We'll upload to [ Foreign language] about a couple of hours after the finish of the meeting. It takes time for uploading, so please be patient if you need it. This is the me`ssage from our CEO, Johnny Shen.
Okay. Good afternoon, ladies and gentlemen. I'm Johnny Shen, Chairman and CEO of Alchip Technologies. Yeah, once again, thank you for joining our investor conference today. We truly appreciate the opportunity to share our Q3 results and provide the update for our business outlook going forward. For Q3. Yeah, let me summarize a bit. Our third-quarter revenue came in below plan. Primarily, it's due to the planned change of our IDN customer and also capacity shortage for our cryptocurrency business. As a result, the revenue reached TWD 223 million and net income TWD 44.3 million, and EPS is NTD 16.4. The detailed financial breakdown and analysis will be presented by CFO Daniel in the following section. There are a few highlights for last quarter. Number one, we make a significant. Progress with our number one most important customer. The M3 design we tape out was successfully verified.
A substantial number of wafer orders already placed to the major supplier. The project remains on track for high-volume production starting from Q2 next year, with no change on annual revenue forecast. In addition, the design activity for next-generation products has already begun. We expect to recognize a portion of NRE revenue this year. Number two. Regarding our automotive business, our end customer is highly satisfied with the chip's performance and has already placed substantial wafer orders. The chip was deployed across all their product line, and customer has even decided to integrate two chips into their high-end model. Production is scheduled to begin late this quarter, and we expect this product will become one of our top revenue makers starting from next year. Meanwhile, the next generation has already underway, ensuring the revenue continuity and strong business momentum through 2028.
Number three, regarding our gross margin improvement, although our Q3 revenue declined significantly due to lack of production revenue, our NRE business remains strong, contributing to a 6 percentage point improvement in gross margin compared to previous quarter. Despite a 20% decrease in total revenue, our net income and EPS were slightly higher than last quarter, reflecting our different business mix and disciplined cost management. Looking ahead, our Q4 is a traditional peak season for NRE. We are confident of achieving even higher gross margin this quarter. Number four, regarding the ecosystem partners, starting from N2, Process node, and beyond, HPC capacity has increased dramatically, with a single design often integrating multi-die and diverse solutions. Unlike most of our competitors who follow a captive model, seeking for higher margin, Alchip is promoting an open ecosystem strategy, collaborating with a broad range of partners to develop comprehensive and efficient solutions.
Our ecosystem network has expanded substantially in recent quarters, with more partners eager to engage in co-development. We firmly believe the future of the ASIC industry lies in the open system, not in a closed captive system. Yeah, as for the geopolitical risk management, we continuously diversify our business and design resources beyond China to mitigate the geopolitical risk. In Q3, less than 8% of total revenue originated from China. To strengthen our global engineering capability, we have launched a very aggressive hiring plan focused on the region outside of China. Our new Japan office can accommodate up to 200 employees, while our Malaysia and Vietnam office now hosts 100 engineers combined. We plan to expand our Southeast Asia workforce to around 120 employees by the end of this year. In conclusion, we anticipate a further revenue reduction this quarter.
However, our gross margin % is expected to improve again, driven by higher contribution from NRE revenue. Despite the revenue decline, our quarterly earnings are projected to reach the highest level of the year. Looking ahead, we remain highly optimistic about the AI market. From 2026 to 2029, we expect our growth. To stay in with the industry leading partners and competitors. We are confident in our ability to outperform the average market caterer in a high-growth HPC application. Thank you very much.
Okay, thank you, Johnny. For this page, this is the details about our third-quarter P&L. The numbers are very straightforward. For the third quarter this year, we recorded almost TWD 223 million. It represents a 25% quarter-on-quarter decline and a quite significant 51.5% year-on-year decline. I will address the reasons behind it later. As a result, the operating income in the third quarter is TWD 38.8 million, compared to last quarter, which is a 3.2% quarter-on-quarter increase, while the year-on-year decline is 33.6%. For the third quarter net income, we recorded TWD 44.2 million USD, translating into 16.4 EPS in New Taiwan dollars. The net income represents 3.1% quarter-on-quarter up and a 20.3% year-on-year decline. This is the revenue breakdown as usual. You can see that the HPC remains the majority revenue contribution for our revenue. The reason for the consumer product.
reason our revenue in percentage going up is because of the production contribution from Japan's consumer electronic projects. As usual, we are focusing on the HPC, especially AI-related applications for our future. For the process node breakdown, like always, Alchip has been proud to be the leader within the most leading-edge process node technology. In the third quarter, we have combined close to 90% in revenue exposed 7 nm, 5 nm, 3 nm, and the 2 nm, the so-called most leading-edge process nodes. Only around 10% of our total revenue is exposed to 16 nm, 12 nm, or the more legacy process nodes. I believe this revenue breakdown in process nodes remains the top tier within our industry. For the geographic breakdown, like I mentioned, for Japan, because of the mass production of the consumer product to Japanese entertainment.
Gen customers, the third-quarter revenue exposure to Japan went up to 17%. In the meantime, the majority of our revenue exposed to North America still exposed to North America region, accounting for 74% of our total revenue in the third quarter. For the Asia-Pacific, which includes China and Taiwan, and almost no Southeast Asia exposure, combined accounted for 7% of our total revenue. For the third-quarter numbers, as just mentioned, the revenue declined. The main reason is our 5 nm accelerator chip. The shipment had tapering off because the end of the life cycle actually happened in September. The 5 nm AI accelerator shipment, which shipped to the US IDNs, ended its life cycle in the eighth quarter. At the same time, we do not have too much production revenue contribution from the other projects. However, because of the.
Higher NRE percentage in contribution, our profit margin improved quite a bit. The third-quarter 25% gross margin improved to 28% from 21% a quarter ago. The NRE revenue contributed around 30%-40% of our total sales in the third quarter. Like Johnny mentioned, we have done a good job in the OpEx, cost, and the expense control. Another reason for relatively low operating expense is the less employee option amortization expense, which we expect to steadily go down a little bit in the coming couple of quarters. I would say the increasing NRE revenue in the third quarter is mainly due to the strong project inflow, mainly from the North America region. In the same time, we do tape out several big milestones for some important projects. Okay, this page is for the outlook for the fourth quarter this year and the 2026.
We expect our NRE revenue to further grow sequentially, which means we are expecting better profitability in the fourth quarter. We see the Process node migration continues, and we expect higher NRE contribution in percentage, also in absolute value in the fourth quarter. We expect the 2 nm projects to begin revenue contribution in the fourth quarter. Actually, we already recorded some revenue for the 2 nm already. For the revenue outlook next year, for 2026, we expect our total revenue to jump up. That means starting from the fourth quarter. Fourth quarter revenue in all will remain weak unless projects significantly contribute production revenue to us. It is a fact, as we mentioned. As the 5 nm AI accelerator project entered the end of the life cycle, in the fourth quarter, we do not have projects to contribute significant production revenue to us.
Another reason for the weak fourth quarter revenue expectation is because the ADAS project, previously, we were expecting to begin its contribution in the middle of the fourth quarter. However, because of the longer-than-expected testing process, right now, we are expecting the revenue contribution from the ADAS project starting from very late in the fourth quarter, which is one of the reasons behind a weak fourth quarter. However, like I said, we expect revenue to level up significantly starting from the second quarter next year because of the shipment started for our most important 3 nm accelerator project to kick in in the second quarter next year. I guess we addressed many points for the investors. We are going into the Q&A session. Please use the raise hand function or write down your questions through the Teams message function. Thank you. Okay, Laura, please.
Laura, you can unmute your speaker, your microphone. Okay. There could be some technical problem for Laura. Charlie, please, you can unmute your microphone for questions.
Sure. Can you hear me okay?
Yes.
Okay, great. Thanks, Johnny and Daniel, and also your comments about the result and the outlook. First of all, I wanted to know how we can properly model the 3 nm or the future 2 nm revenue contribution from the major customer, because I seem to sense that there could be a circular business model change to customer on tour. I think for this, right, not just a sales side, but also buy side, we do have some hard time to predict your future revenue. Just FYI, for example, in the past, we can cross-check from supply chain to get a sense about the potential of the chip volume. Based on that, the AST, we can derive our top line, gross profit, and then your EPS. Can you give us some guidance on how we are going to model your future profits or revenue properly?
Okay, I'll go first, and Johnny will give you a broader overall picture. Actually, we cannot comment on specific projects, but since it is the most important project for us, I would like to provide some clues for your projection. First of all, based on our experience and the 5 nm project of this product, these 3 nm revenue definitely could be a multi-billion business to us. For next year, I want to emphasize, probably you may hear about that we told that the shipment was likely to kick off in the first quarter, and right now we shifted to the second quarter. However, no matter if it will start in the first quarter or second quarter, the yearly scale for this project remains unchanged. To us, next year, I will still expect this is a billion-dollar business.
Okay.
Yeah. In terms of how much revenue we are going to get, and I also agree some of the business may be customer design to handle by themselves due to some reason. Honestly, that's a customer's decision. For us, we just make sure the growth rate meets our expectation. I think that's already prior agreed with the customer. A certain portion of our revenue definitely will be allocated to us with upside. If we have some prior agreed percentage, unfortunately, we cannot share, but it is to ensure companies grow and sustainable revenue will be sustainable in the future. As you know, the N3 capacity is so tight, and customers try to get more capacity. If any additional allocation they can receive from TSMC, we will share some of them as well.
I think we are, even though we didn't get the full allocation, but our customer makes sure the growth rate for our customers is satisfied for both sides. Also, when they have an upside, we will also enjoy it. I think that's an agreement on the current generation and also the generation beyond.
I see. Thanks, Johnny and Daniel. Can we get a sense of the so-called potential EPS contribution? Because no matter how hard we try to do the modeling, right, the biggest unknown is always the allocation. That allocation seems to be very fluid based on what you just described, right? I think some of the U.S. companies, when they provide revenue or gross margin guidance, sometimes they also provide the EPS range, right? I'm not sure if management can also do that for this.
Okay, Charlie, unfortunately, we are listed in TSE. So we cannot provide the numbers. The authority, the TSE, will be mad about that. Another thing is, actually, we usually cannot comment the EPS or the things on a particular project. I would like to offer you some clues. For the production, for 7 nm project, two generations ago, we guide the gross margin for the product is about 10%-15%. We are pretty confident for the 3 nm project to be in the same range or better.
Okay. Yeah, I'll put it this way. It just came to me 10 seconds ago. Maybe. Let's assume the TEM of the ASIC would be TWD 30 billion next year. Do you think you can get like 10% of market share next year? Your industry peer, right? They said in 2028 the TEM would be $50 billion. Do you think you can get a market share of like 10%-15% as well?
Charlie. Don't push us with the numbers in this call.
Okay.
Yeah. Like I said, it is definitely a multi-billion dollar business for the project in generation. Since the life cycle of the product is expected to be in 2026 and 2027, I guess you can easily get a four-part range for next year's revenue contribution from this project.
Yeah. Okay. Charlie, I know there's a certain, yeah, a lot of stuff is not clear at this moment, but I think we believe this is the customer. We've been working with them for a long time. Whoever makes a more contribution to them, I think you will enjoy, I think, more outcome. I think that's for sure. In terms of EPS and those kind of things, I think once the project starts to kick off, after you do some calculation, I think on the given quarter, during the production, you will figure out.
Right now, I think. Yeah, it's too early for us to tell. We've been warned almost every time to share some future numbers.
Okay. Okay. We will be patient. It's just a little bit goodwill because for investors, they don't like uncertainty, right? Just my very, very honest opinion. But we also.
Yeah. I also agree.
Yeah. We appreciate, and hopefully, we can get your updates next time when that project enters mass production. Yeah, it's a long discussion. Probably I go back to the queue. I do have some other questions, but I will leave it to other speakers first. Thank you.
Thank you. Okay, Laura, you can unmute your microphone. Laura. It seems Laura still has some difficult technical issue. If there are any questions, please use the raise hand function of Teams for doing that. Okay. Charlie, please.
Oh, thank you. Yeah, I will continue. Yeah. Just want to know kind of the progress of other new projects. I think one is the 2 nm project. You said you just booked some revenue. I believe there's a circular test chip. In terms of the 2 nm mass production timing, is there any change? I think a quarter ago, you kind of talked about the revenue in the coming four years, right? I'm not sure when should we start to incorporate the 2 nm mass production revenue in your future revenue forecast?
Okay. Actually, for the 2 nm project, because it's still time for tape out, we don't talk about the potential production scale yet with the customer. However, based on the current industry practice and the outlook for those users' future CapEx, we do believe that the production scale for each generation will be bigger and bigger. For the scheduling, I would say the cadence for the project for this customer is usually every two years. I guess it's quite easy to predict the potential production time for the 2 nm project. However, I have to say that everybody wants to have the project go smoothly and quickly. Everybody wants to get the chip as soon as possible. We will try our best, and the customer will try their best. Of course.
The whole supply chain will try their best in order to get the chip on time.
Okay. Yeah. Let me also add some information. Yeah. First of all, let me clarify. We have multiple wings for 2 nm, but I definitely know which project you are pointing to. I think, just like Daniel mentioned, the scale for each of the generations, I think that increased exponentially. I think that could be even for the given N2 project. I think we are under the huge pressure to complete this design as soon as possible. To be, I think, both us and also our customer are in sync. We will provide the best service and to achieve the, in order to control the schedule and to make sure the product goes to production as soon as possible.
For us, to be straight, unlike the current generation, because we do not have an N5. We have a huge expectation for N3. We are waiting for N3 to go to production in order to fulfill the gap. Like this year, there is a huge revenue gap. In the future, this kind of stuff will not happen. If next generation happens sooner, we will be very, very appreciative. We will be very happy. Even though any production sleepers, it does not hurt our revenue too much because in usual case, when the next generation, due to some reason, slows down a bit, the current generation volume will increase. I think the best thing for us is that we have continuity. I think that is the most important thing.
Right. Right. Thanks, Johnny and Daniel. Are we confirmed to win this 2 nm project as a customer? This has been a circular debate, right? How do we convince investors that you win this? The second question is that you talked about generation on generation, the revenue scale would be much bigger, right? After changing to circular COT business model, I feel like the narrative should be on whether your profits, your total profits to earn on a 2 nm project will be bigger than 3 nm.
Yeah.
Can you comment on both? Yeah.
Okay. How to convince? Honestly, I don't know how to convince. But.
Okay. I guess that's our job.
Yeah. Honestly, from our point of view, we just do our job. Actually, like I always talk to the investors. For projects with such scale and the complexity. Actually, in order to catch up with the cadence of the customer, a lot of the engineering work has already there. So I do not know if it is a truth, but it is happening. That is why we mentioned, actually, we already have 2 nm related revenue in our P&L in the first quarter this year. And for the scale.
Profit scale. Yeah.
Profit scale. I would say the pricing pressure has always been there. If you wear customer's shoes, definitely you want the suppliers to provide some cost stuff every generation when the volume keeps on rising. However, we will try to defend the pricing pressure by showing our value to the design, by showing our value to the production, and most importantly, by showing our value to our suppliers, which is the manufacturing, the OSAT, and the packaging. All in all, by combining those reasons, I would assume even if there is pricing pressure for the next generation, we can mitigate the pressure to a certain degree by working with the suppliers.
Okay. Yeah. I feel like 2 nm is much more complex, and revenue scale is much bigger. I think you deserve higher profits generation by generation. Anyway, that's my second question, and I will hand over back to you. Thank you.
Thank you, Charlie. Jeffrey from Glory.
Yes. Thank you, Johnny, Daniel. You mentioned your big accelerator customer. You mentioned the ADAS customer. In the past, you've also talked about networking projects. Can you maybe give a little bit more details on geometry, scale, and timing of some of those bigger networking-related projects? Thanks.
Actually, we do several projects within the networking application with a couple of North American networking players. I would say for the smaller customers, the production scale is not that significant, honestly, because it is in a quite special application. For the second customer, I would say it is a series of project chains. For the first project, it will go into the production phase next year. However, we do not expect very significant volume from the first one. For the second one, which is going into the design already, we are expecting the shipment volume could be significant. The production scheduling is most likely to happen in 2027.
Yeah. Jeffrey, I think the networking-related application, we all know the chip size are much smaller, but I think customers also adopt the leading-edge technology like N3. We expect the revenue will hit a certain number, but it is not. Happen to be a billion-dollar scale, I think, for sure. To be honest, if it is a few years ago, we still consider it is a very, very good project for us. Right now, I think because most of the investors, I think, have a very high expectation for our growth rate. I think networking only plays a small portion of the revenue starting from next year.
Okay. Great. Thank you. My last question. Your IBM customer, any future projects do you expect next couple of years, or do you think that's done?
Okay. For the IBM customer, for now, honestly, no. Our concept is the same. For doing the AI-related chips, especially the accelerator or let's say GPU. If anyone wants to have a competitive edge, they have to find the best manufacturer to produce their chip. For now, it is TSMC. For this IBM customer, if they want to do AI chip and with high commitment, I would say the better way for them is to do the manufacturing in TSMC as well in order to compete with their competitors. If this IBM wants to do the project in TSMC, I think we have a pretty good chance to play the same role like we did in the previous generations of chip.
Yeah. Thank you.
If they decide to use their own fab, I think the chance for us to win is very slim. We probably do not want to touch.
Okay. Thank you.
Okay. Next is Patrick. Patrick Bao.
Hi.
Hi.
Great. Thank you. I just wanted to ask about the N3 project. So whilst you can't give us guidance on the absolute size, have you seen that size be increased in the last few months or any changes in the potential size of that project?
The size of the production scale?
Yeah.
Which project? You mentioned about the.
Yeah. Which project you mentioned? Sorry.
The N3 project next year.
Oh, N3. Okay. Okay. Actually, for this project, starting from the design, early design phase, the customer keeps on telling us the scale of the production is a monster. And we keep on hearing the additional thing, additional scale, all the way through the design phase. However, as you may know, the wafer capacity, the wafer and the CoWoS right now in TSMC, especially for 3 nm, is very, very, very tight. Like Johnny mentioned earlier, if we can, or the customer can get more wafer allocation, there could be upside. The scale really depends on the wafer.
Yeah. For this product line, fortunately, the CoWoS doesn't play a too much important role in terms of capacity because they're using different CoWoS solutions. The major challenge is the N3 wafers.
Okay. Got it. When do you anticipate finding out if they can secure more N3 wafers? How much more could they secure? How big an increase could you see to this project?
Actually, for the next year, we already have the numbers. In the same time, since the demand is better, both parties are talking with TSMC in order to get extra wafer allocation.
In usual case, there may be some upside. In the past, TSMC reserved little capacity for the emerging usage and maybe some of their existing customer changing plan. So that's a source of upside.
Got it. Will the upside that could be unlocked be proportional to you? If they could increase wafers 20%, would you get 20% higher revenue? Or does this change in business model mean it's not as proportional?
Henry, I knew you want to quantify the numbers, but honestly, for now, we do not have an idea.
As soon as the customer has some upside, we will enjoy.
The upside.
The upside. Okay. Great. Looking at your kind of other customers and potential new customers, has there been much progress with other hyperscalers or with other large customers?
Okay.
Yeah. Yeah. So the definition of the large customer, you probably mentioned about other CSP, right? We encounter so many customers right now, whoever doing the accelerator in the industry, I think right now we have a chance to win, yeah, even for the CSP. To answer your question, if you ask me, do we already have any significant win? Unfortunately, the answer is no. We do not have any other CSP at this moment. To be very straight with you, every time when they have a big project on the accelerator side or on the CPU side, we have a shot. I think just like I mentioned before, sooner or later, I think most of CSP will adopt COT, this kind of open solution. Yeah. I think they really like to work our business model to make everything so transparent.
Got it. Great. Thank you.
Thank you.
Okay. Let me try Laura again. Laura, you can unmute your microphone. Okay. It works.
Thank you, Daniel.
Yeah. We have to talk to her.
Thank you, Daniel.
It works.
Okay.
I just told Daniel, yeah, we have to pick up your phone before this ending call.
Okay. Thank you. So you can hear me clearly right now, right?
Oh, yes. Very good.
Thank you. Appreciate it to have me come back. Johnny, you just mentioned that your open ecosystems business model will help you to engage more of the opportunity when it's moved to 2 nm project. May I ask that, what would be more details that can you share with us on the business model? You work with the third party, and how would that impact your gross margin and also the business scale for the future AI accelerators? Before you answer me, can I clarify your 3 nm project business model is pretty much the same as your 7 nm one? That's correct?
Yes. Yes.
Yeah. The model is pretty much the same. Yeah. So basically, the open ecosystem, what we propose to our customer, I think number one is transparency. Yeah. The customer knows all the costs, including wafer, including IP, including our design service, and also our margin. We agree with a certain margin to add up to their costs. This is what we call a COT model. Yeah. Both parties agree with a certain percentage margin. I think that's a prior agreement. The upside for us, yeah, as you know, the volume increases drastically generation over generation. In the other world, even the agreement between us and the customer, the number is fixed. They negotiate with all the pricing by themselves. Sometimes, because of a volume accumulation, we will get additional support from the supplier side. Yeah. In this industry, I think suppliers play a very fair role.
Whoever plays more order, they can enjoy better pricing. I think that's an upside. If we accumulate more customers together, we'll have more benefit from the supplier directly. It doesn't conflict with the pricing which customers negotiate with the supplier directly. For the N2 technology or beyond, the design becomes so complicated. It's no longer a homogeneous type of one single table and produce a chip. One design requires multiple tables, requires variety for IP, and also the solution. Yeah. For example, we may work with some I/O chiplet chip provider. We can do some integration with them. We may work with a CPO vendor. We may work with different IP vendors. I think I don't believe one single company, no matter how big they are, they can provide the most comprehensive and total solution in the future technology. Yeah. Because different solution has a different expertise.
It has a different company to focus on that area. We just try to put everybody together to provide the most comprehensive and cost-effective solution. Right now, we have multiple IP partners and PCB partners and I/O chiplet partners and also CPO partners.
Yeah. Given the complexity of the chip designs and I/O chips, you will provide this kind of system integration and silicon ventilation, etc. Can we assume that the gross margin in that kind of type business model will be higher than your current business model? Because your effort definitely.
Hopefully. I think that customer is very smart. If you'll be providing more. Higher contribution to their share, I think that we deserve higher margin. In fact. Our margin expectation even increased a bit, still much less than our current competitor in the U.S.
Yeah, of course. Okay. Thank you.
Thank you.
Thank you.
Okay. Next one. Goku, please.
Yeah. Thanks for taking my question. When we come to the COT business model, the one question that a lot of investors ask us as well is, is it the final kind of stopping point for the customer, or will they move forward to kind of control everything themselves? Because your main customer also has some CPU projects where they do it pretty much direct to the foundry itself. Just wanted to understand your thought process in terms of how you kind of make sure that your value is getting captured and the COT model with the open structure kind of continues to remain and the customer does not want to kind of move to internalizing everything themselves.
Goku, I assume you are asking, is there any possibility for customer insourcing the production, right?
Yeah. It's not just production, but I think they are already doing COT. Is it the natural progression for them to do everything themselves? Maybe not in the next or the next generation, but just wanted to understand how you kind of keep your value still.
I'll say it this way. First of all, if you are talking about insourcing the physical design, we don't consider customers have very good incentive to do so. Because unlike the CPU and networking, the accelerator design, the physical design of an accelerator is very, very difficult and complicated. No need to mention about the process, no. For them to build up a capable team to insource the physical design for a such complicated chip, what is the benefit they can get? They have to take the risk for delay and mistake, multiple retable, and the much longer design turnaround time. From our point of view, we don't see the in-housing happen. I won't say in the short time. Even in the mid to long term, I don't consider it will happen.
Yeah. I agree. I think to answer your question, if you're asking me about the possibility, of course, anything is possible. If a customer can do the better job than us, yeah, of course, if I'm a customer, I will do everything by myself in order to save the cost. Nowadays, I emphasize so many times, design becomes so complicated. Each of the players in the supply chain should focus on their own area. Yeah. The reason we can table everything on time is because we're doing this kind of design, at least 10-20 designs every year. If a customer decides to do by themselves, they're only doing the one design every other year. The knowledge accumulation and those kind of things, at the end, I believe customers will make it happen, but likely the schedule will be delayed.
Now, right now, I think the usual generation only lasts two years or a little bit or a year and a half. If the delay like a previous generation just happened, delay for six months. The market is not going to be waiting for you. You will lose the market. You try to catch up on the next generation. It's not worthy to take this kind of risk. And also, different regions have a different working mentality. Yeah. I just joke with my customer. Even, I send my team to your company. Do you have a confidence to make them work through the weekend, work through the holiday, work through Christmas? I think different companies have a different DNA and mentality. If a customer tries to go beyond that, I think most likely they will suffer a bit.
Understood. That is clear. Thanks, Johnny and Daniel. The second question, since you talk about the Alchip moving to a bit more of a kind of collector of all the IPs and kind of offering it in an open kind of environment to customers, could you talk a little bit about networking and chip-to-chip interconnect? I think right now it feels like scale-up networking becomes as important, if not to some extent, even more important than the ASIC itself. You have the partnership with NVIDIA on NVLink Fusion. You are working with Astera Labs also on some of the other interconnect stuff. At least observing from the market, it feels like that piece of the IP seems to be still very proprietary.
The open source seems to be, at least if you look at what happened in OCP and all the developments, felt like open source is definitely behind the curve compared to proprietary technology from NVIDIA or Broadcom. How do you see this evolving when you talk to all the customers? What could be Alchip's role here, including any progress you are seeing on the NVLink Fusion?
Okay. For the customer city town, or is it AC? We are trying to provide an open ecosystem to customers. The reasons are, first of all, by providing an open ecosystem, the customer has much, much better room to save some cost. Because in the future, you definitely know that those future CapEx lanes are crazy. Any percentage saving is big money. We do believe by providing an open ecosystem to customers, the customer can enjoy much better pricing or cost saving from the ecosystem. Secondly, like Johnny mentioned, we always believe that everyone should do what they are good at. We are a physical designer. We do physical design. If a customer needs related IP, we can provide our IP partners to them. For CPO, the same thing. For I/O chiplet, the same thing. By providing that.
We believe we can have a pretty strong competitive edge to our competitors. I would like to mention one thing. Twenty years ago, actually, TSMC is providing an ecosystem and winning out the whole market from IBM. For now, Broadcom, Marvell, MediaTek, probably they can offer everything. Just like IBM did 20, 30 years ago.
Got it. Any significant progress you are observing on NVLink Fusion? Given it's already about six months since you signed the partnership?
Yeah. NVLink Fusion is a very good technology, and we are more than happy to work with NVIDIA for that. In the end, it is customer's decision. It's a good technology, and many of our customers are interested in this technology.
Yeah. Saving has many dimensions. Sometimes the quick turnaround time is a saving. Sometimes the total power consumption is a saving. We do have a few, many inquiries on NVLink Fusion collaboration, and we work with NVIDIA very closely. They even assign the people. When the customer comes, we are co-visiting customers to promote the solution altogether. Hopefully, in the near term, we have some good news to share.
Okay. Understood. That is clear. Just follow up on a different question, I think, from a different analyst. On the second customer in CSP. Johnny, in your mind, what is the main challenge for you to get the second customer? Is it the customer coming to have the same kind of capability as your first customer that they can easily embrace your open ecosystem? Is that the bigger challenge, or is there some other factor that is the bottleneck to potentially win the second CSP customer?
I think the most challenge for us is we have to change customers' mentality and perception a bit. I think when we talk to the potential customer, I think they are kind of convinced which area they should focus and which area they should outsource. It takes some time for other. I think our current customers are different. They already have a design team even before everything. They have a core team prior to winning this business. The other CSP doing reversely. They already have a business. They try to build team. They hire a lot of gurus from each of companies, like ASIC company, NVIDIA, AMD, everywhere. They have a different mindset. They have a different mentality. I think we have to work with them. I'm not saying educate.
We have to work with them and tell them what's the right way to adopt the COT model. Yeah, it takes time. Every time when we have some engagement with them, I think they are lessened. I think we have a shot. Some capability they have to develop. Yeah. Sometimes more people doesn't mean they can do a better job. I see efficiency and also the one team with a good leader. I think they can help us to do a much better job. Yeah, to answer your question, yes. That's a challenge because we try to work with a pure CSP and work with a pure system company to do COT. I think that's still a lot of lessons learned for both parties.
Understood. Yeah. Thank you very much. Thanks.
Okay. Charlie, please.
Sure. Yeah. Thanks for taking my follow-up question. Yeah, I remember a couple of quarters ago, you sort of shared some chip price—not chip price, right? The ASP is like 4x-5x versus the 7-nm generation, meaning your 3 nm chip ASP. Do you still hold the same assumption? Management just said that in the coming month, you probably will have better visibility for the wafer allocation. Can we also get a little bit clearer about the ASP assumption?
Yeah. Unfortunately, we cannot discuss. We cannot talk about pricing. Yeah. Yeah. It's a hard requirement by the customer.
Right. I think recently, you can see a lot of news from that player. Yeah. They just got a phone call. They have pretty much high confidence to use their own chip, eventually replace their current supplier. I think the next generation and also the generation behind, I think the plan doesn't change. We expect a very, very big volume and progress on the N3 and beyond.
Okay. Okay. Great. Yeah. The next question is a little bit harsh. Yeah. Because for your recent quarter revenue mix, part of that is due to you cannot secure a 3 nm wafer for a crypto customer. How should investors be convinced that you can secure 3 nm wafers for your major customer next year? Also, another tougher question is that your local peer, which is also your foundry's subsidiary, right, recently, there seems to be okay to secure those wafer shores for crypto. Can you comment about what you really think about your circular foundry partnership?
Okay. First of all, crypto project is totally different from an accelerator. They have huge difference for the priority within TSMC. For crypto business in TSMC, the priority is low. When you try to secure wafer from TSMC, especially for the 3 nm, it is really, really difficult. I do believe that our peer is also facing difficulties of getting 3 nm wafers for the crypto customers. For the accelerators, it's a totally different thing. First of all, the customer is what TSMC wants, and the application is what TSMC wants. Fortunately, the co-ops, the co-ops of the chip is in a less crowded process. For the 3 nm accelerator project, for now, yes, the customer do wants more wafer. However, the current allocation is quite good.
Okay.
Sure. So which means that for next year's 3 nm for AI accelerators, it would be a totally different case versus the crypto. Okay. Okay.
Yes.
Okay. Okay. Great. Yeah. Last one is the ARM total design. I think following Goku's question about NVLink Fusion and circular partnership, all good, right? I remember you also have this ARM total design circular partnership. I'm wondering if you consider to be more aggressive in ARM total design because lots of CSP customers, they wanted to do their CPU as well. Also, again, referring to your industry peer, very, very low margin, but actually it's very, very good for their revenue momentum. I believe it should be still positive to the EPS. Johnny, how do we think about if there will be a future opportunity coming for this kind of ARM-based CPU? How should we handle this kind of opportunity?
Right. I think a couple of weeks ago, we just announced we joined the ARM total design service. Yeah. I think we work with ARM very closely. Even though they say this program is closed before, but they kind of open and re-invite us in, yeah, for some reason. Yeah. There are some CPU-related design opportunities. Yeah. We are using ARM. I think focus on the design is our number one priority. We try to do design along with production in order to provide value and also to get a higher margin. I think that's our number one priority. We do have some opportunity in the U.S. and also in Japan using ARM as a server type of a CPU. Yeah. To answer your question, if any design, any customer comes to us to do the production-only type of business.
First of all, we will evaluate the margin. Yeah. If the margin, we think a range, does not fall out of our bottom line, we will take. I think I agree with you. In terms of EPS, in terms of risk, it definitely helps. The drawback side, they will have a certain impact on the gross margin as well. Yeah. If it is a CSP type of a customer comes to us, most likely, we will try to participate because we try to win their design and eventually try to provide more value on the design side. If it is other business, other smaller customers come to us for production-only type of business with low margin, most likely we will reject.
I see. Yeah. Thanks for your answers for those tough questions. Thanks for bearing with me. Thank you.
Thank you. Okay. Because of the time constraint, we took two more questions, one from Laura, one from Ellison. Laura, please.
Yeah. Thank you. Just very quickly, thanks for taking my follow-up question. Johnny, you did mention that the constraint of 3 nm wafer supply. Yet for the CoWoS part, I'm just wondering, do you already work with OSAT partners or still mostly at TSMC on the CoWoS package?
Okay. Laura, actually, the bottleneck for the 3 nm project, right now, the bottleneck is actually wafer, not the CoWoS. Yeah.
Yes.
CoWoS has a different tie, right? The specific tie we are using, the capacity is not the bottleneck. To provide the chip, the top-die wafer will be the area, major shortage.
Yeah. Sure. So I'm just wondering that. Do you already kind of secure enough CoWoS supply at TSMC? Or for the CoWoS, you also have kind of a backup plan to work with the OSAT partner? There is a. Relatively less constraint.
Actually, look at the CoWoS is secured.
Okay. Okay. Thank you.
Thank you. Okay. Ellison?
Yes. Hi, Johnny, Daniel. Can you hear me clearly?
Yes.
Yes. Yes. Just a quick one. I recall in 7 nm generation we were facing some of the ABF substrate shortage issue, so we increased the suppliers. I think as ABF now is getting tight again, my question is, can we get enough ABF substrate supply this time? Will this impact our 3 nm project revenue scale if we cannot secure enough ABF substrate? You have already talked about 3 nm capacity, cost capacity. I just want to know your view about the ABF substrate situation. Thank you.
Okay. Okay. Let me explain to you. Actually, there are numbers. The numbers based on the secured capacity for wafer, CoWoS, and of course, the substrate testing, everything. So there are numbers because we are entering November now. What we are trying to say is if there is any upside from wafer because the demand is getting higher. If we can have, or the customer can have, more wafer allocation from TSMC. Definitely. Because of the cliché of the customer, I do not think the other parts of the supply chain will be a very big problem.
Yeah. I think there's a big lesson learned for us and also for our end customer right now. Except the top-die for HPM, for substrate, I think they have multiple sources. Yeah, in order to diversify the risk.
Okay. Got it. Can I ask another question or do we need to?
Sure. Please.
Yeah. I think my second question is about your major competition and also on the 2 nm project because we kind of hearing that your major competitor is also considering lowering the ASP or margin in order to seek more opportunities from your largest customer now on 2 nm project. I just want to know that if they lower the ASP, will this impact our current relationship with our largest customer? Or do you think the ecosystem we are building now is strong enough to compete even though they consider lowering the ASP? That's my last question.
Okay. Okay. Ellison, let me make sure the competitor, major competitor you mean, are you referring to U.S.?
Yes. Yes. Yes. U.S. Yes. Got it. Thank you.
Okay. First of all, we try not to come at other companies. For the competition, I will say this way. First of all, design, capability, and ability are our strengths. We want to win because of our design. Our existing customer knows it very well. They understand inside out about our design capability and the value we can provide to our customer. On the other hand, it is the consideration of the cost. I do not think there is any chance that the U.S.-based competitors can compete with us on pricing. For the future generation, first of all, like John mentioned or like I mentioned, for a project with such complete, such skill, design skill, and the complexity, the engineering is already there. For the other thing, I do not know. I really do not want to come along at it because.
It would like we are trying to. We really don't want to say things on other companies.
Got it. Got it. Yeah. Thanks, Daniel. I think that is clear enough. Thank you.
Thank you, Ellison. Okay. The time is late. I guess it concludes our third-quarter earnings call. Thank you for your participation. See you again in our next earnings call. Thank you.
All right. Thank you very much. Thank you for that.