Good afternoon, welcome to eMemory's Second Quarter 2021 Webcast Investor Conference. Present today we have Chairman and President, Dr. Charles Hsu; Senior Vice President of Business Development and Spokesman, Mr. Michael Ho; Director, Ms. Li-Jeng Chen; and Director of Finance Department, Ms. Teresa Ku. The format for today's event will be as follows. First, eMemory's Chairman and President, Dr. Charles, will give an opening remark. Afterward, Senior Vice President, Mr. Michael Ho, will summarize our operations in the second quarter of 2021, followed by the outlook of our business. Next, Dr. Charles will share with us on the news on hardware security in DARPA. We will go into the Q&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 three hours after the conference is finished. Please visit the company's website at www.ememory.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 statement as shown on page three of today's presentation. I would like to give the floor over to eMemory's Chairman, Dr. Charles Hsu.
Good afternoon, everyone. Thank you for attending our conference call today. It is with profound sadness we announce the sudden passing of our former President, Dr. Rick Shen, from heart attack last month. As the company has always established a strong deputation 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 16-nanometer and beyond are 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-inch in comparison to eight-inch, there will be a considerable potential for future growth.
As for our new technology, we are confident with the development and adoption across the 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 second quarter operating results and the outlook of our businesses. Thank you. Michael?
Good afternoon, everyone. I will first begin with our second quarter results. Second quarter revenue was NTD 541 million, down 9.3% sequentially, but up 27.9% year-over-year. Down 8.6% sequentially, but up 35.9% year-over-year in U.S. dollars. The operating expense were NTD 259 million, down 0.1% sequentially, but up 13.8% year-over-year, mainly attributable to expenditure increases such as human resource expenses, rewards, bonuses, and the compensation of employees and directors. This brings us to the operating income of NTD 283 million, with a decrease of 16.3% sequentially, but an increase of 44.3% year-over-year. 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 NTD 3.27, and ROE was 50.2%.
For the first half of 2021, the revenue was NTD 1,138 million, up 35.7% year-over-year. The operating expense increased 15.4%. The operating margin was 54.5%, with an increase of 8 percentage points. EPS up 54.5% to NTD 7.2, and ROE gained 12.5 percentage points to 55.3%. Let's move on to revenue contributions by licensing and royalty. Licensing in the second quarter accounted for 32.2% of the revenue, down 1.4% sequentially, but up 47.9% year-over-year, or down 0.4% sequentially, but up 57.3% year-over-year in U.S. dollars. Royalties in the second quarter contribute 67.8% of the total revenue, decreasing 12.6% sequentially, but increasing 20.2% year-over-year. Down 12% sequentially, but up 27.6% year-over-year in U.S. dollars. In the first half of 2021, 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% year-over-year, with licensing and royalty both increasing 66.2% and 35.4% respectively. In terms of revenue contribution by specific IPs, the results are as follows. NeoBit accounted for 28.6% of total licensing revenue 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-inch for production and adopting NeoFuse IP instead. Other products such as legacy PMIC, automotive IoT related, will contribute to NeoBit royalty in the future. NeoFuse accounted for 58.6% of total licensing revenue in the second quarter, up 12.7% sequentially and 22.1% year-over-year. Its royalty decreased 7.1% sequentially due to the seasonality of smartphone customers, but increased 89.6% year-over-year due to the continued strength on new application production.
This brings the royalty of NeoFuse to 49.6% of total royalties. Our PUF-based security IPs contributed to 1.2% of licensing revenue in the second quarter. Even though engagement with the industrial leaders will take a longer time, as it involves security architecture, it is still actively ongoing. We expect more significant contributions from PUF later this year. As to MTP technology, licensing revenue decreased 62.2% sequentially, but increased 82% year-over-year to account for 11.6% of licensing revenue in the second quarter. Royalty from MTP increased 17.5% sequentially and 38.7% year-over-year to contribute 3.4% of total royalties. Currently, our MTP team is working with partners on developing MRAM, ReRAM, and AI memory. We have just gained ReRAM qualification in 14 -nanometer process and are in discussions with other customers for design in.
In the first half of 2021, for NeoBit, the licensing revenue increased 74% year-over-year, but royalty decreased 3.4%, accounting for 40.7% of total revenue. For NeoFuse, the licensing and the royalty revenue grew 21.8% and 94.5% year-over-year, contributing to 50.1% of the total revenue. For PUF-based security IP, licensing revenue increased 122.4% year-over-year, about 0.7% of total revenue. For MTP technology, the licensing and the royalty revenue increased 304.4% and 12.3% year-over-year, accounting for 8.5% of the total revenue. Now, looking at the royalties for eight-inch and 12-inch wafers. Eight-inch wafers, which accounted for 51.8% 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 will contribute to eight-inch wafer royalty in the future.
12-inch wafers contributed to 48.2% of royalties, decreased 6.3% sequentially, increased 71.1% year-over-year due to the continued strength of new application productions. There are 154 product tape-outs completed in the second quarter, which remains at a record 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 2021 and beyond. For licensing revenue, there is a continually strong demand from new NeoFuse, PUF-based solutions, and the MTP. We expect licensing revenue to continue its growth this year. For royalty revenues, eight-inch and 12-inch royalties will continue their growth momentum.
Eight-inch royalties will grow due to the demand and the contents increases for PMIC, MCU, fingerprint, and the sensor related in the 5G, automotive, and IoT related applications. 12-inch royalties will have strong growth as customers' productions are licensing for TDDI, OLED, ISP, DTV, set-top box, Wi-Fi 6, Bluetooth, Ethernet, switch, TWS, DRAM, and others. 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 expanded their 28 and 22 production capacity. We have accumulated more than 140 New Tape-Outs at this process node, which will drive momentum to the growth of royalties in the future. Looking at the new business development. Our new applications are centered on the business development of hardware security.
NeoFuse in advanced processes is being adopted for security key storage and 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 PUF-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 PUFrt and PUFiot 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 collaboration to CPU security architecture in the future. eMemory and PUFsecurity has also joined DARPA Toolbox 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 characterization works and will move forward for further qualification tests. In Q2, we have announced the cooperation of PUFsecurity and Andes to integrate Crypto co-processor PUFiot into the RISC-V AIoT security platform. We also continue to develop our PUF-based solution to implement HSM, 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.
As we have announced in June, we are working with DARPA for advanced on-chip security mechanism, utilizing our OTP memories and PUF to establish a unique identity for every chip, as well as foundational building block for mitigating supply chain vulnerabilities. Our solutions come with embedded NeoFuse and the NeoPUF 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 SHIELD to protect the secure boundaries. There are four programs running by the DARPA, which can be implementing our PUF-based root of trust and the secure solutions. By doing that, which can facilitate the development of chip providers for government and defense devices. These four programs, one is System Security Integration through Hardware and Firmware, which abbreviation is SSITH.
It aims to develop hardware security architectures and associate design tool to protect the electronic system from remote attack on locations such as software or firmware. Another program is Supply Chain Hardware Integrity for Electronic Defense. It is called SHIELD. It aims to prevent counterfeit or unauthorized IC to enter the module supply chain with hardware root-of-trust. The third program is Automatical Implementation of Secure Silicons. It's called AISS. It aims to automate the process of incorporating scalable hardware security into chip design. The fourth program is called Asset Management Infrastructure, AMI. It aims to protect chip throughout their lifecycle by using hardware security and the blockchain to manage keys, authentication, and the certification during field usage.
These four programs all aim to provide the hardware security to secure the systems, no matter used in the government or defense device, and also in the future consumer products. For us, the ultimate goal is to have the PUF-based security architectures in every single chip, and the supply chain, going from chips to finished modules, need to be secure with minimal cost. When the device goes into the field use, it will remain under lifecycle security management until end of life to secure the decommission path and never make their way back to another device. DARPA's defense contractors who work on this full 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 the defense to be ideally produced inside the U.S.
Foundries like GF, Intel, SkyWater, and onsemi are operating in U.S. to manufacture the defense or the product required by governments. We are working with the related party to build a platform for defense products. We expect this platform to extend to commercial product as the U.S. government is pushing for a clean network and the supply chain management for national security. Okay, thank you.
This concludes our prepared statement. We now begin the Q&A session. Please submit your questions in the input box on the webcast window, and you will enter a 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.
We have many questions. The first question come from Davey. Davey, which is our shareholder too. Okay. I know a lot of questions is centered on our drive royalty only grew 5%. Do we have any reason for that? Michael, please.
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 foundry due to the ceasing of production by one 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? Can it work for, say, like 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 FinFET 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 foundries are expanding their capital expenditure, especially for the 28 -nanometer process. How will this impact the company?
Well, thank you for the question. Well, as mentioned previously, we have accumulated more than 140 NTO at the 28 and 22 process node, with our IP widely used in various products. 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 a 28 -nanometer wafer is several times higher than the ASP of the wafers on mature process. As our royalty rate is fixed, this will also benefit us in terms of the royalty income. Thank you.
Meaningful contribution from PUFsecurity's IPs. Charles, please.
The business model we prefer is a royalty stream business model. To maximize the future continuous royalty stream, we are building the platform business model for PUFsecurity's IP. We are building platform in foundries, CPU IP companies. Recently, there are quite a few CPU IP companies come to us to invite us to cooperate with them to produce secure CPU. 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. In addition to these platforms, we also already have quite a few customers using PUF-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 grown 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 eMemory royalty in two to three years? Michael, please.
So far, we have accumulated more than 60 new tape-outs at the TSMC 28 and 22 nodes across several different application fields. We are confident that the new tape-outs will continue to be coming, bringing significant rise in royalty income for us in the next two to three years. Thank you.
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. Yeah. 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 application, such as like FPGA, AI, and 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 were 35.4% year-over-year growth in terms of U.S. Dollars. Our largest foundry customer didn't increase wafer prices in line with the other foundries. This caused only a slight rise to our wafer price ASP overall. Thank you.
Another question. If Intel wants to enter the foundry industry, it can open its IP for customers to use, or it could accept the IPs that most foundries are already using. Which kind of development does the company think is more likely to happen? How is its impact on the company? Michael.
Good 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 bring in good production experience and records. In addition, our IPs offer the best convenience for end customer to freely move from different foundries compared to the used foundry's internal solution. Our IP can bring great benefits to any fab that intends to get into foundry business, especially since many of the major fabless customers, their value, are our existing customers. Thank you.
The other question is, you hope that in future, PUF will be used in every chip. Why will every chip need a PUF solution? Charles Hsu.
Okay. As I mentioned that since quite a few companies who provide the CPU come to us to invite us to cooperate with them to incorporate our PUF-based security solution with their CPU. In the future, what I mean that every chip needs security will have the PUF solution. That's our goal, and I think as the security requirement become higher, in the future, every chip needs to have the PUF-based security. Thank you.
PUFsecurity is the first to propose a product, PUFiot, that meets the FIDO, F-I-D-O, standard. Using PUF as device identification can help IoT device development and the manufacturer, like OEM, ODM, to create IoT product solution that meet the FIDO standard. Does this mean eMemory secure IP will become a security standard for IoT?
Yes, because FIDO Device Onboard, they already defined the IoT device authentication standard for connecting online. That is basically for every IoT device, if they follow FIDO's Device Onboard spec, then they have to follow these standards. Our PUF IoT security functions, in our announcement press release, we already announced that our PUF IoT security function satisfies the defined standard on Device Onboard in the FIDO's.
The first-tier companies, such as Microsoft, are promoting no password verification. What is the impact on eMemory OTP or PUF, Charles?
Okay, yeah, this question is very good. It's actually related to FIDO's standard, because FIDO also promoted no password verification. Microsoft promoting the no password verifications, which requires an authentication process. In any authentication process, the device needs to have the unique ID. The PUF 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 uses NeoPUF, they will also use NeoFuse. Will the licensing fee and the royalties be charged double? Is the price of NeoPUF higher than NeoFuse? Michael, please.
As we mentioned in our previous earnings call, our NeoFuse provides a secure storage function, and the NeoPUF provides 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 higher upfront fees and royalty than the single one. Thank you.
When does NeoBit patent expire? Michael.
Okay. Very good question. I think, as an IP provider, patent is very important to us. Generally, a patent grant period is around 20 years. However, when we license our technology to foundry and IDM, it's not just a single patent. It's actually a patent group that includes the bit cell structure, operation scheme, array architecture, design circuit, and the relevant process patent and know-hows. 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 NeoBit cell patent was applied again in 2014 due to continuous improvement of cell structure and the design to extend the expiration date to 2034. Similar will be applied to our other technologies. We are not worried about the due date of a single patent. Thank you.
How is NeoPUF used in a DPU, data center processor? Is it used for public key encryption? Do cloud and end device have to use eMemory NeoPUF technology for effective decryption? Charles Hsu.
DPUs are used in the system to share the load of the CPU. A DPU can take care of the security functions as well as storage processing. The NeoPUF is used to protect the private key, which is an essential element for chip securities. For the communication between edge and the cloud devices, they can decode and encode the secret by using their shared key between the edge device and the cloud device. Thank you.
Will eMemory also collect royalty for the mass production of PUF security products? Michael, please.
From our business model, we collect the royalty from foundries according to our OTP PUF technology license grant to them. Additional design royalty will be collected from fabless customers per their security IP requirement from PUFsecurity. 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 it using NeoFuse? 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 tape-outs in 12-inch process till now, we will expect such momentum will keep moving. Thank you.
Okay. Will there be customer wafer production next year for NeoPUF? Who are the customers and which are the processors? Michael.
Okay. We already have some customer new tape-out with our NeoPUF IPs, ranging from 0.11 micron to 7- nanometer process nodes. Some of them are already in the engineering sampling delivery stage and will start to have some wafer volume production in the second half. Thank you.
What is the difference in cost and performance between NeoPUF IP and a single dedicated security chip, such as T2, which is adopted by Apple? Charles Hsu.
Okay. T2 actually is a standalone security element chip, which is taking care of the security functions with the Apple's application processor. NeoPUF-based security element IP we are developing actually can be used for the embedded into the application processors. You don't have to add the standalone chips with the application processor. By embedding our PUF-based secure element IP, which can improve the security and save the cost.
TSMC will set up fab in different country, which will involve a large amount of investment and inevitably affect gross profit. Will there be any discount requirement for IP vendors? Michael, please.
That is a good question, and many people have an interest in it. Foundries are expanding their capacity in different locations due to the geopolitical considerations. Our non-volatile memory IPs are within their ecosystem and will be grown through different fabs as well. We already have a 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, new 7 -nanometer, and the N5, 5 -nanometer, expected to start contributing royalty? Michael.
As we mentioned, we would expect to collect the N7 royalty from the FPGA customer later this year. As to the N5, our OTP is still in the qualification stage and will take additional one to two 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 TSMC and already have some alpha customers under design in. Thank you.
What is the progress status and the potential development applications for MRAM and ReRAM? Michael.
Question. For MRAM, we are developing in the 22 -nanometer ULP process with our partners. As to the ReRAM, we just completed the qualification in 40- nanometer process node and are developing the 22 -nanometer one 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 mobile. Thank you.
Wi-Fi 6 has evolved into Wi-Fi 6E and even to Wi-Fi 7. What change does this have for the use of NeoFuse? Michael.
Question. Wi-Fi 6 and Wi-Fi 7 will use the same security architecture. 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.
eMemory major revenue from Asia, China. Most of the U.S. big IC fabless, like Google, Apple, Qualcomm, use 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, they are already two big customers, is our customer already. Our plan to expand our U.S. business is to promote our cloud-based security solutions, because many of these customers, they are very concerned about the security issues. If you can see from many press release or newsletters, you can see that these big company, particularly platform company, they are very concerned about the security issues. If they are edge device, which is not secure, and the hacker can go through the edge device and go to hack their platform or to hack their cloud server, that will cause big issues for these big companies. I think that particularly they are also in very advanced nodes. That is what we have been doing and promoting to promote our cloud-based security solutions to these big companies.
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 a queue. We will collect your questions and will get back to you in a moment. Please hold on.
What application will like DDIC PMIC fingerprint to contribute certain percentage of the company revenue? And what is your progress with Arm? In what application and what process node? Michael, please.
Thank you for the question. Yeah, as everybody know, our royalty base is based on the wafer volume to collect. 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. These 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 40 -nanometer and the 22 -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 enter a queue. We will collect your questions and will 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 three 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.