Earnings Call: Q2 2021

Aug 11, 2021

Good afternoon, and welcome to eMemory's Second Quarter 2021 Webcast Investor Conference. Present today, we have Chairman and President, Doctor. Charles Qi, Senior Vice President of Business Development and Spokesman, Mr. Michael Ho Director, Ms. Lijin Chen and Director of Finance Department, Ms. Theresa Koh. The format for today's event will be as follows. First, eMammi's Chairman and President, Doctor. Charles will give an opening remark. Afterward, Senior Vice President, Mr. Michael Ho will summarize our operations in the Q2 of 2021, followed by the outlook of our business. Next, Doctor. Charles will share with us on the news on hardware security in DARPA. Then we will go into the Q and A session where our management team will be ready to answer your questions. Please feel free to submit your questions in the input box on the webcast window throughout the conference. As a reminder, this conference is being recorded and a webcast replay will be available within 3 hours after the conference is finished. Please visit the company's website at www.emami.com.tw under the Investor Relations section. As usual, before we begin, we would like to remind everyone that today's presentation may contain forward looking statements that are subject to risk factors associated with the Semiconductor and IP Business. Please refer to the cautionary Please statement as shown on Page 3 of today's presentation. Now I would like to give the floor over to eMemory's Chairman, Doctor. Charles Xu. Good afternoon, everyone. Thank you for attending our conference call today. It is with profound sadness we announced the sudden testing of our former President, Doctor. Rick Shen from Heart Tech last month. As the company has always established a strong Reputation system, we are confident his vision for the company's future will continue to be fully realized. All regular operation will proceed as normal during this interim period, With myself, temporarily assuming the President's responsibilities. As mentioned previously, we have entered a multiyear growth cycle Following the applications of 28 nanometer process nodes, the applications of 60 nanometer and beyond Entering into production, which will contribute to our royalties in the future. Our penetration rate is still low. But considering the larger application market for 12 inches in comparison to 8 inches There will be a considerable potential for future growth. As for our new technology, We are confident with the development and the adoption across various markets. I will elaborate More on our partnership with U. S. DARPA toolbox initiative later. Next, I will invite our Senior Vice President of Business Development, Michael, to report our 2nd quarter Operating results and the outlook of our businesses. Thank you. Michael? Good afternoon, everyone. I will first begin with our 2nd quarter results. 2nd quarter revenue was TWD541 million, down 9.3% sequentially but up 27.9% year over year or down 8.6% sequentially, But up 35.9 percent year over year in U. S. Dollars. The operating expense Were TWD259 million, down 0.1% sequentially, But up 13.8% year over year, many attributable to expenditure increases Such as human resource expenses, rewards, bonuses and the compensation of employees and the Directors. This brings us to the operating income of NT283 million dollars With a decrease of 16.3% sequentially, but an increase of 44.3 percent year over year. Therefore, the operating margin Decreased by 4.4% sequentially, but increased 5.9% points year over year to 52.2%. Overall, Our second quarter EPS was TWD3.27 and ROE was 50.2%. For the first half of twenty twenty one, The revenue was TWD1138 million, Up 35.7 percent year over year. The operating expense increased 15.4% And the operating margin was 54.5 percent with an increase of 8% points. EPS up 54.5 percent to NT7.2 and ROE gained 12.5 percent points to 55.3%. Now let's move on to revenue contributions by licensing and the royalties. Licensing in the 2nd quarter accounted for 32.2% of the revenue, down 1.4% sequentially, but up 47.9% year over year All down 0.4% sequentially but up 57.3% year over year in U. S. Dollars. Royalties in the 2nd quarter contribute 67.8% of the total revenue, Decreasing 12.6% sequentially but increasing 20.2% year over year Or down 12% sequentially, but up 27.6% year over year in U. S. Dollars. In the first half of twenty twenty one, the total revenue grew 35.7% As compared to previous year, licensing and royalty have a growth of 56.6% and 28.1%, respectively. In terms of U. S. Dollars, the total revenue increased 43.6 percent year over year with licensing and royalty both increasing 66 0.2% and 35.4%, respectively. In terms of revenue contribution by specific ITs, the results are as follows. NeoBIT accounted for 28.6 percent of total licensing revenue in the first in the second quarter, increasing 82.9% sequentially and 145.7% year over year. Its royalties accounted for 47% of total royalty, down 19.1% sequentially and 13.9% year over year, mainly due to seasonality of smartphone customers And some products like PMIC and DDI moving into 12 inches for production and adopting Neofuse IP instead. Other products such as legacy PMIC, Automotive IoT related will contribute to new build royalty in the future. Neo fuels accounted for 58.6% of total licensing revenue in the 2nd quarter, up 12.7% sequentially and 22.1% year over year. His royalty decreased 7.1% sequentially due to the seasonality of smartphone customers Increased 89.6 percent year over year due to the continued strength of new application production. This brings the royalty of NeoFuse to 49.6% of total royalties. Our path based security IPs contributed to 1.2% of tight licensing revenue in the second Quarter. Even though engagement with industrial leaders will take a longer time As it involves security architecture, it is still actively ongoing. Thus, We expect more significant contributions from PAS later this year. As to MTP technology, Licensing revenue decreased 62.2% sequentially, but increased 82% year over year to accounted for 11.6% of licensing revenue in the 2nd quarter. Royalty from MTP increased 17.5% sequentially and 38.7% year over year to contribute 3.4% of total royalties. Currently, Our NTP team is working with partners on developing MRAN, IRAN and AI memory. We have just scanned our ERAN qualification in 40 nanometer process and are in discussions with RFAR customers for design in. In the first half of twenty twenty one, For NeoBitt, the licensing revenue increased 74% year over year, but royalty decreased 3.4%, accounting for 40.7 percent of total revenue. For NeoFuse, the licensing and the royalty revenue Grew 21.8 percent 94.5 percent year over year, Contributing to 50.1 percent of the total revenue. For PUB based security IP, Licensing revenue increased 122.4 percent year over year, about 0.7% of total revenue. For MTP Technology, the licensing and the royalty revenue increased 304.4% And 12.3 percent year over year, accounting for 8.5% of the total revenue. Now looking at the royalties for 8 inches 12 inches wafers. 8 inches wafers, which accounted for 51.8 percent of royalties, decreased 16.7% sequentially But increased 3.3% year over year due to the seasonality of smartphone customers. Other products such as legacy PMIC sensors and automotive related We will contribute to 8 inches wafer royalty in the future. 12 inches wafers contribute To 48.2 percent of royalties decreased 6.3% sequentially Increased 71.1 percent year over year due to the continued strength of new application productions. There are 154 product headbounds completed in the second quarter, which remains at a greater high level, reflecting persistent demand for design activities with our IPs. We will provide more information in the management report. In the next section, I will address our future outlook. We expect the growth of revenue to continue in the second half of twenty twenty one and beyond. For licensing revenue, there is a continuing strong demand from NeoFuse, TARC based Solutions and MTP. We expect licensing revenue to continue its growth this year. For royalty revenues, 8 inches 12 inches royalties will continue their growth momentum. A inch royalties will grow due to the demand and the content increases for PMIC, MCU, fingerprint and the sensor related in the 5 gs, automotive and IoT related applications. 12 inches royalties will have strong growth as customers' productions are licensing for TDDI, OLED, ISP, DTV, set of box, Wi Fi 6, Bluetooth, Ethernet, Switch, TWS, DRAM and RS. In addition, We also expect to see more royalty contributions from the FinFET process in the second half of this year. Recently, several major foundries have actively expand their 2822 production capacity. We have accumulated more than 140 new cabals at this process now, which will drive momentum to the growth of royalties in the future. Now looking at the new business development. Our new applications are centered on the business development of hardware security. New fuse in advanced processes is being adopted for security key storage And he is seeking to replace the conventional eFuse. We expect this will be a trend for hardware security As productions are moving to more advanced processes, our effort in the past Is also gradually being seen with higher adoption and penetration rate. Business activity of path based security solutions are in progress in applications of IoT, Industrial IoT, AI, Blockchain, FPGA, Data Processor Unit, that is DPU, Mobile, Storage, UFS and Automotive. In addition, our PaaS RT and PaaS IoT have been adopted by several customers across various applications. As for the collaboration with ARM, since customer adoption cases Have been very successful. We intend to expand the cooperation to CPU security architecture in the future. EMemory and the Pub Security has also joined DARPA toolbox in initiative to provide IP solutions for accelerated technology innovation. For new IP technology development, 6 nanometer OTP has passed the qualification test And already has customer adopt in. As to 5 nanometer plus N5P, It has completed terrorization works and will move forward for further qualification tests. In Q2, we have announced the cooperation of Tufts Security and Andes to integrate Crypto, co processor, PUB IoT into the risk by AIoT security platform. We also continue to develop our PaaS based solution to implement HSN, That is hardware security module, which can be embedded into the chip to provide a security function for Network Applications. Next, I will pass the time to Charles. Thank you. So as we have announced in June, we are working with DARPA for advanced on chip security A mechanism utilizing our OTP, memories and path to establish a unique Qi. Identity for every chip as well as functional foundational building block for mitigating supply chain vulnerabilities. Our solutions come with embedded near fuse and the near path to make up the secure storage and the chip fingerprint, providing an isolated secure boundary for the system, as shown in the PowerPoint, Along with an anti tampering share to protect the secure boundaries. And there are 4 programs running by the DARPA, Xu, which can be implemented implementing our path based rule of trust and secure solutions. And by doing that, which can facilitate the development of chip providers for government and Defense Devices. This 4 program, 1 is System Security Integration Through Hardware and the Firmware, which your abbreviation is SSITH. It aims to develop hardware security architectures and associate design tool to protect electronic system from remote attack on locations such as software or firmware. And the another program is supply chain hardware integrity for electronic defense. It is called SHI. It aims to prevent counterfeit or unauthorized IC to enter the module supply chain with hardware rule of trust. And the 3rd program is Automatical Implementation of Secure Silicones. It's called AISS. It aims to automate the process of incorporating scalable hardware security into chip design. And the 4th program is called Asset Management Infrastructure, AMI. It aims to protect chip throughout their life cycle by using hardware security and the blockchain to manage Xu. Keith, authentication and certification during the field usage. And these 4 programs are all aimed to Provide the hardware security to secure the systems no matter use in the government or defense device and also in the future Consumer Products. The ultimate goal is to have the for us, the ultimate goal is to have the path Xu. Xu:] Based security architectures in every single chip and the supply chain going from chips to finishing modules Need to be secure with minimal cost. So when the device goes to into the field use, it will remain Xu. Under Life Cycle Security Management until end of life, to secure the decommissioner costs And they never make their way back to another device. So DARPA's or defense contractors who work on this 4 program Can easily adopt our solution into their products. The U. S. Has also prioritized the supply chain security, such that they require the chips Used by government and defense to be ideally produced on inside the U. S. So foundries like GF, Intel, SkyWater and Onsemi are operating in U. S. To manufacture the defense or the product required by governments. So we are working with the related party to build a platform for defense products. We expect this platform to extend To commercial product, as U. S. Government is pushing for our current network and the supply chain management of national for National Securities. Okay. Thank you. This concludes our prepared statement. We now begin the Q and A session. Please submit your questions in the input box on the webcast window And you will enter the queue. Should you wish to raise your question in Chinese, we will translate it to English before our management answers your question. We are now going to collect questions and we'll get back to you in a minute. Please stay with us. Many questions. So the first question comes from David, which is our shareholder too. Okay. I know a lot of questions It's centered on our dry royalty, only grew 5%. Do we have any reason for that? Michael, please. Thank you for the question. Let me explain in more details about that. Our royalty grew 12% in terms of U. S. Dollars. Royalty from the majority of our foundry partners Grew 20% or above, except for a significant drop from the Chinese country Xu. Due to the season of production by 1 Chinese customers, we expect the royalties from that Chinese foundry to pick up when other customers ramp up production. Our August royalties will grow much higher with a correlating rise in the total Q3 growth. Thank you. Are there any limitation for your IPs as you move forward into the newest technology platform? Andy Wolfow say like a 2 nanometer GAA structure. It's a good question. Actually, there is no limitation, and we are confident it will work for the GAA structure. It's just like previously, we have moved from the planar type to the FinTech process. Since the transistor is always a MOS, Metal Oxide Semiconductor Structure, which is the basis for our OTP technology. Our process remain robust and able to scale. Thank you. Another question. Global Semiconductor Foundry are expanding their capital expenditure, Especially for the 28 nanometer process, how will this impact the company? Thank you for the question. Well, as mentioned previously, we have accumulated more than 100 and 40 NTO at the 2822 process node with our IP widely used Xu. Currently, major foundries are actively expanding the 28 production capacity. This will help us during wafer production volume in the future. In addition, the ASP of 28 nanometer wafer is several times higher than the ASP of the wafers A mature process. As our royalty rate is fixed, this will also benefit us in terms of the royalty income. Thank you. Xu. Charles, please. The business model we prefer is royalty stream business model. So to maximize the future Continuous royalty stream, we are building the platform business model for top securities IP. We are building platform in foundries, CPU, IP companies. For example, recently, there are quite a few Qi. CPU IP companies come to us to invite us to cooperate with them to produce the secure CPU. And also, we also build the platform on the design service companies. As all of these platforms start to roll out, we will see a meaningful return from security IPs. So in addition to these platforms, we also already have quite a few customers using PaaP based security solutions. They will start to have products by the end of this year or early next year. Our branding on security has Also growing quite a bit, which we have observed from the inquiry numbers through our promotion program. Thank you. TSMC has announced 28 nanometer production expansion. How will this 28 nanometer product affect e memory royalty in 2 for 3 years. Michael, please. So far, we have accumulated more than 60 new kebabs at the TSMC 2822 nodes across several different application fields. We are confident that the new cat box will continue to be coming Bring significant rise in royalty income for us in the next 2 to 3 years. Xu. Thank you. And this question also related to TSMC. TSMC has been emphasizing that high performance computing drives Semiconductor demand in their past earnings call. What contribution does this have to the company? Michael? Okay. Yes. I think the application of the HPC is mainly concentrated in the advanced process. As you can see, we have made good progress in advanced process and have received some customer requests in applications Such as like FPGA, AI and the DPU. The licensing per case and the royalty per wafer Are much higher than the mature process, which is also a considerable driver to our future revenue contribution. Thank you. The mature process wafer fab have an expanding annual revenue growth rate trend and the wafer price are also accelerating. However, the company's annual revenue growth rate does not reflect it. What is the reason? Michael? That is a good question. Our royalties in the first half of the year We're 35.4 percent year over year growth in terms of U. S. Dollars. Our largest foundry customer didn't increase wafer prices in line With the other countries, this caused only a slight rise to our wafer price ASP overall. Thank you. Another question. If Intel want to enter the foundry industry, it can open its IP for customers to use Or it could accept the IPs that most foundry are already using. Which kind of development does the company think Is it more likely to happen? And how is its impact on the company? Michael? A question. I think the foundry and IDMs are customers that we value very much. The largest foundry in the world have proven that our products can help their customers, bringing Good production experience and the records. In addition, our ITs offer the best convenience for end customer to freely move from different foundries compared to the used Foundry's internal solution. So our IP can bring great benefits to any fab that intends to get into foundry business, especially since many of the major fabless customers they value Xu. Thank you. Xu. You hope that in future, PAP will be used in EviChip. Why will EviChip need a PAP solution? Charles? Okay. As I mentioned that since quite a few company who provide the CPU come to us to invite us to cooperate with them to incorporate our security PAP based security solution with their CPU. So for the future in the future, what I mean every chip is every the chip needs the security We'll have the PoF solution. That's our goal. And I think it will be as the security requirement become higher, This will be the in the future, this will be every chip need to have the pulp based securities. Thank you. PaaS Security is the first to propose a product, PaaS IoT that meets the FIDO, FIDO, standard. Using PAS as device identification can help IoT device development and the manufacturer Like OEM, ODM to create IoT product solution. That means the final standard. Does this mean eMemory secure IP will become a security standard for IoT. Yes. Because of FIDO device on board Already they already defined the IoT device authentication standard for connecting Online. So that is basically for every IoT device. If they follow FIDO's device onboard I expect then they have to follow these standards. And our PUB IoT security functions, We already in our announcement press release, we already announced that our POP IoT Security function satisfy the defined standard on He was on board in the 3rd 5 doors. And the 1st tier companies such as Microsoft are promoting no password verification. What is the impact on eMemory OTP or P wave part? Okay. Yes. This question is very good. It's actually related to Fido's standard because Baidu also promoted no password verification. So Microsoft promoting the no password verifications, which requires an authentication process. And in any authentication process, The device need to have the unique ID. And the path can generate a unique ID very easily and by the chip itself and which is essential for a system without password verifications. In the previous earnings call, the company mentioned that if a customer use NeoPath, they will also use NeoFuse. Will the licensing fee and the royalties be charged double? Is the price of NeoPath Helen NeoPhils? Michael, please. As we mentioned in our previous earnings call, Our NeoFuse provide a secure storage function and the NeoPath provide a secure key generation. Both are essential for security applications. We can provide an integrated IP that will have a comprehensive solution with the one stop shop. Such integrated IP will have a higher upfront fees and royalty than the single one. Thank you. When does Neopig pattern expire, Michael? Very good question. I think as an IP provider, patent is very important to us. Generally, A patent grand period is around 20 years. However, when we license our technology to foundry and IBM, It's not just a single pattern. It's actually a pattern group that increased like a piezo structure, Operation Skin, array architecture, design certainty and the relevant process pattern and the know how. Besides, we will continue to add new patents and features to make our licensed technology More powerful and useful. That is the reason we can keep providing the best solutions to our foundry partners and customers. For example, our new NeoBid sales pattern was applied again in 2014 Due to continuous improvement of sales structure and the design to extend the Expiration date over to 2,034. Similar will be applied to Our other technologies. So we are not worried about the due date of a single pattern. Thank you. How is NeoPath used in a DPU data center processor? Is it used for public key encryption Xu. To cloud an end device, have to use eMemory Neopath technology for effective decryption. Charles? Atifu are using the system to share the load of the CPU. A CPU can take care of the security functions as well as storage processing. And the NIO path is used to protect the private key, which is an essential element for chip securities. And for the communication between edge and the cloud devices, they can Decode and encode the secret by using their share key between the edge device and the cloud device. Thank you. Well, eMemory also correct royalty for the mass production of a past security products. Michael, please. From our business model, we collect royalties from countries according to our OPP, Tufts Technology license grant to them. Additional design royalty will be collected from fabless customers Per layer security IP requirement from the top security. So that is the business model we are running now. Thank you. Did the royalty growth in the first half of the year mainly come from Samsung production in UMC? Is he using NeoFuse? And how long will this continue? Michael? For this question, I think we have received a clear growth in our royalties From various foundries in the first half. And of course, UMC is one of them. With more accumulated new tabels in 12 inches process till now, we will expect such momentum will keep moving. Thank you. Will there be customer wafer production next year for NeoPark? Who are the customer and which are the process. Michael? We already have some customer New Taeba with our Neopark IP is ranging from 0.11 micron to 7 nanometer process nodes. Some of them are already in the engineering, sampling delivery stage, And we'll start to have some wafer volume production in the second half. Thank you. What is the difference in cost and the performance Between NeoPath's IP and a single dedicated security chip such as T2, which is adopted by Apple. Okay. T2 actually is a standalone security element chips And which is taking care of the security functions with the EPOS application processes. And NeoPath based security element IP we are developing is actually can be Use for the embedded into the application processors. And so then you don't have to add the stand alone Qi. Chips with application processor. So by embedded our path based secure element IP, which can improve the security and save the cost. TSMC will sell fab in different countries, which will involve a larger amount of investment And inevitably affect gross profit. Will there be any discount requirement for IP vendors? Michael, please. Good question and many people have interest in it. Foundry are expanding their capacity in different locations due to the geopolitical considerations. Our non volatile memory IPs are within their ecosystem and will be grow to different fabs as well. We already have fixed business model and contracts with the foundries. So Everything will run as usual, and we will do our best to support their capacity expansion plans. Thank you. When are N7, means 7 nanometer and the N5, 5 nanometer, expected to stop contributing royalty? Michael? Mentioned, we would expect to collect the N7 royalty from the FPGA customer later this year. So as to the N5, our OTP is still in the qualification stage And it will take additional 1 to 2 years to start collecting the production royalty. Thank you. Are there any new customer added from DRAM, Michael? Okay. Currently, we are qualifying OTP in the new DRAM process for PSMC and already have some half our customers under design in. Thank you. What is the progress status and the potential development applications for MREN and iEREN? Michael? Question. For M RAN, we are developing in the 22 nanometer ULP process with our partners. As to the iRen, we just complete the clocation In 14 nanometer process node and are developing the 22 nanometer 1 now. For this emerging memory, they can be used as non volatile memory for analog IC Like SoC PMIC, MCU, SoC, ASIC and Edge AI, They also can be used as the cache memory for CPU and the mobile. Thank you. WiFi 6 has evolved into WiFi 6E and even to WiFi 7. What change Does this have for the use of neophylls? Michael? WiFi 6 and WiFi 7 will use the same security architecture. Therefore, NeoFuse Can be used in the same way to store the private key. NeoFuse is replacing eFuse for key storage for high security requirement. Thank you. E memory major revenue from Asia, China, most of the U. S. Big IC satellite like Google, Apple, Quocang, U. S.-based, similar vendors. How eMemory plan to grow business in the U. S, the larger market. Charles, please. Okay. Among this list, actually, there are already 2 big customers Xu. Our customer already, and our plan to expand our U. S. Business is to promote our app based security solutions because many of these customers, they are very concerned Qi. About the security issues and you can see from many press release or news letters, You can see that this big company, particularly a platform company, we are very concerned about the security issues Because if they are edge device, which is not secure and the hacker can go through the edge device And to hack their platform or to hack their cloud server, then that will cause big issues for these big companies. So I think that particularly, they are also in very advanced nodes. So that is what we are been doing and Chi. Promoting to promote our top based security solutions to these big companies. And this is what We have done and also we are doing in promoting our business to these big customers. Thank you. As a reminder, should you wish to raise a question, please do so through the input box on the webcast window And you will enter the queue. We will collect your questions and we'll get back to you in a moment. Please hold on. What application will like a DDIC Pimi fingerprint to contribute certain percentage of the company revenue. And what is your progress with ARM? In what application? And what process? No. Michael, please. Yes. As everybody know, our royalty base is based on the wafer volume to collect. So any kind of application can have a big wafer volume will be our target application. Currently, We already work for the application like CIS, ISP, DRAM, this kind of application, which will have a good wafer volume. Besides that, like for advanced node, They have a higher wafer ASP and also have a good wafer volume. We use the security IP to Increase our penetration rate to this kind of business in the future. As to the cooperation of ARM, currently it's based on the 4022 nanometer generation For IoT and edge AI kind of application, we are moving to more advanced technology Like 7 nanometer and below, we expect to have more cooperation in the future. Thank you. As a reminder, should you wish to raise a question, please do so through the input box on the webcast window And you will answer the queue. We will collect your questions and we'll get back to you. Please hold on. As there are no further questions, we now begin closing comments. Charles, please proceed. Thank you once again for your patience and the support for eMemory. We will continue to work hard On IP Innovation and Security Solutions for our customers and bringing higher return for our shareholders. Thank you. Thank you, ladies and gentlemen. Before we conclude today's conference, Please be advised that the recording of the conference will be accessible within the next 3 hours. Thank you everyone for joining us today. We hope you will join us again next quarter. You may now disconnect. Goodbye and have a good day.