It's time. Dear investors, analysts, and fund managers, welcome to Alchip Technologies' fourth quarter 2024 earnings call. I'm Daniel, and this call will be hosted by me, Daniel, and our CEO, Johnny Shen, as always. So, next page. Okay. Guys, as usual, it's a safe harbor disclaimer. And the next page. Okay. This meeting will be in English. So if you need Chinese presentation slides, please go to the MOPS to download the Chinese version. And you can write down your questions through Teams message function. Sorry, I didn't change the application name. And/or you can use the raise hand function through the Teams application for the Q&A session. The host will unmute you for your questions. And this video and audio content of the meeting will upload to the MOPS, which is [Foreign language] about three hours later after the meeting closed. Next page. Okay.
First of all, I want to invite Johnny, our CEO, to start with a very short Alchip introduction.
Okay. Good afternoon, ladies and gentlemen. I'm Johnny Shen, President and CEO of Alchip Technologies. Yeah, once again, thank you for joining our investor conference meeting. Yeah, we appreciate the opportunity to share our 2024 result and provide guidance for future business outlook. So briefly, company update. We found that the company is founded in 2003. In last year, we've been achieving market cap more than $9 billion. Since we found the company, we've been successfully taking more than 600 design. And within 600 design, there's more than 60 are FinFET and also more than 18 are CoWoS-related designs. Our last year revenue achieved $1.62 billion. The majority of our revenue is a direct contribution by HPC and AI. We are a TSMC 3D Fabric member and also VCA member. Our annual capacity is 20-30 tape-outs every year.
Our market focus is HPC, AI, networking, and automotive. Next page. Okay. Yeah, allow me to give everybody a quick update for our Q4 and also the last year summary. We are pleased to announce our Q4 financial result, with revenue reaching TWD 404 million, representing approximately 39% year-over-year growth and 12% Q-o-Q decline. Our net income came in at TWD 57 million, with an EPS of TWD 23. Both market record highs for the company. For 2024, our four-year revenue totaled TWD 1.62 billion, with net income TWD 201 million, EPS TWD 81.3. All historical highs for the company. We consider 2024 to be one of the best years for Alchip. For the first time, we have surpassed TWD 1 billion in revenue, achieving over TWD 200 million in net income. We are proud to be world's number one pure ASIC service provider and number two AI ASIC provider by revenue.
More than 90% of our revenue is directly from HPC and AI applications. In addition, we have successfully completed approximately 30 tapeouts, primarily using leading-edge technology, and have made significant progress in penetrating the ADAS market. Regarding the capital market, Alchip maintained one of the highest liquidity levels in the industry. Despite strong revenue growth, our share performance last year was weak due to the various factor. The stock experienced high volatility through the year, ultimately ending flat. The detailed breakdown comparison will be presented by CFO Daniel Wang in a later section. As for the future business outlook, our major mass production line is currently in a transition period. The previous generation is approaching the end of life, while the next generation is set to ramp up starting from next year. We had high expectations for our IDM customer and also ADAS production this year.
Initial volume forecast was very promising, with the potential to offset the transition gap, even drive the revenue growth. However, post-production is facing challenges. Our IDM customer has revised their production demand multiple times, and ADAS customer revenue will be delayed two to three months due to a recent incident. As a matter of fact, our mass production revenue forecast has dropped significantly compared to the previous earnings call. Regarding the design opportunity, we are seeing increasing demand for HPC and AI-related businesses in North America, utilizing the leading-edge technology like N5, N3, or even N2. We have already secured several design wins and remain confident to further grow our NRE revenue this year. Additionally, there's a potential upside in the cryptocurrency sector. The revenue opportunity could be significant provided we can address the dependencies such as the wafer capacity limitation and also the prepayment requirements.
For the geopolitical risk management, yeah, we have successfully diversified our business beyond China into other regions. In 2024, only around 10% of our revenue originated from China. However, we remain committed to support businesses in China provided they are financially healthy and comply with all the related regulations. Regarding our workforce expansion, we have launched an aggressive hiring plan to strengthen our engineering support resources outside of China, including Japan, Taiwan, Malaysia, and Vietnam. Our Japan office has expanded to fit up to 150 employees, and our Malaysia office already staffs more than 25 engineers. We plan to grow our Southeast Asia workforce to 120 employees by the end of this year. Yeah, this is a strategic expansion plan to provide more flexible and cost-effective solutions to meet our customers' dynamic requirements in the global market. In conclusion, our revenue faced some challenges this year.
We anticipate a 10%-20% year-over-year decline, but our percentage gross margin is expected to improve, driven by higher production margins and also greater contributions from NRE revenue. Despite the revenue adjustment, our earnings forecast remains consistent with last year. So overall, we remain highly optimistic about the future AI market from 2025 to 2027. Like other industry leaders, we are confident to achieve a 40%-50% compound annual growth rate. Thank you very much.
Okay. Okay. This is the numbers, and it is pretty straightforward. I guess you can find our revenue numbers easily from the public information. I will state it very quickly again. For the fourth quarter last year, the revenue is $404.1 million, which is a 12.1% quarter-on-quarter decline and a 38.8% year-on-year growth. And for the operating income, we reached $54.2 million in the fourth quarter last year, which indicates a 7% quarter-on-quarter decline and a 37.6% year-on-year growth. And for the net income part, we recorded $56.9 million net income, and it represents a 2.5% quarter-on-quarter growth and a 60.7% year-on-year growth. The fourth quarter last year, the EPS would be TWD 23 million. For the revenue and for the reason behind better profit with quarter-on-quarter decline revenue, I will address the reasoning later. Next page.
Yeah, this is the comparison for 2023 and 2024. For 2024, the total revenue is about TWD 1.6 billion, which is 65.4% year-on-year growth. The operating income is TWD 202.3 million, which is a 67.6% year-on-year growth. For the net income in 2024, we recorded $200.7 million, which is 88.4% year-on-year growth. For the EPS for the whole year, last year is TWD 81.3, based on the concurrent shares outstanding and the FX. Next page. For the revenue breakdown, as usual, for the application, you can see HPC and the AI represent dominant percentage of our total revenue. For last fourth quarter, the HPC and the AI-related application accounted for 92% of our total revenue. For 2024 as a whole, the HPC and the AI-related revenue accounted for 93% of our total revenue. Next page. Okay.
For the process node breakdown, you can see for the fourth quarter last year, the five- nanometer or advanced, the process node is gradually growing. In the fourth quarter last year, these process nodes accounted for 45% of our total revenue from 23% in the third quarter last year. And for the seven- nanometer revenue, for the revenue in the seven- nanometer process node, it accounted for 51% of our total revenue. And I would say the main reason behind is because our major products, the seven- nanometer AI accelerator, is gradually phasing out starting from the fourth quarter last year. And for the 2024 as a whole, for the seven- nanometer and higher, I didn't put the five- nanometer category into the yearly comparison in order to be more consistent with 2022 and 2023.
So for seven- nanometer and the more advanced nodes, the revenue coming from those nodes accounted for 96% of our total revenue. I do believe for the process node technology, Alchip is still the industry leader among all the ASIC vendors. Next page. Okay. For the regional breakdown, like Johnny mentioned, we are gradually shifting our focus to the North American market. For last quarter, fourth quarter 2024, the revenue coming from the North American region accounted for 90% of our total revenue, while the Asia-Pacific region contributed about 8% of our total revenue in the last quarter. For Asia-Pacific, it includes Taiwan, mainly Taiwan and China. So for 2024 as a whole, the revenue from the North American region already accounted for 86% of our total revenue, while the revenue contribution from the Asia-Pacific region accounted for only 11% of the total. Next page.
Okay. For the fourth quarter in the 2024 business review, as I mentioned, the fourth quarter revenue declined by 12% quarter-on-quarter, and it's mainly due to the tapering off shipment of the seven- nanometer AI chip to North American cloud service provider customer. Like I said, despite the weakening sales in the fourth quarter, the net profit in the same period came at TWD 57 million, up 3% quarter-on-quarter and 61% year-on-year, respectively, because of higher gross margin. I think the better fourth quarter gross margin is mainly due to the more favorable revenue mix. Like Johnny mentioned, we have a little bit better percentage mix for the NRE and for the production. The product, the major contributor in the production revenue, has better gross margin than our seven- nanometer AI accelerator products.
For 2024 as a whole, I would say it is a very strong year in Alchip's history. The seven- nanometer AI chip shipment to the cloud service providers is still the major contributor. And as I mentioned, the net income outgrows the sales growth. It represents that we have pretty good operation gearing and better non-operating income. And the non-operating income last year contributed mainly by the higher interest income compared to the previous years. And I'm proudly saying that both the top and the bottom line in 2024 are our record high numbers. Okay. Next page. For the outlook in the first quarter and 2025, I would say for the first quarter 2025, we would like to post a seasonal decline because, first of all, the seasonality of the NRE revenue. Usually, the fourth quarter is the high season for NRE, and the first quarter is the low season.
Secondly, the shipment of the seven-nanometer AI accelerator will keep on going down because of the end of the product life cycle, and the five-nanometer AI accelerators to the IBM customers is kind of slow due to customers' special situation. I guess many of you already acknowledge the whole situation right now our IBM customer is facing, and we expect a quiet 2025 sales performance because, first of all, the phasing out of the seven-nanometer AI accelerator shipment. Secondly, the soft demand for the five-nanometer AI accelerator to the IBM customers, and for the number-wise, though we were warned by TSMC many times a week and I give release the guidance in numbers, but roughly for now, we expect our revenue performance in 2025 will be declined 10%-20% year-on-year, and the NRE demand and the pipeline remains very strong.
We see strong project pipeline for AI and the HPC and networking-related projects coupled with the process node migration from seven- nanometer, five- nanometer to five- nanometer and three- nanometer, and we expect multiple two-nanometer projects to kick in this year, and we see more favorable sales mix, which will result in, I would say, pretty good gross margin improvement in 2025. And under these circumstances, I don't consider the bottom-line performance will be as worse as the sales performance this year. Okay. I guess that's the whole part of the company presentation, and we will go into the Q&A session. As mentioned, please use the raise-hand functions of the application, or you can write down your questions through the message function. Or if you want to ask in Mandarin, there's no problem. I and Johnny are all Mandarin native speakers. There's no problem. We can answer questions in Mandarin.
Thank you. So the first one will be UBS, Annie. Please unmute your microphone. Annie? UBS, Annie Chen, you have to unmute your microphone. Okay. Probably some technical problem for Annie. Charlie, please. Morgan Stanley, Charlie.
Can you hear me okay? Hello? Yes.
We can hear you clearly.
Thank you. Hey, Johnny, Daniel, good afternoon. So first of all, maybe just want to go through your key assumptions for this year's revenue guidance. I'm wondering if you include the three-nanometer production revenue in this year's guidance when you provided a 10%-20% revenue decline? This is the first question. Thank you.
No. Actually, based on the schedule we are having right now, the revenue contribution, it is possible we may kick off the mass production close to the end of this year. However, first of all, we want to be conservative.
Secondly, even we can have the production contribution from this product, the revenue could be insignificant because of the scheduling.
Okay. So if you anticipate you're going to do the mass production, is it fair to say you have already taped out this three-nanometer chip?
Okay. Sorry, I cannot disclose the details of the project based on customer's request. But like I said, usually, if you want to have a three-nanometer AI accelerator into production in early 2026, you'll need to tape out at least in the first quarter 2025. So based on the schedule, you can guess the situation for the chip right now. So all the scheduling right now is on track.
Okay. Gotcha. Thank you. And also, Johnny, I appreciate you providing a long-term CAGR guidance. I feel like your business will have a big fluctuation.
So providing a long-term CAGR, I think, is very good news for long-term investors. But what's the trajectory? First of all, when you said 40%, 50%, you said also TSMC is a five-year CAGR, or is it a three-year CAGR? And any implication to 2026 revenue growth?
Okay. Let me try to cover that. So basically, the similar number, I think, presented by TSMC by the market leader like the TSMC you mentioned about, and also the respectable competitor in the US, Broadcom, also mentioned about they also have a very aggressive plan. And for example, they mentioned about 2027 will be $45 billion from the ASIC market. I don't have a precise number shared by our customer, but we do receive some information because based on current ASIC revenue percentage weight, our customer play a very important role.
Yeah, they have a confidence to maintain the same percentage contribution in terms of total ASIC market contribution. So based on this effect, I think 40%-50% compound, I think, is highly achievable.
Okay. And last one, and I will be back to the queue. I'm a little bit worried about the circular design house whitelist. So I think some of your competitors or industry peers are in the design house whitelist, right? So I'm not sure if they would impact your future engagement with Chinese customers who want to do AI or high-performance computing chip.
Okay. Charlie, for the whitelist, honestly, our legal department is still working on the whitelist. But I have to say, for now, first of all, we still have about one year grace period. Secondly, because Alchip has always been compliant with all the regulations.
So at least for my personal thinking, we should be fine to obtain the qualification on the whitelist in the future. So far, we don't see great difficulty of applying the list.
But whitelist stuff, I think some customer did mention about, but right now, it's not a showstopper because we still have a grace period until April 2026. Yeah. And yeah, in fact, this whitelist is just being announced, I think, a couple of months ago while the Biden administration, I think the last stage of the Biden administration. For U.S. customers, we don't have any concern. For China customers, yeah, because of that, I think we need to apply the whitelist. Yeah. Based on current instruction from the legal department, I don't think we have too much difficulty to get on the whitelist.
I see. Thanks, Johnny. Thanks, Daniel. I will be back to the queue. Thank you.
All right. Thank you. Okay. Laura, Citi, please. Please unmute your microphone.
Hello. Hi, good afternoon. Can you hear me?
Yes.
Hi. Thank you. Thank you for taking my question. My question is also about the long-term growth outlook. I think we obviously are quite confident about after the transition into next year. So I'm just wondering, aside from your existing customers, any other potential big projects you are working on? I recall last time, Johnny, you mentioned that several other projects like the networking part and also some of the startup companies. Can you share with us more of the progress right now? What's the progress now they are? And when is the schedule we can expect we'll have better visibility or contribution? Thank you.
All right. Yeah. Let me try to answer first. Yeah, first, maybe Daniel can and more later.
First of all, in order to further grow our company, winning more customers, I think, may not achieve our growth rate. I think the key is to secure our current customers and winning their next generation. That's the number one priority of the company. If we maintain this design way and winning their next generation, for sure, we're going to have a 40%-50% growth rate. The other project will be the upside. But given the fact, other than this account, we did do well for other accounts. As I mentioned before, even last year, we've been taping out more than 30 designs. This year, we see more and more opportunity in N5, N3, or even N2. Some of the whoever has the funding to do the N2 are a very big company.
Even they are startup. They are famous startup company, or they are a well-known company. That's why they have the funding to do the N2 design. Yeah. So unfortunately, we cannot disclose too much detail about the big account penetration. But I can mention whoever they have a design opportunity will have a chance to compete. Yeah. To be honest, there's a very limited proven ASIC vendor. Yeah, maybe less than three. So whatever the RFQ release, Alchip will always have a chance to compete with the others.
Yeah. Laura, like Johnny mentioned, I would say this market is very special, especially for the cloud service AI-related chips market. I guess the older investor acknowledged there are only four big fishes: the Meta, AWS, Google, and Microsoft. And they are really limited in numbers of the suppliers: Broadcom, Marvell, Alchip, MediaTek, probably GUC.
So whatever there is a new project, I think the customer will release the IFQ to the vendors I just mentioned. But to compete for those projects, for now, honestly, I will say Broadcom will still be the strongest among all the suppliers in terms of the front-end capability, IP readiness, and the back-end capability. However, we also do think Alchip is very competitive in competing projects. First of all, we are more flexible. Secondly, we are pretty good in pricing. And trust me, in the future, pricing will be a very big issue for this market space. So what we are trying to do now is to be technology ready. First of all, there will be many, many new technologies will be into the three-nanometer and the two-nanometer processing projects, such as the 3D IC, such as the I/O chiplet solution, or probably in the near future, CPO.
So for now, I will say the ability and the experience in advanced packaging will be Alchip's advantage in competing with the future projects. Secondly, we are already prepared a lot of things for the 3D IC kind of technology and the I/O chiplet solution. So for me, I don't want to release very optimistic guidance or hope to the investors because for the ASIC business, winning is everything. Losing is nothing. So as long as we have a very good position, I believe we eventually will win some projects from other customers in addition to the existing one.
Okay. Thank you. Thank you. I'm asking that because we see that the ASIC, every generation cadence is also getting kind of shortened. We know we are adding more R&D resource. And also, we have quite strong confidence on the next generation, next year, three-nanometer project.
But some of the long-term investors, they also care more about that. What will be the next one? So yeah, that's the reason I'm asking that. Other than the existing biggest customers, what would support our better visibilities into maybe 2027 or onward? Yeah.
Okay. First of all, for the cadence of the chip introduction, I will say right now, the ASIC is catching up with the ASSP. You may see the current GB200 is in four-nanometer. And our customers will have the three-nanometer product by the end of this year. So I think the speed for ASIC-related AI accelerators is catching up. Secondly, I think for the future, like you said, 2027 and onward, like Johnny mentioned, to execute the current three-nanometer project in perfect shape will be job number one for us. Secondly, to win the next generation accelerators from the existing customers is the job two.
For now, we are highly confident we can be the generation-by-generation partner with our major customers.
Okay. Thank you. That's very clear. Thank you.
All right. Thanks. And next one, Robert, JPM.
Hey, Johnny. Hey, Daniel. Can you hear me?
Hello. Yes.
I also want to delve into the long-term growth outlook because when I look at least four CSP customers, I think there's only one CSP pursuing the engagement model, which is outsourcing the back-end design to you guys, right? The other three is basically outsourcing the full-stack design. So that requires some front-end design capabilities. So what's your strategy here to tap into the other three? Because as far as I know, I think compared to other bigger US companies, I think the front-end design engineers for them is much stronger. Are we going to beef up our front-end design capabilities to tap into other three customers?
Yeah. Let me try to address this. Front-end, I think you can categorize the front-end in many fields. So basically, our strategy and principle remain the same. We will not touch customer's architecture. We are the service provider. We will not get involved on the spec. Yeah. We don't want to compete with the customer. We will not compete with our customer. But in terms of IP integration, either it's a scale-out or scale-up, we do have a plan to establish the resource in order to connect SoC, which is a GPU XPU, to the networking part. We do have this kind of plan to expand our resource either through investment. We try to hire more people, or we partner with some partners. Yeah. We do have this kind of requirement. We did receive this kind of requirement and also have this kind of opportunity.
Some of the CSP and many startup companies have this kind of requirement. Yeah. Our strategy remains the same. We will not get involved in the architecture. But for front-end integration to connect all the IP together, UCIe, HBM, I think we will have a solution for our customers to use. And fortunately, our number one customer, I think their strategy remains the same. The cooperation between us and them, I think, is working very well for current generation, also for the next generation or beyond.
Yeah. Thanks, Johnny. Also, I want to follow up on this. I think you touched upon some of my questions. So is there any possibility of this key customer to change the engagement model? For example, they are now at three-nanometer, and probably in the next generation, they'll migrate to two-nanometer or A16.
Will they be, I mean, requiring some front-end design support, RTL support from U.S. vendors for that, or do you think that they can still handle the front-end design for even the next few generations?
Yeah. I'm not much about any specific customer. If their design, next-generation design, remains homogeneous, I think they don't have such a kind of a requirement. If they're thinking about chiplet, and yes, both of us need to do something. So that's why before taking the next project, there's a lot of homework we need to do, a lot of trial, including test chip. Yeah. Both companies need to work together. And yes, we need to do a little bit more investment in order to support the chiplet design. I think they also understand. Is it all right to answer your question?
If the next design goes to chiplet and there's more connectivity integration kind of a design work needs to be done.
Okay. Robert, any further question?
Yeah. I'll go back to you. Thank you.
And if you have any question, please use the raise hand function. And then we'll call you, and you can unmute your microphone, or we will answer your questions. Okay. Allison, HSBC, please.
Hi, Johnny. Daniel, can you hear me?
Yes, please.
Yes.
Yeah. Thanks for taking my question. I just want to have a quick follow-up. I noticed that our OpEx number increased like 70% YoY last year. I'm just kind of curious how should we look into 2025 OpEx level given more engineering expansion overseas? Thanks.
Okay. There are a couple of one-time items in our last year's operating expense. So we see very limited operating expense expansion in 2025.
In other words, I will say you can project single-digit growth for our operating expense this year.
Thanks. Very clear. So I think my next question will be given we have many cash on hand right now, and this also leads to a higher interest income. I'm just kind of wondering when do we expect this cash level will significantly decline? Will this be second quarter next year, second half next year? I'm kind of curious when is the real timing for the cash level to decline significantly? Thank you.
Okay. I knew we have a pretty good cash position. However, in order to handle the coming production needs in 2026, which I want to mention again, the scale of the production could be really, really significant.
So the cash position, I would say, probably will start to go down in the second half this year in order to be prepared for the production in 2026. And we will see the terms among Alchip and the customer and the vendor, especially TSMC, in order to get a more clear picture for the cash flow while we do the three-nanometer production plan. Yeah. May I ask you a question?
Yes. Very clear. Thank you.
And any further questions from you, Allison?
That's it. I'll go back to the queue. Thank you. Thank you, Bob.
All right. Thanks. Sure. And Charlie, please.
Hello. Hi. Thanks for taking my further questions. So I guess there are two or three follow-ups. First of all, Johnny, you mentioned there's an IP for future two-nanometer design, right?
So I wanted to ask a very specific technology CPO because to me, CPO is more than just an IP, right? It's an EIC, PIC design, and also the CPO module, right? And if you look at the global leading provider, Broadcom, is very ahead in this technology. Marvell Inc., they will provide a solution to ASIC designs soon. So my question is that for your coming two-nanometer competition, is CPO being considered? And even if it's not the coming two-nanometer, let's say the coming two to three years, right, if you need to get a CPO technology, whether you really have a real partner?
Yeah. To be straight, the inquiry for CPO from potential customers right now, we have a few, but not too many CPO. We do have some two vendors willing to work with us very closely. Yeah.
In fact, some of them, we are even thinking about investment. I think within a short period, maybe you will see some announcement made by us on the CPO kind of approach. We all know increase the bandwidth and also taking care of the heat problem. I think that definitely will be the next-generation consideration. CPO and also SOW, I think we all have some solution. Yeah. We may not be like Broadcom. We can do a lot of test chip, but we do have a few customers willing to do this kind of study and R&D along with some startup company. I think our CPO stuff, we are pretty much pay attention and will have a plan in place very soon.
Okay. Charlie, for now, I cannot disclose the name of the company we are trying to work with.
This company is considered the leading optical solution company in Taiwan. Most likely, we will have a plan for what you said, the module, the solution of the modular solution of the chip in the module very, very soon.
Okay. Yeah. I don't mean to dig into much detail. Actually, my intent is really to get a sense in the coming two-nanometer project competition whether CPO is a consideration. It seems like CPO is more for the future project, but for the coming two-nanometer competition. What would be the critical points for the major customers to consider whether they want to award to you or your U.S. competitor?
Okay. I think for N2 technology, most likely due to the optical size limitation, and most people will be using the chiplet solution.
In order to reserve for the compute die, the major top die only for the compute area. The rest of even the analog mixed signal and also the SRAM, they may put in another mask. So those kind of integration, I think it will be very challenging. And the interface, either they are using their own proprietary solution or UCIe. And there's many areas we need to prove it. So we do win some design, N3 and N2 chiplet-related design. We are pretty much will be the first few companies that have chiplet production soon. And in addition to that, this year, we also have a plan to work with the foundry and to make our own test chip. Yeah. Either it's N2 + N3 or N3 + N5. So this is a test chip.
And also, along with the customer's IP, this is a plan already in place. Yeah. So I think future technology, in addition to the form factor and also the heat solution like a CPO or SOW, I think the chiplet is the most important area. We are focused to prepare R&D around that.
I see. Yeah. So that links to my next question, pricing. So Daniel, you talked about pricing is one of your key advantages. So I think to investors, it could be both sides. It means that you're competitive, which is good. But it also means your long-term gross margin profile. So as a CFO, can you give us some sense about your long-term target of a gross margin given you seem to be more aggressive in terms of pricing? If you look at the operating margin, right, I believe there's a more fair kind of a metric to evaluate your long-term profitability. So can you comment on both fronts, gross margin and operating margin for the long run?
Okay. Sure. First of all, the reason why I said pricing will become more and more important in the future is because the revenue generated from the AI chip, especially from those cloud service providers to the ASIC vendors, is getting more and more significant, which means if the suppliers, when the suppliers try to maintain the same gross margin, the gross profit the vendors can have is double, triple, quadrupled in the future. But however, in the same time, like Robert mentioned, I do think to control the front-end design by their own is the target by most of the cloud service provider customers.
Based on logic thinking, the customer is trying to do more and more of the NRE while the suppliers providing less and less. It will assume the suppliers are providing the front-end and the back-end previously. But in the same time, as the revenue increases, the profit margin, they can get more if they're trying to maintain the same gross margin. So I think that's a challenging thing for the ASIC vendors within the cloud service providers' market. So for us, I will say for the gross margin side, last year is a good benchmark, which means when we have a very, very significant scale of production, the margin for last year is the margin we are trying to maintain. It is also difficult to us because the same thing happens on us as well.
But fortunately, we can argue with the customers saying that we probably will be the cheapest among the capable vendors for the AI accelerator. So I would say our target is to try to maintain the gross margin. But to be honestly, it's a tough environment to negotiate with customers with such big bargaining power. And in the same time, we want to leverage our customer and our revenue in order to get better pricing from the suppliers, from the foundry side. So all in all, yeah, I would say last year's gross margin will be a good benchmark. As for the operating income side, honestly, I don't know because the revenue change could be very, very significant. And as I mentioned, our operating leverage is quite good.
So as long as we can have a very good revenue growth, you can see continuously operating margin improvement in the future, especially in 2026 and 2027.
Yeah. Yeah. Great. Thanks, Daniel. So yeah, I truly believe that operating margin probably is a better way to measure your profitability. I also understand that. Sure. Yeah. The big or giant customer, $1 billion of revenue per project, I think a thin margin could be fair. So since we are talking about this type of $1 billion or above revenue project, can you give us some preview about the three-nanometer lifecycle revenue margin profile whether that includes HBM or not? Are you comfortable to talk about that three-nanometer long-term revenue contribution right now?
Okay. Charlie, like I mentioned before, yeah, based on the other people's market analysis, they've been very aggressive on the overall market, including ASIC.
For 2027, people are thinking about there will be $45 billion ASIC revenue. I also mentioned at the beginning of the speech that our customer has the confidence to maintain or even increase the total weight of the ASIC revenue. So if you're thinking about this $45 billion for ASIC revenue, you can quickly calculate the percentage of that particular customer. That will pretty much be the revenue target we have. But that's why Daniel mentioned about even though we have a very high cash flow, but we still worry about the future production. Yeah. As you know, there's a half-year gap, yeah, between minimum half-year gap. Assuming capacity, no issue. Yeah. We need to place the order before delivery. Yeah. Personally, I'm very optimistic for this particular design.
Yeah. That's a really helpful guidance and a way to think. If you think about what we just said, right, $45 billion TAM in 2027, and assume that the big customer, 10% global market share in ASIC, would that mean like $4.5 billion in 2027 for you?
I don't think that customer only takes 10%, right? It could be more than that. I talk about the market. Yeah. But anyway, yeah, you are also asking a very good question about the HBM. Yeah. We all know HBM is a commodity stuff. And I think it's kind of open. If you want to have an HBM, you probably need to sacrifice more percentage gross margin. But if you consider about the net and also the top line, HBM can contribute some. But if you talk about the percentage, if we recognize more HBM revenue, I think the percentage will further go down.
So this is a kind of trade-off we still put into consideration.
I see. Okay. Thank you. That's very helpful. Thank you.
Okay. Thank you. Okay. And the next one, Haas, please unmute your microphone.
Yes. Thanks, Johnny and Daniel. Sorry, I was in a meeting. But thank you for just accommodating my questions here. So my first question is still back to the market that you could capture in the AI market where you think it is going to grow to $45 billion and will be growing at a CAGR of 40%-50% in the next few years. I was just wondering if you could share a little bit more color between GPU versus ASIC. And within ASIC, which part of the segment you are seeing will be seeing the fastest growth?
Or as a percentage of the total ASIC market, which part are you? How much of the contribution is going to come from the high-performance computing or cloud AI-related chip then? I think this is my first question regarding the high level, your opportunity in the longer t erm. Thank you.
Okay. Let me elaborate a little bit deeper. For the existing project, we do expect very significant production scale. It also represents the quite significant revenue contribution from this chip. As for the details about the production, does it include the HBM or not? It is still under discussion. HBM is a commodity. Actually, I think the customer doesn't care who handles it. They can handle it by themselves, or we can handle the HBM, and the customer pays us probably some handling fee for it. So I can say for now, everything is under discussion.
And as for the scale in 2026 and 2027, I will say we expect year-on-year growth for 2027 as for the revenue for the project. And for the other opportunities among the cloud service providers' marketplace, I will say in addition to the accelerators, we do believe, first of all, the next generation AI CPU could provide some opportunity to us because the next generation AI CPU could apply the advanced packaging, which, as I mentioned, we consider the experience within the advanced packaging is one of our advantages. Secondly, we did a lot of preparation, and we took several projects for networking application. The reason behind is we believe in the future, within the AI data center infrastructure, networking-related application could be the target by customers to do the ASIC.
In order to be better prepared, we have to create the track record, the technology in order to compete within this marketplace. So this area we consider is a correct direction for Alchip. So all in all, I would say the ASIC market, especially within the cloud service providers, AI ASIC market, the market size is expanding very quickly. And in the same time, the capable suppliers actually will remain similar for maybe the next couple of years. Like I said, Broadcom, Marvell, Alchip, MediaTek, probably GUC, or maybe a little bit Socionext. We really think we have a good position to compete for those increasing number of projects, no matter if it is accelerator or CPU or networking chips.
Okay. Yes. Thanks, Daniel. That's pretty clear. And I think just doing the math, on an annual basis, you can take pretty much like 30 projects per annum.
Each of them, if we consider all of them migrating in a couple of years.
No, I think that the process of migration is a gradually moving process. Some of the customers may move fast. Some may move slower. But to us, we do see increasing demand from the two-nanometer side because many of the customers show their interest in moving into two-nanometer process node. However, like Johnny mentioned, for the two-nanometer process node, it is a whole new ballgame from FinFET to GAA. And there could be a lot of chips applying 3D IC or I/O chiplet solution. So the whole size of the NRE, the value of an NRE, will increase significantly by moving the process node from three to two.
Exactly. Yeah. Yeah. So that's what I mean is that the blended NRE concept project is going to be moving up very significantly.
I would assume that your NRE business, if you are able to still take 20 to 30 projects per annum on an annual basis, your NRE business opportunity in the long term could actually reach $1 billion-$1.5 billion opportunity, which is the same scale as you are going to make here, so the company basis. Plus, you will have the optionality from the other 20 businesses, including the hyperscalers, startups, or EBSLPs. I was just thinking if that is the correct way to think about that, your recurring business is going to be at least this level, like $1-$1.5 billion going forward on an annual basis, just driven by the NRE migration.
Okay. Hass, actually, your voice is breaking up. I can barely understand your meaning. I'm trying to guess what you are asking.
I guess it's how to keep the NRE growth when the process node is moving and every project needs more design engineering capacity. Is that your question?
Similar.
Yeah. And the other thing, if you can hear me clearly now? I'm sorry. I was just wanting to make sure.
No, your voice is breaking up.
Yeah. I mean, this place probably needs to improve its infrastructure on the cloud AI and also networking going forward. But I was just wondering if it is fair to assume that your NRE business run rate on an annual basis will be growing to $1 billion-$1.5 billion going forward as you are seeing more projects migrating to the advanced node, and each of the project concept will be significantly higher compared to the previous generation node.
Yeah. Okay. Hass, I'm trying to guess your question.
Okay.
Yeah.
I think your question is related to NRE growth rate. Yes, we are very optimistic for NRE growth momentum. Yeah. Just like you mentioned before.
I'm fine either way. Okay. Yeah. It's okay.
Oh, okay. Yeah. If you compare the N3 and N2 NRE, I think the increasing rate will be very significant given the fact the mask itself is more expensive. N2, if they are using the chiplet solution, one design requires multiple tape-out. And also, you're thinking about each of the masks need to do many simulations before tape-out. The hardware usage will be drastically increased. So that's also contributing to a big NRE. Just for your information, before we're doing one N5 tape-out, maybe just require like 200 servers. For N3, N2, the peak time may use over 1,000 servers. Server is also very expensive.
If you consider multiple tape-out on N2, and also including the hardware and also the design fee, the NRE increasing rate will be very, very big.
Yeah. Yeah. Can you hear me now?
Oh, yes. Go ahead.
Okay. Yeah. That's good. So yeah, I was just thinking because your NRE dollar content per project will grow significantly to the advanced node, to the previous generation node. And if you have the capability to take on 20 to 30 projects per annum, and each of the projects will require multiple tape-outs, as you just mentioned, I was thinking if your NRE business run rate could actually be growing to $1 billion-$1.5 billion on an annual basis going forward versus what we have been seeing that your NRE business was just probably at around $300 million-$400 million in the past few years. Yeah.
We are looking forward to break a TWD 1 billion range on NRE, but it will not happen this year for sure. Yeah. Because yeah, we do have a capacity right now, tape-out like a 20-30 design. But to be straight, if for N2, we may consider one design equivalent to three-to-four tape-out, yeah, like we did before. But because of one design, if it's a multiple mask needed, the resources will also increase a lot. Resources will become a limitation for us to take more N2 projects. But to be honest, N2 player is not too many. It's only a few companies. Either it's a CSP or well-established company or very, very well-funded startup may consider about N2. Otherwise, I think N2 is one. If they want to do the one design, I think TWD 200 million is kind of minimum, including everything.
Okay.
Hass, I will suggest you to write down your question because your voice is breaking up severely. Okay. Yeah.
Yeah. If I can ask one more, just one more, if you can hear me clearly.
Okay. Please.
Yeah. For the two-nanometer projects on the ASIC side, when do you see the earliest timing of the mass production from the industry perspective and also for your own business perspective?
Hass, honestly, I cannot hear your question clearly. Can you write down your question?
Okay. Yeah. I'll do that. Thank you so much. Thanks.
Okay.
Thank you, Hass. And Gabriel, Gabriel, please. You can unmute your microphone.
Hey. Thanks, Johnny and Daniel. Can you hear me clear?
Yes.
Thanks. I just have one question. I know I just want to switch the gear to China and ADAS.
As you know, in China right now, especially this year, I think BYD tried to push ADAS and intelligence to very cheaper car. So I think the ADAS market definitely increased a lot. So I will see more increase from China about the ADAS ASIC chip projects. I know you guys are working with Li Auto right now. But if any other guys are seeing more interest from China to do that auto ADAS, and how do you think about the long-term time for this market? Are you seeing overseas auto companies also trying to do their auto ADAS ASIC? And do we have a capacity to catch up that opportunity given we are very shorthanded in AI projects? Thanks.
All right. Yes.
I think because of a successful tape-out and also the chip working very well, thus presenting a very good example for open the door for us for ADAS-related business. Yeah, but when we're taking the business from China, we will be cautious. ADAS, we consider only maybe two to three car makers will produce the volume we expect, so we consider we already won one of the home runs, but we do have some plan to penetrate other car makers, and I think we have a good expectation on the production revenue produced by this customer we already won, and also, they have a next generation will be kicked off very soon, and in addition to that, we did consider to take maybe one more. To be honestly, in terms of working resources in China, yeah, we have more people. Yeah. We have more resources to take China business.
Unfortunately, ADAS-related application right now, I think, is not getting stopped by the major foundry or based on current regulation. We don't encounter any problem to take this project. Before, I mentioned about this project is being slowed down by two to three months due to an incident. Fortunately, this restriction is already removed. Yeah. After three months, the design can go to production now.
Right. Are you guys potentially working with BYD or in China or any other big names with volumes? And how do you see the long-term time of this market? Are you guys trying to?
Yeah. Like I mentioned before, if we want to take one more ADAS-related customer, it got to be a big name. But yeah, unfortunately, we cannot share too much at this moment.
Yeah. Okay.
Gabriel, for your question, I will say China is already the area that those car makers are incentivized to do the ASIC. You can compare the China auto market and the non-China auto market. You barely see automakers outside of China trying to do the ASIC for their car. However, in China, I think the incentives are multiple for those automakers. First of all, they are competing fiercely. They knew they need to provide differentiation, the technology features to the customers. And therefore, it is an incentive for them to do the ASIC. To do an ASIC is very expensive. So we are expecting the top-ranking automakers to do it. Obviously, Li Auto is a big fish, and BYD, and NIO, and probably XPeng. In China, we are relatively very confident. Once the customer tries to do an ASIC, at least they will talk to us.
Because, yeah, proudly speaking, we are pretty famous in China ASIC market. So we don't consider it is a really bigger problem. As long as the project is out there, we will talk with the potential customers. Got it. That's very clear. Fair enough. Thank you, guys. Thanks. And let's take a final question from Robert because of the time constraint. We still have other things needs to accomplish. So Robert, please.
Yeah. Thank you, Daniel. I just want to go back to the key CSP customer. So I just want to understand the life cycle revenue for this three-nanometer. Maybe not the absolute number, or maybe we can compare the revenue potential versus the seven-nanometer that you are running. How sizable are looking at? This is my first question.
Yeah.
Based on the generation, based on their trend, and also the conference they present, every other year, they will do a new design. Yeah. Of course, if the current design performance and selling situation are better, the life will be longer. In the opposite way, if they are not doing well, the lifetime cycle will be shorter. Our previous generation, I think it did in production over two years.
No, no. Three years.
Over two years. So you're almost three years, I know. And yeah, for N3, I have a high expectation. Yeah. Current ROE, I think minimum two years.
And for the scale, I knew that you all want to know the scale of the revenue. I will suggest to think this way. The trajectory of the generation-by-generation projects of this customer will apply the same trend to the three-nanometer project. Okay. And Robert, please. Yeah.
I also want to move to the next generation after three-nano. Will it migrate to two-nanometer, or is it possible to stay on three-nanometer? What's the status of this project? Has the customer started the RTL design already? When will the RFQ be issued and the revenue decision to be made? Johnny, you talked multiple times about the chiplet design. Will we see multiple suppliers on this next generation project after three-nano, or you think that even if the win is a sole win?
Robert, you are going too deep.
So the architecture portion, I think customer is not finalized yet. For sure, Li Auto and TSMC is working on this. And they will make a vendor selection for sure within this year. So a lot of homework we need to do. Yeah. And we're working with them with a different variety of topology. Yeah.
I think because consider about the yield, consider about the cost, considering about the potential risk. There's some possibility go to chiplet, and some possibility remain homogeneous. I think we are working with this particular customer closely.
Thank you. Okay.
Thanks. We'll be happy to do, right, a nswer question. First, on two-nanometer, when would you expect the earliest timing of production contribution? Second, if we did not take it wrong, your sales this year will drop by 10%-20% this year, but earnings will be flat. Could you provide more details on the NRE production mix and your target gross margin this year? For your first question for the two-nanometer project, I will say what we can say right now is we are highly confident we can maintain the partnership relationship with the customer. We always want to do generation-by-generation projects with our customer.
There are some signals about the possibility of winning or losing. For now, the whole situation is pretty good. And secondly, yes, our revenue, we are expecting to drop by 10%-20% this year, 2025. However, as I mentioned, with the improving growth margin and coupled with our operation gearing, we don't think the net income, the net profit will go down in the same range with our revenue, which means the net profit will go down less than 10%. That's what we are assuming right now. But for now, it's only February. And you are asking me about almost all the P&L items. I'm sorry that I cannot give you a very firm answer. I can just tell you the trend and the direction. Yeah.
And for the NRE and the production mix, I will say for now, I am expecting the NRE to account for like 30-something, 30%, around 30% of our total revenue this year. Yeah. And I guess that's it. Thank you all for your participation in our fourth quarter 2024 earnings call. And many of you, I will see you soon. And most of you will see me and Johnny in the next earnings call in probably within two months or three months. Thank you.
All right. Thank you very much.
Thank you.