Welcome to eMemory's 2020 first quarter webcast investor conference. Today with us, we have Chairman, Dr. Charles Hsu; President, Dr. Rick Shen; Vice President of Business Development and Spokesman, Mr. Michael Ho; Director, Ms. Li-Jeng Chen; Director of Finance Department, Ms. Teresa 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. Dr. Hsu 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 the webcast replay will be available within three hours after the conference is finished. Please visit 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 semiconductor and IP business. Please refer to the cautionary statement as shown on page three of today's presentation. I would like to turn the call over to eMemory's Chairman, Dr. Hsu. Dr. Hsu, please go ahead.
Okay. Thank you. Welcome all who attend our Q1 investor conference. Good afternoon, everyone. Our revenue and the royalty of Q1 was a historical high, and our reported April revenue grew more than 20% over last year. As we mentioned in the last investor conference, as a result of flourishing new tape-outs accumulated in the past several years, we are confident that a new renewal multiyear growth cycle has already begun. In addition, with the mass production of the 16 nanometer and below later this year, the adoption rate of our IPs in FinFET process nodes are anticipated to accelerate. Security IP, NeoPUF, our next growth engine that has been designed into IoT and AI applications by industrial leaders, are expected to commercialize by the end of this year. This new development will mitigate the impact of global pandemic.
Next, I would like to invite our President, Rick, to report our operating results of Q1 and the future outlook of our business. Afterward, I will spend a few minutes to introduce the application of PUF-related security in 5G. Okay. Please, Rick.
Good afternoon. Thank you for attending eMemory'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 TWD 415 million, an increase of 14.8% sequentially, and 5.2% year-over-year. In terms of US dollars, Q1 revenue was $14 million, a growth of 17.2% sequentially and 8.1% year-over-year. The operating expenses of Q1 was TWD 221 million, up 9.4% sequentially and 10.1% year-over-year. Q1 operating income increased 21.6% sequentially and remained 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 the establishment of a 100% wholly owned company, PUFsecurity , in May 2019.
EPS of Q1 is TWD 2.38, and the ROE at 39.5%. In the following session, I will break down the revenue contribution by licensing and royalty. Licensing from Q1 is TWD 106 million, accounted for 25.6% of the revenue, down 8.2% sequentially, but up 0.6% year-over-year. In terms of US dollars, licensing revenue is $4 million, down 6.7% sequentially, but up 3% year-over-year. Royalty contributed to 74.4% of total revenue, is TWD 309 million, increased to 25.6% sequentially and 6.8% year-over-year. In terms of US dollars, the royalty is $10 million, up 28.4% sequentially and then 9.9% year-over-year. If we break down revenue by technologies, the results are as follows: NeoBit accounted for 22.6% of the total licensing revenue of the quarter, decreased 24.5% compared to previous quarter, but up 20.5% year-over-year.
Its royalty accounted for 64.5% of total royalty, increased 19.9% sequentially, but decreased 17.7% year-over-year. The decrease was due to some PMIC customers switching to NeoFuse technology. NeoFuse accounted for 17.1.
Okay, 1,000 on the West for 64.
Percent of the total licensing revenue of the quarter, up 13.4 and 0.5% sequentially and 15% year-over-year. Its royalty increased 40.8% sequentially and 187.8% year-over-year. Because of increasing contribution from 28 nanometer process nodes, the royalty of NeoFuse contributed 31.8% of total royalty. Our new technology, PUF-based security IP, has contributed to 0.6% of licensing revenue. Although this new technology has not contributed royalty yet, engagement with industrial leaders are still actively ongoing. Thus, we expect more significant contributions from PUF this year. As for NeoMTP technology, licensing revenue decreased 49.2% sequentially and 56.1% year-over-year. Royalty from NeoMTP increased 14.8% sequentially, but decreased 12.6% year-over-year. This is because of the focus of NeoMTP is in the collaboration with leading customers for automotive applications, and the engagement period is relatively long. In addition to that, our NeoMTP team is working with partners on developing MRAM, ReRAM, and AI memory.
If we break down royalty by 8-inch and the 12-inch wafers, 8-inch wafers, which accounted for 64.1% of the royalty, increased 15% sequentially and 3.3% year-over-year. Royalty from 12-inch wafers contribute 35.9% of the royalty, increased 50.4% sequentially, and 13.7% year-over-year. Our results for single quarter tape-out is a record high. There was a total of 115 product tape-outs in Q1, up 18% from the previous quarter. This indicates that the pandemic has little impact on our R&D activities and operations. We will provide more information in the management report that will be released later today. In the next section, I would like to address our future outlook. We expect the growth of the royalty revenue to accelerate in the second quarter and beyond.
Accumulated 249 tape outs between 55 nanometer to seven nanometer are on the pipeline, including OLED drivers, T-CON, ISP, Bluetooth, switch, Wi-Fi, TWS, SSD, set-top box, video processor, digital power, IoT security processor, FPGA, and the others, which are moving into production stage and that will drive our royalty to grow this year and beyond. Licensing revenue, we anticipate that the NeoFuse and the NeoPUF will continue to grow due to increasing advanced technology platforms and a more comprehensive PUF-based security IPs. Royalty revenues, royalty of DDI will increase due to a higher penetration rate of OLED DDI of existing customers and a new customer that is the largest Korean OLED panel company. PMIC will continue to grow due to continued increases in 5G devices and higher ASP from the migration into more advanced process nodes.
New applications like multimedia-related products such as DTV, set-top box, surveillance, ISP. Networking-related such as switch, Bluetooth, Wi-Fi, and the DRAM will also continue to drive royalty growth. On top of that, the global pandemic has also driven the recent increase in production of eight-inch medical related MCU sensors and the laptop related applications. For new application development, our new applications are centered around the development of a PUF-based technology. The first being NeoPUF, which was designed into leading customers' product for IoT applications. PUFrt, the IP of NeoPUF, is the Root of Trust, was also adopted by customer for AI application last year. With the pandemic changing our behavior patterns, both in life and work, there is an increase in Internet activities that will accelerate the demand for the PUF in security applications. As mentioned before, our PUF-based security IP have been adopted by several customers.
For example, NeoPUF was designed by the largest Chinese chip company into its IoT processor to protect edge devices from external attempts. A Chinese AI customer applied NeoPUF to secure AI training models. A leading European company use NeoPUF to protect sensitive data in connectivity chips. A U.S. customer used the NeoPUF to protect their FPGA IC designs from theft. A U.S. customer applied NeoPUF into their industrial automation application to ensure data security and increase its attack resistance ability. Aside from our development efforts, we also collaborate with Arm to embed our NeoFuse in its security platform, which already has customer adoption and has entered the product verification stage. Contributions from the development mentioned above will be seen this year. For new technology developments, first, we are continuously improving our technology platform.
In addition to 5 nanometer technology platform, eMemory, i-RENE, Arm security IP platform, which we mentioned in previous quarter, we are developing 6 nanometer and 5 nanometer plus N5P technology with our leading foundry partner and have already completed the 6-nanometer development tape out. Second, we are developing new security IPs. After the completion of PUFtrng, that is a PUF-based random number generator, and the PUFrt, that is a PUF-based Root of Trust. We are working with foundry partner to incorporate the PUFrt into Embedded Flash platforms to protect the data stored in Embedded Flash. Our PUF-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 PUF-based hardware security by integrating OTP and PUF security function IPs and cryptographic algorithm IPs to provide total security solutions for AIoT and 5G applications. Before we end, I would like to take a moment to share with you my thoughts on how the global pandemic is affecting our business and the measures we are taking to address these challenges. First of all, our most precious possessions are the health of our employees. To safeguard the health of our employees, we continue to take precautions and measures to ensure our employees are working in a good health condition. During the peak of Taiwan's COVID-19 crisis, we switched to working remotely to protect employees from potential exposure to virus. I am particularly pleased by their execution and efficiencies in this challenging time, and I'm extremely grateful for their dedication and the continuous hard work.
As you all know, we are an R&D company. Our business is mainly focused on providing our IP designs and the technologies. With that being said, we are not involved in the purchasing raw material and facilities, fabrications, testing, or packaging. Thus, our business risk in this situation are relatively low, so we see very limited impact on our daily operations. Since as all our employees are based in Taiwan and our R&D cooperation with our customers are mostly conducted via
Phone calls, conference call, or emails with no absolute necessity to physical contacts. As you can see, our company is doing relatively well under the global pandemic. With that, I will conclude my presentation on our operating results and the future outlook. Thank you.
Thank you, Dr. Shen. I would like to invite Chairman, Dr. Charles Hsu, once again to give an introduction of PUFsecurity application in 5G. Dr. Hsu?
Okay. Thank you. In the next few minutes, I would like to explain how related security application in 5G. 5G uses Network Function Virtualization to serve three big types of applications. One is the Ultra-Reliable and Low-Latency Communication, the second is Enhanced Mobile Broadband communication. The third one is Massive Machine-Type Communication. There will have billions of devices are connected in the network. The attack surfaces by hacker will be increased drastically. To ensure the network and the individual users, or to secure the network and the individual users, become imperative in the 5G applications. To talk about security, let me begin from the Root of Trust. Please turn to page 25. What is the Root of Trust? Root of Trust is a source that can always be trusted within a cryptographic system. What is the cryptographic system?
Cryptographic security is dependent on keys to encrypt and to decrypt data, and also perform functions such as digital signatures. From these two statements, we know that the most important for a system to be secure is to have an always trusted key in the system. What can be always trusted key? Is the key generated by software algorithm be trusted? The answer is no, because it uses algorithm. Can a key inject into a system by an operational engineer to be trusted? The answer is no, either, because it may be disclosed through the human operation. What kind of a key can be always trusted? The answer is a key generated or derived from natural randomness in a chip. By doing this, no algorithm and no human theft can cause the leak of the key.
Our NeoPUF is generated in the chip by using the randomness of the oxide quality during IC processes. Therefore, it serves as the always trusted key, because it is random generated, and it is already on the chip, without operator to inject it into the chip. After we know what is the Root of Trust and how to create very secure key for the Root of Trust, next, I would like to explain how 5G uses such key. In the 5G application, all users request the service from 5G. The first step is authentication process, to let only authorized party to access 5G network. The simplest way is to give user an unique ID from the telecom operator, such that user can use this ID to request service.
If you turn to page 27, it shows three cases of how unique ID, UID, can be stored in the SIM card of the cellular phone. One is the method used now, and the case 2 and the case 3 are proposed the new method, which use PUF to significantly increase the security of the applications. Case 1 is the one I have just talked about, to have operator to write unique ID as root key and store in the eFuse. In such method, the attack surface are obviously exposed. One is on the operator, and the other is storage in eFuse. eFuse is visible from its storage of data. Hacker can get the unique ID directly from eFuse using reverse engineering.
For the case 2, we can improve the security of case 1 by using PUF in the SIM card to scramble the unique ID injected by operator to become a new ID, such that the attack service on the operator is eliminated. In addition, the new ID can be stored in OTP. Here we call it, PUF key storage, which is non-traceable and the data will not be disclosed even after reverse engineering. The even secure case will be case 3. In case 3, no operator need to inject the key. The SIM card can generate the unique ID from its embedded PUF. The unique ID is stored in the PUF. There's no additional storage needed for storing the unique ID. Once you have separate storage for the unique ID, then afterward you can use that for all kinds of key generations.
In page 28 and 29, it will be the authentication process in 5G. Since it is a little bit complicated and it will take much more time to explain, I will leave this to you. You can go through this step by step and learn how the authentication is proceeded after you have a very secure key or secure unique ID generated in your SIM card. I can give you some example. When you use your credit card to do the online purchasing, and the store will send you, or the company you want to buy goods from, will send you a number, ask you to verify. Actually, when they send those numbers to you, they are encrypted.
When your cell phone receives those encrypted number, you can use the same key you have and the service company has, to decrypt the number they send you. After you see those numbers, then you type in, and then the key will encrypt those number and send back to the service company. After they use the same key to decrypt, and they get the number you type in, and if the number is equivalent to the number they send you, then you are authenticated. All the purchase process will be complete. I think, that is what I want to explain. The application of PUF-related security in the 5G and in PUFsecurity, our new company, we also offer Security 101 lectures.
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 we can offer those courses online, or we can visit your office and to give the lecture to your companies. Okay. I think that is what I want to say about the PUF-related security in 5G.
Thank you, Dr. Hsu. We now begin the question and answer session. 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 are now going to collect questions and will reply you in a moment. Please hold on. There is a question from Mr. Wu. Why there was no revenue from royalty in March?
Okay. This is Rick. Let me answer this question. You check with our website, you will find that there's no royalty revenue in the third month every quarter. In general, we collect royalty based on founders or customers royalty report. In the contracts, in general, we request our licensees to deliver the royalty for the previous quarter in the first month or second month of each quarter. That is why we will not have any royalty revenue in the third month in every quarter. Yep.
Still from Mr. Wu. The buyer of the PUF security should be the telecom operator who make a SIM card. When do you think the revenue can be generated?
Okay. I just give an example how to use our PUF-related security IP in the SIM card. Actually, our customer is not the telecom operator, actually is those companies who design the SIM card, then the chip in the SIM card, and they sell the chip to telecom company, and the telecom company have an ODM to make the SIM card. Our customer is those IC design company who produce the chip for the SIM card. Because, the PUFsecurity is only start for one year, then we create all the different kinds of PUF-related IP and the solutions.
At this moment, we only have a very small amount of revenue, but we will expect that the second half of this year and the beginning of, and the start from the next year, we will have more customer to use PUF-related security. Currently, the most customer request our PUF-related IP is from IoT and AI. Thank you.
From Peter. Okay. I have a question about the outlook of the rest of year. Do you expect the strength you saw in April to continue for the rest of the year?
Yeah. As I mentioned in my presentation, we expect the growth of our revenue to accelerate in the second quarter and beyond. The main reason is we already accumulate more than 200 product tape outs in the advanced process nodes. Those application, including not only for the smartphone, but also for some digital consumers and the IoT and the FPGAs. We expect this kind of product application will drive our revenue and royalty to grow in this year. I think this is our perspective on our outlook for this year.
Another question regarding ISP. What do you expect the revenue generation from ISP related products in this year?
Okay. This is a very good question. We work with our global customers for the ISP application for years. You can find out that the ISP product tape-out with our IP. Since last year, we have more and more ISP related product tape-outs. We expect not only for the upfront fee contribution, but also for the royalty, production royalty, in the production stage will contribute in this year.
Another question is regarding the product growth momentum. PMIC and OLED DDI, which has the bigger growth this year?
Okay. I think in terms of the.
Bigger growth or growth rate this year, I think the OLED DDI will be bigger because the customer might move from the old generations to advanced node and more and more adoption of OLED in the smartphones.
Also we gain to the.
Yeah, right.
Which last year was zero. Okay.
Yeah.
Yeah. Of course, there will be a very high growth.
Yeah. We anticipate the biggest Korean OLED panel makers will contribute more royalty to eMemory because we successfully introduced our solution in their product design. Up to now, we already see some good progress in the product verification. That will be a significant driving force for our future revenue growth.
This question from Jerry, okay, which is our very good investor. We very appreciate. Okay. Can you please give example of some of these new IoT customers? Which specific type of IoT product is driving the development here?
Okay, this is a very good question. For the IoT applications, I think that we are very happy to share with you the biggest Chinese design company in the south side of China, adopt our OTP and also NeoPUF NB-IoT product designs. Hopefully we can see the IoT, especially for the NB-IoT, will use our solution to enhance their security level.
A question from Mr. Wu again. For ISP market, which NVM solution did a customer use before? What is the reason they start to use your solution?
Okay, this is a very good question. In the past, some of the ISP product use eFuse, which provided by foundry, free of charge. As you know, the eFuse cannot provide several features, including the memory densities and also security level. The eFuse, you will constantly to burn out the fuse so that the code, UIDs, and some security code will be reversed in case someone want to know the data. When the ISP product move to more advanced, more high-end, then customer need to use OTP NeoFuse as a replacement. That is why customer, when they move to 22 and below, they need the NeoFuse, 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 will reply you in a moment. Please hold.
A question from Peter again. How much of the royalty revenue is currently from leading edge, and how do you expect the mix to develop in the next one to two years?
Okay. As I presented previously, our royalty contribution from 12-inch is about 30% of the royalty revenue. If you look into the detail, the royalty contribution mainly comes from the process node in 80 nanometers to 14 nanometers. In terms of our leading edge contribution, yes, at this moment, it's very few. We expect the leading edge contribution in the next one to two years will significantly grow, and will contribute more portion to our royalty income.
A question from Mr. Wu. Process node advance, how does it impact our financial? If the node advance, the total chip size per wafer will go down. I think this is negative. I guess the ASP can rise if the process node becomes smaller. 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. Let me explain. Although everyone knows that the technology migration is based on Moore's Law. Moore's Law tells that when a product moves from one generation to the other, the chip size will become half, about 50%. Please understand that in nowadays, most of the semiconductor products, customer providers do not consider the cost saving from one generation to another. They are considering how to increase their functionality in the chip. As you can find out that in the AP, for example, for some smartphone application processors, when they move from seven to five nanometer, the chip size will not become smaller. It will become more complicated, and the chip size will be even bigger. We also see the same situation in our customers.
For example, for LCD drivers or LED drivers, when customer move from 55 to 40 nanometer, the chip size will become bigger because they want to embed more SRAM into the chip, hence the chip's performance. When we go with our customer for the process migration or for the process advancement, we will see the chip size become bigger. It means that more wafers will be produced, and the ASP will become higher. It means that the royalty contribution to eMemory will become higher. I think that when customer move to the more advanced process node, the royalty contribution to eMemory will become bigger and larger compared with if customer stay in the same process node.
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 will reply you in a minute. Please hold on. Follow-up question. On process node advance, for example, if the DDIC is using 55 nanometer versus 40 nanometer, how much ASP rise can happen?
In general, for the 55-40, for the general foundries price offering, it's about 20%-30% increase on one generation to the other.
In the interest of time, we now begin closing comments. Dr. Hsu, please proceed.
Okay. eMemory was established in the year 2000, and our first invention, NeoBit, led us to a very high penetration rate in eight-inch and the 90 nanometer process, making eMemory a global top 10 and the largest semiconductor intellectual property company in Asia. In 2010, we developed NeoFuse for 12-inch applications. After 10 years of process technology development and customer engagement and adoption, we have successfully extended our IP into various allocations as mentioned earlier. We expect a multi-year growth cycle ahead. To do so, we are paving the way for the next growth engine after NeoFuse, which is the PUF-based security IP technologies, hoping to extend our growth curve by two to 10 years later. There is a series of a brief introduction of PUF security application in 5G from page 25 onwards.
eMemory has always been a company that focuses on the development of technology platform and innovations in silicon IP that will bring more value to customers and the industries. I believe our PUF-related security will play an important role for 5G, IoT, and AI applications in the future. We hope to use our innovation to ensure all online activities are secure, and this is our company's vision: Embedded everywhere and secure everywhere. Once again, thank you for your patience and the support of eMemory.
Thank you, ladies and gentlemen. Thank you for joining us today. You may now disconnect. Goodbye and have a good day.