your hand. Chi Ho . He didn't put down It's okay, just ignore him.
No, I don't have any other questions. I just raised my hand. Thank you.
Okay. I guess nobody is raising hands asking questions. Again, thank you for your participation and your precious time for our first quarter institutional investor conference meeting. Thank you, everyone. If you have further questions or if you want to know more about our technology, please feel free to email me or set up other conference meetings with me in the future. Thank you. I guess the meeting will end now.
Okay. All right. Thank you very much. We are looking forward for the face-to-face meeting soon. All right. Thank you.
Thank you.
Thank you.