Earnings Call: Q1 2020

May 13, 2020

Welcome to e Memory's 2020 first quarter webcast investor conference. Today with us, we have Chairman, Doctor. Charles Shi, President Doctor. Rixin, Vice President of Business Development And Sportsmet, Mr. Michael Ho, Director, Ms. Lee Jing Chen, Director of Finance Department, Ms. Theresa Kuo. We will start off today's meeting by an opening remark given by our Chairman. Next, our President will summarize our operations in the first quarter followed by an outlook for the future. Doctor. Xi will provide a closing comment at the end. Following management prepared remarks, there will be a question and answer session. Please feel free to submit your question 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 www.ememory.com. Tpw 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 Semiconductor And IP Business. Please refer to the cautionary statement as shown on page 3 of today's presentation. Now, I would like to turn the call over to EMEA's Chairman, Doctor Shee. Doctor Shee, please go ahead. Okay. Thank you. Welcome. Attain our Q1 uh-uh investor conference. Good afternoon, everyone. Our revenue and the royalty of Q1 was historical high and our reported April revenue grew more than 20% over last year. As we mentioned in the last investor conference, in results of collaboration, new tape outs accumulated in the past several years We are confident that a new renewal multi year growth cycle have already gone In addition, with the mass production of the 16 nanometer and, you know, later this year, the adoption rate of our IPs in FinFET process notes are anticipated to accelerate. Security IP, Nearpath, our next growth engine that has been designed into IoT and AI applications by industrial leaders I expect it to commercialize by theendofthisyear. This new development will mitigate the impact of global pandemic. Next, I would like to invite our president Rick to report our operating results for Q1. And there's a future outlook of our business. Afterwards, I will spend a few minutes to introduce the application of a populated security in 5 gs Okay. Please, Rick. Good afternoon. Thank you for attending E Memory's 2020 first quarter investor conference webcast In today's presentation, I would like to report our operating results of the 2020 Q1. Followed by the status updates of our technologies and the future outlook. Q1 revenue was 400 and $15,000,000, an increase of 14.8% sequentially and 5.2% year over year. In terms of U. S. Dollars, Q1 revenue was $14,000,000. A growth of 17.2% sequentially and 8.1% year over year. The operating expenses of Q1 was $221,000,000. Up 9.4% is appreciative and 10.1% year over year. Q1 operating income increased 21.6 percent sequentially and the remains flattish year over year. The operating margin was 46.7% and a decrease of 2.4 percentage points year over year. This is due to the increase in costs incurred by debridement although a 100 percent wholly owned company top security in May 2019. EPS of Q1 is $2.38 and the ROE at 39.5%. In the following session, I will break down the revenue contribution by licensing and erode. Licensing from Q1 is $106,000,000, accounted for 25 point 6% of the road of the revenue, down 8.2% sequentially, but up point 6% year over year. In terms of the U. S. Dollars, licensing revenue is US4 $1,000,000. Up and down 6.7% sequentially and but up 3% year over year. Building contributed to 74.4 percent of total revenue. Is $309,000,000 increased to 25.6 percent sequentially and 6.8% year over year. In terms of U. S. Dollars, the RODI is US10 million dollars, up 28.4% sequentially and a 9.9% year over year. If we break down revenue by technologies, the result are as follows, NuroSat accounted for 22.6 percent of the total licensing revenue of last quarter decreased 24.5% compared to previous quarter. But up 20.5% year over year. It's really accounted for 64. 0.5% of total enrollment increased 19.9% sequentially, but decreased 17.7% year over year. The decrease was due to some PMIC customers switching to new fuels technology. Neo Fuels accounted for $7,100,000 on the web for 64% of the total licensing revenue. Of the quarters, up 13.4% and 0.5% sequentially and 15% year over year. This ROE increased 40.8% sequentially and 187.8% year over year. Because of the increase in contribution from 28 nanometer project notes, the roadie of new fields contributed 31.8 percent of total ROAD. Our new technology, power based security IP has contributed 2.6% of licensing revenue. Although, this new technology has not contributed yet, engagement with industrial leaders are still actively ongoing. Thus we expect most significant contributions from crop this year. As for MTP Technology, license and revenue decreased 49.2 percent sequentially and 56.1% year over year. Road from MTP increased 14.8 percent sequentially, but decreased 12.6% year over year. This is because of the focus of MTP is in the core level. Called collaboration with leading customers for automotive applications and the engagement period is relatively long. In addition to that, our MTP team is working with partners for on developing MRN RN and AI memory. If we break down rowdy by 8 inches 12 inches wafers, 8 inches wafers, which accounted for 60 4.1% of our ROAD increased 15% sequentially and 3.3% year over year. Loaded from 12 inches wafers contributed to contribute 30 by 0.9% of a ROAD increased 50.4% sequentially and 13.7% year over year. Our results for single quarter table is a record high. There was a total of 100 15 product tape outs in Q1, up 18% from the previous quarter. This indicates less than the pandemic has little impact on our R and D activities and operations. We will provide more information in the management report that will be released later today. In the next session, I would like to address our future outlook. We expect the growth of our road revenue to accelerate in the second quarter and beyond. Has accumulated 20449 tape outs between 55 nanometer to 7 nanometer are on the path line. Including OLED drivers, TCOM ISP Bluetooth, switch, Wi Fi, t, double x, SSD, set top ups, video processor, digital power, IoT security, processor, FPGA and then the others, which are moving into production stage as the will drive our ability to grow this year. And beyond. For licensing revenue, we anticipate that the new fields and the new path will continue to drive to grow due to increasing advanced technology platforms and a more comprehensive part of these security IP. For royalty revenues, royalty of DDI will increase due to a higher penetration rate of OLEDDDI of existing customers and a new customer that is the largest Korean OLED panel company. CMIC will continue to grow due to content increases in 5G devices and the higher air further migration into more advanced process notes. New applications like multimedia related products such as DTV, set top ups, surveillance, ISP. Networking related such as switch Bluetooth to Wi Fi and the DRAM will also continue to drive loyalty growth. On top of that. The global pandemic has also driven. The recent increase in production of 8 inches medical related MCU sensors and the laptop related applications. For new application development, our new applications are centered around the development of a power phased technology. The first being new part, which was designed into a leading customer's product for IoT applications. Part RT, the IP of New Pop A's Road of Trust was also adopted by a customer for AI application license, With the pandemic changing our behavior patterns both in life and the work, There is an increase in internet activities that will accelerate the demand for the part in security applications. As mentioned before, our public security IP have been adopted by several customers For example, new powers were designed to find the largest Chinese chip company into its IoT presence to curtail edge devices block external paths. A Chinese AI customer apply new power to secure AI training models, a leading European company use new power to process sensitive data in connectivity chips. A US customer use, use the new port to protect their fpga IC design process. A U. S. Customer applied new pump into their industrial automation application to ensure data security and increase its attack resistance ability. Aside from our development efforts, we also collaborated with Arm to embed our new fields into its securities platform. Which already has customer adoption and has entered the product verification stage. Contribution from the development mentioned above way of business this year. For new technology developments, First, we are continuously improving our technology platform. In addition to 5 nanometer technology platforms, MRAM, IRAN, security IP platform, which we mentioned in previous quarter, we are developing 6 nanometer and 5 nanometer plus M5P technology with our leading foundry partners. And have already complete the 6 nanometer development table. 2nd, we are developing new security IPs after the completion of POP PRNG, that is the part based render number generator and the POP are the latest POP phase root of trust. We are working with foundry partners to incorporate the POP! RT into embedded fresh platforms to protect the data store in embedded fresh. Of our cloud based IoT security solutions, security elements, and the hardware security modules, IPs are also under development. Lastly, we are in process of creating an open platform. This open platform focuses on top based power security by integrating OTP and top security function IPs and cryptographic algorithm IPs. To provide total security solutions for AI OT and the 5G applications. Before we end, would like to take a moment to share with you my thoughts on how the global pandemic is affecting our business and the majors we are taking to address these challenges. First of all, our most pictures positions are the health of our employees. To safeguard the health of our employees, we continue to precautions and the measures to ensure our employees are working in a good health condition. During the period of Taiwan's COVID-nineteen crisis, we switched to working remotely to protect employees from potential exposure to large. I am particularly pleased by their execution and efficiencies in these challenges time and an extremely grateful for layer dedication and the continuous hard work. As you all know, we are an R&D company. Our business is mainly focused on providing our IT designs and the technologies. With that being said, we are not involved in the purchasing raw material and the facilities verifications, testing or packaging. Thus, our business risks in this situation are relatively low So we see very limited impact on steady operations. Since as all our employees are placed in Taiwan and our R and D cooperation with our customers are mostly convergent, but we are Form calls, conference call or emails with no absolute necessity to physical or physical contacts. As you can see, our company is doing a relative well under the flow of pandemic with that. I will conclude my presentation on our operating results in the future outlook. Thank you. Thank you, Doctor. Shen. Now, I would like to invite Chairman Doctor. Telshi once again to be an introduction of puff security application in 5G. Okay. Thank you. In the in the next 5 minutes, a few minutes, I would like to, explain related security application in 5g. Since 5g uses, network function virtualization, to serve 3 big plan of applications. 1 is ultra reliable and low latency communication. And the second is, enhanced mobile broadband communication. And the third one is a massive machine task communication. So there will be we'll have a billions of devices connected in the network. The attack services by hacker will increase will be increased drastically. So to ensure the network and the individual users, to secure the network and the individual users become imperative in the 5 g applications. So to talk about security, let me begin from the role of trust. Please turn to page 25. One is the rule of trust. Rule of trust is a source that can always be trusted within the cryptographic system. And the point is the cryptographic system. Quick geographic security is dependent on keys. So we encrypt and to decrypt data and they also perform functions such as, digital signatures. So from these two statements, we know that the most important for our system to be secure is to have an always trusted key in the system. So what can be always trusted key Is the key generated by the software representative trusted? The answer is no. Because it uses algorithm. Send a key inject into a system by an operational engineer to be trusted. The answer is no either. Because it may be disclosed to the human operation. So what kind of warranty can be always trusted. The answer is the key, a key generated or derived from nature randomness in a chip. By doing this, no algorithm and no human staff, same cost, the depth of the key. So our new car is generated in the chip using The randomness of outside quality during IC processes. Therefore, the service at the always trust to the key because it is random generated and that it it is already on the chip, without operator going jacket into the chip. So after we after we know that we know what is the rule of trust and how to create very security for the road trust. Next, I would like to explain how 5 g uses such key In the 5 g application, all users request a service from 5 g. The first step is the authentication process for less only authorized party to access 5 g network. So the simplest way is to give user and unique ID from the telecom operator, such that user can use this ID to request service For example, when we registered to use a telecom service, we will issue a SIM card. And user ID is given in this SIM card. So if you turn to page 27, It shows 3 cases of how user ID, a unique ID, UID can be stored in the SIM card of the cell phone. One is the method used now and the K2 and the 3 proposed a new method which use PAP to significantly increase the security of the applications. This one is the one I have just talked about to have operators to write make ID as the key and the store in the issues. In such a matter, the attack service obviously exposed. One is on the operator and the other is all its storage in efuels. The e efuels is visible from its storage of data. So hacker can get the unique ID directory from issues using reverse engineering. For the case 2, we can improve the security of case 1 by using PAP in the SIM card to scramble the unique ID injected as I operated to become a new ID such that the attack service owner operator is eliminated. In addition, The new ID can be stored in OTV. Here, we call it the up key storage. Which is nontressible and the data will not be, disclosed even after reverse engineering. And the the even secure case will be in case 3. In case 3, no operator need to inject the key. The SIM card and generate the unique ID from its embedded power. So the path is stored. That's the key. The unique ID is stored in the in the path. So there's no additional storage needed for the for storing the unique ID. So once you have the you have the very you have several storage for the unique ID. Then afterwards, you can do, use that for all kinds of key generations. And then in, page 2028 and 29, it's for this authentication process in 5 gs. And since it's a little bit complicated and it will take much more time to explain. So I will leave this to you. You can go through this step by step and then learn how the authentication is perceived after you have a very secure key or secure unique ID generated in your SIM card. And I can, give you some example. When you use your your credit card, to purchase online, to do the online purchasing, and the the store will send you all the, company you want to buy goods from. We'll send you the a number ask you to verify. Actually, when they send those numbers to you, they actually, they are encrypted And when you receive when your telephone receive those encrypted numbers, you can use the same key you have. And the the service company has with this with the crib, the number they sent you. So after you see those numbers and you copy it and then the key will encrypt those number and they sent back to the service company. So they will after they use the same key to get equip. And then they get the number, you have these. And then if the number is equivalent to the number they send you, then you are authenticate, then the all the purchase process will be complete. So I think that is what I want to give Brad, the application of outdated security in the 5 gs and in past security, our new company, we also also offer security 101. Lectures. So if you are interested to learn more about the fundamental of securities, I think you can get on the website and to get the information from our website and that we can offer those courses us in online or we can visit your office and to give the lecture to your to your to your companies. Okay. I think that is what I want to say about the public health strategy. Thank you, Doctor. Shee. We now begin the question and answer session. And you will enter a queue. We are now going to collect questions and we'll reply you in a moment. Please hold on. There's a question from Mr. Wu. Why there was no revenue from royalty in March? Okay. This is Rick. Let me answer his question. If you check with our website, I think you will find that there's no growth in revenue in the served months every quarter. So in general we collaborate based on foundries or customers' loyalty report. So we in the contracts in general, we request our SSCs to deliver the load for the previous quarter. In the 1st months or 2nd months of each quarter. So that is why. Whenever so that is why we will not have any loaded revenue in the 3rd month in every quarter. Still from, Mr. So the buyer of the park security should be the telecom operator who make a SIM card, when do you think the revenue can be generated? Okay. So I just give an example of how to use the our path, related to security IP in the SIM card. But actually our customer it's not the telecom operator. Actually, it's the those company who designed the SIM card, but then it's the chip the chip in the same car and they say they sell the chip to telecom company and the telecom company has an ODM to make the same car. So our customer is those IC Design company who designed, who produce the, chip for the same car. And because the top security is only start for 1 year and then we create all the different kinds of outdated IP and the solutions. So at this moment, we only have a very, very small amount of revenue, but we will expect that the second half of this year and the beginning of Then the start from the next year, we will have more customer to use possibly related security. But currently, the most, customer requests our path related to IP is from IoT and the AI. Thank you. Found Peter. I have a question about the outlook of the rest of the year. Do you expect the strength you saw in April to continue for the rest of the year? Yes. As I mentioned in my presentation, we expect the growth of our revenue to accelerate in the 2nd quarter and beyond. The main reason is we already accumulate more than 200 product type ops in the advanced process notes. And the loss application including the, not only for the smartphone, but also for some digital consumers and the IoT and FPGAs. So we expect this kind of the product application will drive our revenue and a royalty to grow in this year. So I think this is our perspective on our outlook for this year for this year. And all the questions regarding, IT what do you expect the revenue generation for IP related products in this year? Okay. Okay, this is a very good question. We've always our global customers for the ISP application for years. And then you can find that the ISP product tab out with our IP. Since last year we have more and more ISB related product tables. So we expect not only for the offline fee contribution, but also for the royalty production and reliability, in the production stage, will be well contribute in this year. Another question is regarding the product growth momentum. Timi and the OLED PTIC, which has the bigger growth this year. Okay. I think in terms of the bigger growth or gross rate this year. I think the OLED TDI will be bigger because that we the customer migrate from the all generations to advanced node and more and more adoption of OLED in the smartphones. And also we came to the largest. Yeah. Right. Of course, there will be very high growth. Yeah, we anticipate the biggest Korean or LED panel makers will contribute more, really to e memory because we successfully introduce our solution into layer in their parallel design. And up to now, we already see some good progress in the product verification. So that that will be a significant driving force for our future revenue growth. This question found jewelry, okay, which is our very good investor. We very appreciate, okay. Can you please give example of some of these new IoT customers? And which specific type of IoT product is driving the development here. Okay. This is a very good question. IoT applications, I think that we are very happy to share with you, like, the biggest Chinese design company in the south side of China and on the double OTV and also portfolio, MBIO T. Product designs. So hopefully we can see the IoT, especially for the MD IoT. Will use our solution to enhance their security label. The question is from Mr. Wu again. For ISV market, which NVM solution did a customer use before? And what is the reason they start to use your solution? Okay, this is a very good question. In the past, some of the IST product use efuels, which provided by foundry, free of charge, but as you know, like the efuels cannot provide several features, which which cannot provide some features including the memory densities and also security level. Because the EPUC will cause me to burn out the fuse. So that's code, IO IDs and then some security code will be reversed in case someone want to know the data. So when the ISP product moved to more advanced, more high end, then customer need to use OTP neo fuse. As a replacement so that that is a white customer when they move to 22 and below, they need new fields. Our solution to enhance their product competitiveness. As a reminder, if you need to raise a question, please submit your question in the input box on the webcast window, and you will enter a queue. We will collect the questions and we'll reply you in a moment. Please hold. The question is from Peter again. How much of the royalty revenues per currently from bleeding age? And how do you step and meet to develop in the next 1 to 2 years? Previously, lastly, our royalty contribution from 12 inch It's about 30% of royalty revenue. If you look into the detail the relative contribution mainly come from the process node in 80 nanometer to 40 nanometer. So In terms of a leading edge contribution, yes, at this moment, there's very few So we expect the leading edge contribution in the next 1 to 2 years will be significantly grow, and will contribute more potent to our royalty income. The question for me is to process no advice. How does it impact our financial? It's a no advance. The total chip size per wafer will go down. I think this is negative, but I guess the ASP can write if the process node becomes smoother. Normally, how much more revenue can be generated if the advance happens? Okay, I think this is a very good question. And a lot of investors have a similar question to us. So, but let me explain, although everyone knows that the technology migration is based on the most low. So the most low tier is less when product moved from 1 generation to the other chipsets will become at about 50%. But Please understand that in order that most of the semiconductor products need to not customer providers do not consider the cost saving from one generation to another. They are considering how to increase their functionality in the chip. So as you can find that in the AP, for example, for some smart smartphone application processors when they move from 7 to 5 nanometer, the chip size will not become smaller. They will become more complicated. Electricity will be even bigger. So we also see the same situation in our customers. For example, for LCD drivers or OLED drivers when customer move from 55 to 40 nanometer, the chip size will be configured because they want to increase in embedded more S run into the chip, hence the chip's performance. So When we go with our customer for the process migration or for the process, as the management we we will see the chip size become bigger. It means that more wafers will be produced and the ASP will become higher So it means that the royalty contribution to email will become higher. So I think that when customer move to the more advanced process node the loyalty contribution to e memory will become bigger and larger compared with the e customer stay in the same process notes. As a reminder, if you need to raise a question please submit your question in the input box on the webcast window, and you will enter a queue. We will collect your questions and we'll reply you in a minute. In a minute, please hold on. Follow-up questions. A personal event, for example, if the DDIC is using, 55 nanometer versus 40 nanometer. How much ASP rise can happen? Okay. In general, for the 50 5 to 40, in general for the general foundries price offering It's about 20% to 30% increase on one generation to the other. In the interest of time, we now begin closing comments. Officially, please proceed. Hey, memory was established in the year 2000 and our first invention NLP led us to a very high penetration rate in 8 inches and the 19 nanometer process. Making Emory our global top 10 and the largest semiconductor intellectual property company in Asia. In 2010, we developed near fields for 2012 inch applications. After 10 years of process technology development and the customer engagement and adoption. We have successfully extended our IP into various allocations as mentioned earlier. We expect a multiyear growth cycle ahead. To do so, we are paving ways for the next growth engine after near fields, which is a tough based security IP Technologies, hoping to extend our growth curve by to 10 years later. There is a series of a brief introduction of, past security application in 5 g from page 25 onwards. Emerging has always been a company that focuses on the development of technology platform and the innovations in Silicon IT. That will bring more value to customers and the industries. I believe our path related IP will play an important role. For 5g IoT and the AI applications in the future. We hope to see use our innovation to ensure All online activities are secured and that this is our company's division embedded everywhere and secure everywhere. Once again, thank you for your patience and support in memory. Thank you, ladies and gentlemen. Thank you for joining us today. You may now disconnect. Goodbye, and have a good day.