Good afternoon, everyone. My name is Jeff Ohlweiler, Head of Research at Macquarie Taiwan. I'm very happy to be hosting Phison's Fourth Quarter 2022 Earnings Conference. With that, let me turn it over to K.S. Pua, who's the CEO of Phison. K.S. will start with a presentation and then we'll go to Q&A after that. K.S., over to you, and thank you for your time today.
Yeah. Thanks, Jeff. Thanks to everyone. Yes, we start today's our presentation. We go to the Q&A. Okay. We go to the... In first page, we like to have some communication with our analysts and also the journalists and also our investor. In these few years, when reports in the memory, actually memory, they cover a lot of memory, so making a lot of confusion. What I'd like to try to redefinition. When talking memory, we, in our mind is a DRAM. Talking about the boot is a NOR. Talking about NAND, we define this as so-called storage. Phison, we are in the storage business. Basically, Phison now we cover more both mature products and also much advanced growing business.
In mature products such as, you can see the medical, industrial, and a lot of high-end camera. The mature business actually helping Phison to create good gross margin. Of course, this business, we are not able to create a big growth in revenue, but helping us in growth in our profit. In the more advanced growing business, such as the data center, automotive, which we need to keep injecting big money into our R&D development for our future technology, and means that with the heavy investment, we are capable to have a big growth in coming revenue, and potentially we try to get a more gross margin. Recently, Phison, we are capable to maintain our gross margin just because we have a lot of diversification on the mature, stable business. Later, I will show to you.
This is a less R&D investment, but good profit. On the left-hand side, we have a big investment and waiting for our next booming in our revenue and profit. This is our 2022 Q4 breakdown in our revenue. In controller side, we still in the total revenue, still above 30%, so this is good to us. Consumer business growing little bit because, you know, Q4 is a K.S.tmas season, a lot of K.S.tmas demand coming, especially last year is the K.S.tmas after the pandemic. We got some good demand in the consumer business. In gaming business, in the last Q4, actually is very slow, I think due to the inflation impact. Since last almost end December, the PS5 demand suddenly improving.
Recently, our PCIe Gen 4 high-performance demand, which is PS5 upwards, we got multiple x of a demand. This is helping Phison to digest our summer inventory and try to get a better, little bit better margin, gross margin in our business. Excuse me, can you mute? Hello? Jeff? Okay. Okay. By the way, in our embedded ODM, seasonal, the PC business shut down, the smartphone suffer high inventory. Embedded ODM, we are declining, but we hope coming quarters, embedded ODM can help us to gain our revenue. Q4 last year, the revenue close to TWD 12 billion. The gross profit, TWD 3.4 billion, is the third highest in the same period. Okay? The gross profit, YoY -27%.
Due to the revenue drop 26%, almost the same ratio. We summarize in ASIC, by year 2022, we have a 34% revenue coming from controller, and this is the highest in Phison's record. In last few years, our heavy R&D investment helping us to gain a lot of NAND companies, controllers, outsource business. This is helping us to gain the better gross margin and also helping Phison to gain the share in the market. In the controller, the growth YoY is 17%, and the PCIe, mainly is a Gen 4, the growth is 15%. Both are record high. Module-wise, 70% coming from module business. The PCIe YoY is 9%.
Unfortunately, last Q4, the PC business selling are frozen, we hopefully, by this year, we're able to have the other improvement again. This is our revenue. You can see, since the last Q3, revenue start dropping because of inflation and the China COVID lockdown. Revenue-wise, we are lowest in 2022, which is Q4. Gross margin wise, by last year Q4, we are 28%, which improved 4% from the last year Q3. Based on our study in the Q4, we still have to write down our inventory, and this infect 5% of our gross margin. Just in case if the market is a flat, no the write down, our margin can be 33%. You know, it is what it is.
Even though write down 5%, we still keep 28% as our gross margin. Overall, by 2022, the total write down impact our 2.8% of gross margin. Again, if flat, we come back 2.8%- 28%. We are 30%, close to 31%, which is a history high in our business. This start to show you, Hyzen's, our diversify in our product line. Mainly we have a lot of auto, industrial and gaming helping Hyzen to gain much better gross margin. Business to help Hyzen is much healthy right now. Okay. I think everyone more concerned about the profit. Okay, we have to explain here. By the Q4, on the book, the profit at the NEPS is TWD 1.1.
Why, and what happened? Hyzen, we have an investment in China, okay? We own 39% of the company in China, which they are suffering the China lockdown. China, their delivery problem, pandemic, and also their overall weak demand. They are suffering, they are operating loss and also the inventory write-down. So we have to write down this, taking this loss close to TWD 3.9 million, almost TWD 4 million. Again, it is what it is. We cannot do anything, but this happens. We wish the market turn to good. They are able to try to digest the inventory and return back the LCM write-down. The write-off back to our write-down, then we are able to take some write-off back by this year.
we, without don't count the, our investment company, we still have a EPS TWD 5 . after the suffer the loss on the book is TWD 1.1. Okay. This is our balance sheet highlight. I think you are more concerned is our inventory. Basically, by end of last year, inventory actually declining. We are managing actually quite good skill in our inventory. after the big amount of inventory write-off, our total costs in our inventory is very competitive. in the cash flow wise, actually our cash flow improved versus Q3 last year. at this moment, Hyzen still manage a very good high portion of cash. This is helping us capable to support our supplier.
Also, we are also capable to getting much lower price from our supplier at this moment. Overall in finance, we are still very healthy. Inventory, we are still under our manage. Hopefully, this year, everything can go to positive. There we can turn our inventory back to our cash. The company, the debt value is , it's TWD 196. Okay, back to the income statement here. In talking about gross profit, you can compare here, Q3 and Q4, revenue declining 15%, gross margin declining 3%. Actually, on the other hand, means our gross margin rate actually improving. Operating expense, we are Okay. Hyzen, we are not laying off people. We are not cutting people. Actually, on the other hand, we keep increasing our R&D headcount.
Due to the economy issue, right, the bonus write-off, we are cutting down a lot of the bonus write-off. Overall, the OpEx by 4 Q last year little bit declining versus 3 Q. Compared to the last 2021 4 Q, it's a 24% cut down. Employee number increasing, but we are managing well in our OpEx without lay off the people. Talking about the OP. Actually, OP, Q4 improving in Q3. Again, unfortunately, we are taking the loss from our investment company in China, which we have to suffer total up to overall, including the foreign currency and the investment loss is TWD 1 billion. Actually, this is quite painful to Hyzen. Again, it is what it is. This happened. We are trying to recover back from this situation. Okay.
Gross margin wise, actually little bit surprise to me. You know, after write off of 5%, we still have a 28%. Means Hyzen's, our business combination is very healthy. Okay. I'd like to also show you our TIF and non-TIF comparisons. Basically the difference, the gap difference here is mainly the employee stock options. The cost of the options. Not much big difference. The total percentage is at 0.5% and 0.6%. This is a not big impact. Okay. We're back to our business highlights. The few press, you may award Phison now we are working with another third party. Phison, our enterprise SSD already earn the NASA certification.
Way sooner or later, Phison's Enterprise SSD is going to build, establish on the moon, start with a test. If everything going well, 2025, our products will start to operate on the moon. This is a big milestone of Phison to show our technology. If Phison drive can be good on the moon, then we no need to argue how about on the Earth. We are trying to get the more data center business. This is to helping us as a proven of Phison technology and quality management. Phison, this is our first Gen 4 enterprise SSD. We got award from Taiwan Excellence Award. This is also helping us to gain a lot of spotlight from our client.
Two months ago in the Las Vegas CES, Phison's customer, MSI, we ODM our Gen 5 to them, which we got the how it award. Best in show CES 2023. This is today is only Gen 5 product in the market. Also, this is a report from the TradeQ. We are working with one... Okay, showing here the Micron. Their new client SSD V-NAND solution with the Phison controllers E21. What this trade point, TradeQ give 100 point, means full point of this one. The mean, this is a best DRAM-less drive in the world with our Phison controllers, with Micron 232-layer NAND flash. Hopefully second half, this drive will get a more PC OEM business, then helping Phison to gain more our controller revenue.
For Phison design win by Q4. In OEM, we put our, this is our highest PCIe Gen 4, higher performance drive into the OEM notebook. Also we are putting our Gen 3 with the FIPS to the rugged notebook for military use. This is a high margin business. For gaming, we're also putting our Gen 4 SSD built into the gaming laptops, which is a high-end product. Now it's going to MP. We believe, this will helping Phison to get a more... This is not only a controller, but we are supplying the controller and the flash. All the component is a CKD. Revenue-wise, it's quite attractive. In the automotive, we are putting our Gen 3 BGA into the rear seat entertainment.
Right now, the EV, especially in China, they are aggressively to put the entertainment system into their rear seat. Phison, we got many design win in China market. We're also putting our enterprise SSD to few server customers and already qualified by tier one. For industrial, we're putting our Gen 3 into data logging systems work together with our industrial partner. Also we are start up product into their video surveillance systems. I think most attractive to Phison is the gaming laptop and also the entertainment in the EV. Also, Phison, we have a design service business. We are helping the game console key player to put our controller with our firmware management of NAND. They are moving upward to the next NAND generation. With Phison's controller firmware customization, we design service for them.
We also have a design service to our NAND supplier, the high-end Gen 4 enterprise SSD into the automotive, which asking for secure and safety. Sooner or later, we are going to have samples to customers and give to the tier one automakers for testing purpose. In Japan, we get our Pachinko platform customization business. In the... Oh, I need to highlight here. The Android phone, actually, every Android phone from a different brand looks like it's the same product because not much differentiation. Recently, we are working with a few phone makers to customize Phison eMMC and UFS features to help making the phone has a little bit different features, performance to make sure they are able to show the phone different with the competitors, then they can get something higher ASP from the competition.
We got award one, from one of Android phone makers, the two years award to prove to thanks to Phison as the best technology supporter to them. We are talking to them. We have a three generation of a UFS controller working for them. Means we direct design win into the phone makers. Okay, the last, some outlook here. I think, we need to read carefully about what happened in this market. After the Lunar New Year, I stay a week in China, keep looking and checking, investigating what is going to happen. I can feel the China system makers, their aggressively to launch, to develop, integrate their new products. They try to get more business to get a better ASP.
We believe the demand momentum is there, but inflection this year still, you know, making the demand slowly, but they are preparing. We believe something is going to happen soon. Again, due to inflation, due to war, due to currently the bank. The price of NAND is getting low, but for sure one thing you can read from public, every NAND maker, including the biggest NAND supplier, start to suffer minus operating margin. Or someday, I can say it, they may suffer minus gross margin in the NAND business. I believe this is not going to sustain for few more months because it's a negative cash flow in this business. We also believe the capacity cut down from China fab, from Japan fab, from Singapore fab, from Korean fab is happening.
The last, our observations from the PC supply chain, from the smartphone supply chain, from IoT supply chain, we got the intelligent number that the inventory of storage actually declined quite a big number, but they're still not willing to start to push for all to buy the storage product just because they think tomorrow can be potentially will be cheaper, so they are waiting. If they keep waiting, supplier getting big minus and system side have a low inventory, and the season is coming. I mean, the summer season coming, the back to school season coming, K.S.tmas season also coming. When that happen, right, we believe they will create the shortage period in the market. This is my view in our outlook. Okay. In the R&D side, you can see Phison's, our account actually keep increasing.
By today, we already have a 3,000 R&D account. Some shareholders asking Phison to have a layoff to save the OpEx. Again, this is Asia, and Phison's, once we hire the engineers, we need to spend at least two years to train the engineer. Again, we have a many projects still queuing, customers still pushing. We don't have enough skilled engineers to cover the project. We are not going to lay off, but we keep hiring the good talent to make sure when the next cycle of crisis, we are capable to get most of the order and the share from the market. Okay. We have collect some Q&A. Let me finish this Q&A, then we can back to online.
Many shareholders, many investors asking, "Hey, when is your PCIe Gen 5 is going to popular in the market?" Somebody saying by this year's Q4. First of all, I don't think this is going to happen. Look to the CPU makers, they are now suffer the profit. Look to the PC makers, they are suffer. Look to everyone slow down their R&D investment. We believe PCIe Gen 5 will push to next year second half or next year Q4, start to go to the market. Okay? Means at least a three quarter push out. This may create a good window to Phison. Why? Look to today's market, the high-end PCIe Gen 4 SSD, the more high-end, actually is a Samsung, WD. The rest looks like it's Phison's group, Phison's customers.
If PCIe Gen 5 push out for three quarters, the market will need a high-end product. Phison, we are the major players. Just few weeks ago, months ago, they have a report saying Samsung's SSD have some quality issues, some RMA issue. This also the reason why Phison recently we got multiple x of a demand from our high-end Gen 4 business. We believe Phison is going to benefit our Gen 4 business. On the other hand, Phison also to make sure we have a Gen 5 ready today for the client business. We also have a new most advanced 7 millimeter controller for Gen 5, which is designed in, into the PC tier one. We are prepared, make sure ourselves ready by end 2024, we are able to ship to the market to take the share from the market.
About Phison's, our cash. Again, the cash most important to Phison is to maintain our business. Today, Phison still zero debt from the bank. We all inventory, all by cash, and we still hold a big portion of cash. If market keep going down, I believe... Of course, of course, we will suffer, you know, there's some inventory loss again, but our cash able to buy more and much cheaper NAND component. By the way, my NAND cost is much lower than the supplier cost because now they are in a big minus. If I'm correct, recently we buy a NAND, a piece of NAND from a supplier, they are losing two piece of NAND. You can imagine how bloody in supplier side today. We keep our cash mainly in the business development and also in R&D development.
We are able to share some portion to our shareholders. This morning, board members just approved by last year, last Q4, last second half, Phison's total earning is around TWD 6+. This time, we decide to improve the dividend up more than 55%-60%. Number is relative small, but the ratio we are increasing. Hopefully, sooner or later, we are able to pay back more dividend to the shareholders by our good profit in the coming futures. Okay, this is more concern about Phison's inventory write-off. This is to show you, okay? The above the zero is a write-off. Below is a write-down. You can read since last year, Q1, after the pandemic happened, market price turned down, moving slowly.
We are writing off quarterly big amount number of here. By end of last year, total write-off number is close to 11% of our inventory. 11%. By this year, Q1, January is a write-off, but February already write down. Means we have a reversal from our write-off. The reason is the price already touch bottom, and we are keep selling our components. We have a reversal from our write-off number. Overall, we expect the total because by end of March, we still buying some components. It's a big amount of components which is so cheap. Potentially we are going to write off some more number, but we are managing like close below TWD 200 million. Overall, we are writing off, but we still able to keep our gross margin.
This is more concern about Phison recently about talking about the analyst report this. I prefer you can know what analyst saying. Look to our chart here. Phison every time, big growth. The big growth actually coming from a big cycle down. 2008, the bubble happened. By 2009, we have a big jump. 2010, because of the great debt crisis, big jump. 2018, due to the oversupply in the 2D to 3D, we suffer. 2020, big jump. This year, 2022, we suffer due to the COVID again. COVID recover, but we potentially believe sooner or later, we may have a big jump because we have covered more controller share. We cover more product lines.
We cover every application from auto, medical, industrial, PC, gaming, IoT, data center, blah, blah. Okay. With the dynamic, I think sooner or later by Q1, you can read their report. It's so broad. I don't believe this is going to sustain anymore. They need cash. When markets happen, bounce back, I believe Phison, we are able to have the other big jump. Okay. This to show you when NAND insufficient happened. Phison at the past, we are suffering the gross margin. By Q4, the NAND is actually oversupply is like 13% according to their report. Phison, we are maintaining the 28% gross margin. Actually, it's much healthier than before. Q1, our gross look as good as Q4. Okay? The only issue is the revenue-wise because ASP going down, they matching module.
We are working very hard in revenue. We are still able to keep the gross margin because of business diversify. The other concern is about our China investment, which we suffered loss, big loss in the Q4 last year. On the book, Phison, the total value of Hongxin, which has around close to TWD 3 billion. Okay? Hopefully, their business will turn to good. Phison going to recognize the investment gain from them. Actually, Phison, we gain when we decide to merge Hebei and the Shenzhen Hongxin. Phison gain the big amount from this entity. Hopefully, sooner or later, we are able to gain more. ESG, in these three years, we are working super hard on the ESG, and this is index from the DJSI.
Phison now we are in the 75 point. It's a middle high. We are keep improving our stuff. You can see from 2020, 41, 63. Last year, 75. Hopefully, this year we are able to get a high 70 or low 80. This is all the Q&A here, we can back to the online.
Great, K.S.. Thank you for that. Very helpful. Before we open the Q&A to online participants, maybe I could ask a few questions first. I guess one of the questions I've been getting from investors, you know, obviously since YMTC was added to the Entity List is, you know, prior to that, what was your business with them in terms of, you know, controller sales and NAND purchases and, you know, what changed that and how did that impact Phison?
Okay. after last December, Phison cannot ship anything to YMTC. Okay? On the other hand, Phison helping YMTC enable a lot of smartphone and data center business with Phison controllers.
Mm-hmm.
Those already in the phones AVR. On the other hand, the phone makers, they need to buy the same configuration, Phison controller, YMTC flash, right? I'm not able to sell the controller to them, but I'm able to sell controller to third party. They can buy the NAND from YMTC and assembly the same configuration products to the phone makers. On the other hand, actually Phison will benefit.
Mm-hmm.
From this issue.
Okay.
Yeah.
For your China exposure outside of Hongxin, any other subsidiaries of that you still have in China that, you know, could either be positive or negative?
Actually in China, we have two main subsidiaries. One is Hongxin, and the second one is doing some storage for the security products, which is encrypt product. Their size is too small. It's too small. We suffer some loss, but the number relative to compared to the Hongxin is like Hongxin is a single digit. We just ignore.
Okay.
Yeah.
Talking about, you know, maybe start with PCI Gen 4. You know, obviously the initial start you had was with game consoles and then, you know, working with potential PC OEMs and then also for server. Can you talk about, you know, that potential market for gaming? Is there more upside from where you are now? Obviously, there's a lot of central PC upside, but, you know, are we seeing PC adoption, PC Express 4.0 already, or is that really still a kind of a next year story? For PCI Gen 5.0, is that a server first or is that a PC first story?
Okay. Talking about Gen 5, we believe, the gaming desktop, high-end desktop is happening. We are now shipping the Gen 5 module for gaming desktop. I think the big volume happen soon is the server, not PC. For laptop, Gen 5, I believe will happen only by end of 2024 because of reason the cutdown, the layoff, this, that. Okay? Back to the Gen 4. We believe this year, most of the laptop, bundle the drive, most likely Gen 4. Potentially, some PC makers still hold some inventory was a Gen 3 SSD, which the forecast that place to supply happened by end of 2021. Imagine the market actually shut down by last year, April to May timeframe after the Shanghai, lockdown. Before that, most product was a Gen 3, okay?
Market, there's a Gen3 inventory or I can say there's some high inventory in Gen3 in controller, in module, Gen 4 actually is a less inventory. This year, we get from the PC makers, the mainstream of the storage bundle into the laptop will be Gen 4 512 GB and Gen 4 1 TB. This is good to us because Gen 4 512, 1 TB in the market inventory is low.
Mm-hmm.
Yeah.
Okay. When you talk about whether it's PC, you know, whether it's desktop, notebook, or servers, is that all gonna be found in your embedded ODM business, or is that gonna be spread out into other areas, or?
Right now we keep everything in the embedded ODM. Sooner or later, when my enterprise SSD business growing, we will take out spin out from the embedded ODM. I mean, when the number can be over 5%, 10%, then, you know, this is meaningful to put it. Yeah.
Okay. Also the last few years, you've seen a nice uptick in your controllers percent of sales. Can you talk about, you know, ASPs and units in terms of, you know, last year was mostly uptick from ASPs and/or was that mostly from units?
ASP big growth actually was 2021 because of fan-in type. 2022 by second half, Phison already volunteered to cut down the price to customers. We don't care actually the fan-in packaging cost still high, we volunteer to have a cost down to our customers because at that time, we already can feel my main supplier start to suffer from their gross margin. As a long-term friendship, we are helping them to cost down. We suffer the little bit margin, this is to keep for long-term relationship. By this year, we believe ASP on controller is still difficult because demand is still very bad. Phison, we are capable to earn much more profit from the modules. The reason is, in modules, right, the NAND price dropping already YoY more than 60%. We are capable to gain some design win business, which the price dropping like 20%, but actually cost dropping 40%. Profit-wise, we are good. Yeah.
Okay. All right, great. A reminder to callers, you know, you can put a question in the Q&A box that I can ask, and also, you know, we'll also ask for raise hands, and you can ask directly as well. K.S., I got a few questions here in the Q&A box. First one, as to bit growth, you know, what's our thoughts for 2023 bit growth? Is zero a target or is that, you know? What are you thinking for this year?
You talking about revenue growth or what? Bit of bit.
Phison bit growth shipments.
Yeah, I believe this year will be the big growth. It's a big improvement because the ASP of a NAND is so cheap.
Mm-hmm.
Okay, you look to my January, February. Actually, I read my big growth, little bit higher YoY, little bit higher.
Mm.
Revenue number is so low because price already 60% down.
Yeah.
Yeah.
Okay, next question. Is there any chance that enterprise level revenue will see 10% of revenue next year?
Yes, definitely, yes. This is going to happen because in the coming few years, Phison big growth, our revenue growth has to coming from the enterprise and auto.
Okay. Are those revenues, is that all module, or does that include just some controllers as well?
Enterprise, we don't have a controller business because they have no control customers. Control customers is only the NAND makers, so it's all modules. Also, we have a modules and the controller business.
Okay. Next question. Whether there will be a new product for the combination of UFS 4.0 and BGA SSD?
Yes. We are working UFS 4.0 with the two NAND makers and the two phone makers, okay? The challenging of a UFS today is the demand in this year still way small. We are concerning if we make it ready, still no business. We are pushed out little bit schedule. Now we are getting four project awards by our NAND and the phone makers. For BGA SSD, actually recently booming due to the EV entertainment demand. It's a 512 GB and 1 TB. Looks like Phison is a key player in the BGA. We are working hard with the EV makers in China.
Okay. Next question. Are there a lot of supply opportunities for first-line CSPs?
This is good question. Actually, first-line CSP is not Phison's aiming customer this moment because what they are asking price is, you know, super low. I think this is all the NAND makers business. In the CSP customers, Phison we are looking for controller design service potential business, and we have one ongoing.
Okay. Okay, great. All right, next question. Will the next generation of mainstream game consoles, one American, two Japanese, or will Phison be able to get design in all of those or just keep the same one American, one Japanese that you have now?
Basically, American side, we already made many design wins, so we working very hard and we are working with them. It's a three-group working, Korean supplier, American console customers, and we provide the full controller and turnkey business. Japanese is a quite, you know, I'm not able to talk that much. First of all, in upward market, we are taking the major share. For next generation, business, the development, we are working hard. Okay? We are working hard. I don't believe this is going to happen soon. Based on roadmap from them, this may happen only after two years. We are working on that.
Okay.
Yeah.
Next question on automobile related. Now, what's the expectation for contribution by 2020 in terms of revenue for ?
Okay, still hard to say because for the autonomous, I don't know, this is not only a technology concern, but also a lot of regulations. Okay, let me try to summarize what happened in the automotive today. Today, traditionally, the storage in the automotive is mainly for the maps of navigation and also the video recording, okay? They're consuming only, like, less than 100 GB per car. This is a so small business, but we occupy the big portion of eMMC controller. Revenue is low, but share is high. Recently, again, I keep emphasize that EV try to put the entertainment into the auto, into the vehicle, which they're asking for 500 GB or 1 TB, and this is higher ASP. We are working on that.
If this happens, we can gain revenue growth and a gross profit. The last is autonomous, which they're asking terabyte, high-end enterprise level, safety, drive, and Phison looks like is one of two designer in the world. Again, we don't know this, when it's going to happen. Potentially, by end 2024, customers start to ask Phison to ship the controllers. We got a forecast already. That one, if happened, if we are able to provide the TB drive, then you can imagine the drive is a few hundred dollars.
Mm-hmm.
we expect that is going to happen by 2025.
Okay. If I go down your list of revenues, you know, controller, embedded ODM, gaming, industrial module, consumer retail, what grows faster than average this year? What grows slower than average this year for you?
Controller-wise, I think we are stable. Recently we got a few more design win from the NAND makers. Potentially the big growth, the biggest growth will coming from embedded ODM because we believe PC is going to recover. By the way, we got a tier one PC customers forecast increase in the Q2, too, which never happened in the Q4. Q4 was totally zero. Q2, we already got the forecast up. The smartphone looks like China is booming up. Big growth definitely coming from embedded ODM. Controller will be stable. Industrial will be stable. Gaming, I don't know yet. Recently, gaming was so strong, I do not able to sustain until end of this year.
Okay. Are any questions from the floor that wanna raise hands? Well, can you see the raise hand? I don't see the raise hand button here. Does anyone wanna unmute themselves and ask a question?
Yeah. Tony.
Hi. Hi, K.S.. It's Tom. Can you hear me?
Yes.
Hi, K.S.. Thank you for presentation. I think I have maybe two questions. First one is regarding to your revenue contribution in fourth quarter. Controller is like 32%.
Yeah.
If I remember correctly, it looks like to be one of the highest, sales contribution from controller within the quarter, right? Because I remember in previous quarters, most likely 20% . Is there anything related to our, you know, driver or, you know, those non-controller IC business booming in fourth quarter?
Okay. Actually, Gen 5, the driver on the Gen 5 motherboard, Phison market share is the biggest in the world. Unfortunately, Gen 5 this year, as I mentioned, right, the market is so slow. The company keep cutting. You know, the motherboard maker, they also suffer the gross margin, so slow down all the new products. Since the last week, the driver forecast coming from the three motherboard in Taiwan suddenly increased 2x, 3x, means the market finally coming back. The driver itself is below TWD 2 product. That is a small revenue. I mean, meaningful to us is we're able to put the driver to the PC, and now we are trying to put our new driver into the server. Okay?
We have our new driver coming back, two weeks ago, already put our driver on the, some servers, and the Intel platform Gen 5. If that happen, their driver can be between TWD 4-TWD 5, and they are going to use the 16 piece per driver so, per motherboard. If that happen, will help us to create a lot of revenue.
Okay. May I ask how much sales contribution, I mean, within the ASIC or controller business, how, what's the breakdown right now? It's like 90% controller or?
You mean the driver, the portion, right?
Yes.
No. Okay, I give a number, okay? We are shipping like 2 million piece in a quarter. 2 million piece with TWD 2 is just TWD 4 million. Easily you can see almost nothing now.
Okay.
If we put this into the server, then amount can be big.
Okay.
Okay?
Thank you, K.S.. Second question is regarding to, you know, the EPS has been pretty low in fourth quarter, right? I mean, it's almost back to 2008 level. You have mentioned about gross margin may be relatively stable in the first quarter compared with fourth quarter last year. How about the, you know, non-OP loss from the machine in China? Will we see deteriorating EPS in the first quarter?
Okay, I mean, now it's totally different with the 2008. 2008, Phison only with the USB drive, we might be crash to crash. Now we have so many diversify in their product. Look to here, right? This low earning is not caused by Phison operation. It's caused by our investment. To be honest, I can't do that much.
Yeah.
Okay. I believe by Q1, Hongxin still suffer their inventory still.
Mm-hmm.
I still no idea the amount because Phison, we are not managing Hongxin, we just as investor. We have to wait until their accountant to have a report. We are keep monitoring them. Hopefully, their business is more simple. When the market flash price pull up, then the loss will turn to the earn. I hope this helping Phison potentially to return our loss in the last year Q4 and this year Q1.
Understood. basically maybe in the near term, I, in your view, maybe for the NAND cycle or the earnings momentum, maybe first quarter should be the lowest point. Is that a correct assumption?
In my view, yes, I think better to call Samsung, ask Samsung whether they are going to keep cutting price or not. I totally don't know what happened there, but again, until end of this month, you can read from every supplier, every name makers who minus gross margin, single-digit gross margin, big minus in their operating profit. The question is how long they are going can be sustained.
Mm-hmm.
Yeah.
Okay. Understood. Thank you so much, K.S..
Yeah.
Okay, great. Thank you. The next question is coming from Jason from CSA. Jason, you can unmute yourself and ask your question.
Thank you for taking my questions, Mr. Pan. My first question is in terms of your gross margin in Q4. If we look at your gross margin in Q4, if we don't recognize your inventory write-off, it seems like your Q4 gross margin have the improvement compared with Q3. I just wonder how to get such improvements during this NAND or module ASP downtrend.
Okay, this is tips. I don't know if I can tell you the secret. Imagine, Phison have so many diversify, right? Just I'm saying that we made a lot of design win into the systems. If a flash price dropping 60%, I need to have inventory write-off. On the other hand, the design win project, the customer is not much sensitive in the price. We just lower like 5%-10%. On the other hand, actually we gain more from the design win project, which can be industry, can be auto, can be IoT, can be telecom, can be medical. Phison will cover most of those business, helping Phison to gain the gross margin. This is the big difference between Phison and Hongxin. Hongxin in China, mainly is a consumer market.
Hongxin today, like Phison in 2008, consumer. Phison today, we cover everything. If you're asking me, downtrend in the market, actually I'm more happy because when downtrend today, my cost in NAND is much lower from my manufacturers. In talking about the modules price competitions, we can be much competitive than NAND makers. We are able to get more profit from those business. Okay?
Got it. your design win products or projects have the higher gross margin compared with.
Yes.
Maybe other product line.
Yes.
Okay. Okay. Got it. Okay. Thank you. My second question is in terms of your applications. It seems like your consumer product lines or segments have the sequential improvement in Q4, but your industrial segment had a huge correction in Q4. Could you give us more color on these two kind of product lines or segments? Do we see any recovery from the consumer side or it's just your, you know, your design wins or design-ins project to sustain your gross momentum in Q4? I also want to know the more details coming from, you know, your negative growth or correction in industrial segment. Thank you.
Okay. In last Q4 is a seasonal, consumer market tend to good. Again, due to the inflation, last year you imagine, right, a lot of corporate lay off. They suffer the high interest that pulls out their demand. That's why industrial, we are declining. Recently, what we get from the forecast from our designing customers, the demand gradually back. Gradually back. If you ask me potentially in the coming few months, which is stronger, I can share with you will be embedded ODM because smartphone lower inventory in the storage. PC makers lower inventory, sooner or later they need to get something. Consumer-wise, I think usually Q1 is a slow season. Q2 little bit good. Q3, Q4 pick up. This depends on the macroeconomic, okay? Inflation looks like from days ago, U.S. market looks like under managed, under control. Hopefully, this helping in the second half this year, consumer market able to boom up and we are able to benefit. Yeah.
Got it. Thank you. My last question is, can you give us your, you know, guidance for your OpEx, no matter the numbers or percentage? Thank you.
Operating expense. I think. Okay, let me have a number here. You can see. Okay, I think it's here. We increased the headcount, but because of P&L going down, we are not taking that much of bonus. We believe our operating expense will keep like flat in these two quarters. Okay.
Oh. That means, number or percentage?
No. I was talking about number.
Yeah.
Number. percentage, I have to check. The reason why is that. Okay. I have to share with you when the day NAND suppliers saying that, "Okay, no more. They don't want to take loss no more." The low inventory players, they need to buy inventory. The world is suddenly changed in one night. I mean, the percentage, I'm not able to tell you because I don't know yet. Number, I think we can keep it flat. Yeah.
Okay. Thank you. I have no more questions.
Okay, great. The next question comes from Anthony Leung. Can you unmute yourself and ask your question, Anthony?
Hello. Hello. Thank you for taking my question. Yeah. My first question is about the UFS business. Just say that you have some pipeline and for phone makers and also for the NAND makers. I want to know for the NAND makers, recently we have seen some like the smartphone, especially for the biggest UFS NAND makers. Is there any chance to get the share in the phone side, the phone market? Yeah, I want to hear some view and when do you expect this to happen, if this is true. Thank you.
Okay. The phone to this far as the MCP and discrete. MCP only three suppliers. We have to get the, either one controller business, but looks like two Korean, they use all in-house. Okay? Potentially we can get the other one as a controller customer to put our controller into the MCP. In discrete side, we are much easier because we can direct work with the phone makers. That's why I'm saying that. In discrete we have nine customers using our controller. On the other hand, we have two phone makers, we are working with them on controller.
Okay, got it. For the phone maker side, is this just started for the R&D or design, or it is just on the pipeline and we will see that the second half of this year to happen?
Actually, UFS 3.1 is happening now, but just slowly went up.
Yeah, okay. Got it. Got it. Thank you. My second question is about the inventory write-off. You just said that, the first quarter the margin will have some more write-off, and overall we will see continued inventory write-off. Will we see the total inventory write-off to kind of like shrink from fourth quarter? Just want to know that, total including inventory write-off, the gross margin trend. Thank you.
Based on this chart, I'm just here with you. February is the reversal. It's inventory write down, not write off. Means inventory we gained. March, because we keep buying more, cheap NAND from the supplier, potentially inventory need to write off something. The number I think will be big declining. Potentially by Q2, the whole quarters inventory is writing down. Means will turn to positive. It's a reversal. Now I'm not much worried about the inventory write-off because, you know, the price is almost bottom. When it just boom up, price up, suddenly all the write-off we have to return back as a positive number.
Okay, got it. We expect some inventory reversal in this from the second quarter onwards.
Hopefully, yeah. February this happened already. Yeah.
Okay. Got it. Thank you. I have no more questions. Back to you.
K.S., it's Jeff again. One more question for me. You know, it sounds like you're very confident that NAND pressure is at the bottom, which, you know, I certainly agree with, but why wouldn't you be more aggressive in buying inventory even?
I do.
Okay.
Not because I like to buy much. Every NAND supplier keep come to me. While they offer the much of a, you know, aggressive price and they are taking, you know, minus 60%-70% gross margin, why not?
Mm-hmm. Yeah. Okay. A couple more questions from the Q&A box here. Phison invested in Hosin Global company a few years ago. Is there any IPO plan this year or in the near future?
Let me clarify. Phison now we are just a pure investor, we are not getting any involved in the operation, in the decision. That's why I don't know what happened in but I believe there's a plan to go to IPO, especially in the China market now, you know. The government looking for more domestic designer, this that. I believe there's a plan, but I don't know when. Hopefully they can make it happen soon, Phison we are able to take our investment back to help make my idea, you know, more income from the investment. Yeah.
Okay. All right, another question. Micron, Western Digital, Kioxia and other have delayed production expansion. Will it affect the progress of development or development of the main controller?
Answer is yes. Actually, they are not just only delaying, they cut down the CapEx. What I like to say, they may skip the 2xx level.
Mm-hmm.
on my hand, right, with controller is ready. If they move from 2xx to 3xx, Phison can use the current controller, optimize the firmware. To me, development is nonstop. Nonstop. Yeah.
Mm-hmm. Okay. All right. The launch time of the new E27T is due to the announcement of SMI and Maxio new generation Gen 4 DRAM-less products and Maxio supply. How will Phison respond?
Okay. For the E27, this is a dedicated design for the two NAND makers. It's a highest performance with the full function on the DRAM-less controllers. Okay? Yes, we get the from SMI and Maxio. I'm not much worried. Maxio, we test their products, we found their PCIe interface compliance has many issue. In quality-wise, still long way to go. For SMI, yep, they have a product. My question is, by this year, the PC total amount by unit declining. Means control demand declining. Okay? By Phison, we end the design win from the NAND makers. From our partner KingFai and other, you know, our module customers. Controller, potentially we make growth because more design win, we able to get our gross profit from their module business, which... By the way, the investment in the controller is so high, so expensive. Okay? I don't worry about Maxio. I don't worry about SMI. Yeah.
Okay, got one more question here in the, in the box. Korean NAND factory enters the main control supply chain opportunity. I'm not sure if that means-
Mm-hmm.
Are you seeing more chance for you to gain, share or get into the Korean NAND makers supply chain or?
Okay.
actually, either that or buy more NAND from them?
First of all, Korean NAND company, they are not going to sell controller for sure, right? My understanding is saying, is then NAND, Korean NAND is going to outsource? Answer is yes, because okay, look to this, to this market. Every NAND maker lay off, cut down the bonus, cut down the salary. They want to lower down all the OPEX, all the expense, right? They cannot miss the time to market projects. That's why they have to outsource. That's why for these three years, we're increasing engineers. I'm not going to lay off engineers because we have so many inquiry for the NAND makers, not only Korean, but also China, also U.S. and Japan. That's why we need to have a good amount of the good skill trained engineers. The answer is yes, we are getting few project from Korean NAND makers.
Okay. I have one more question and then maybe give everyone last chance to if they have further questions before we end. I guess, you know, Silicon Motion agreed to be acquired by MaxLinear at some point last year. You know, is that any impact on you? You know, whether or not that deal goes through, you know, what's the impact to Phison either way?
I don't know whether this is going to happen. I still keep listening. They are waiting the Beijing antitrust decision. Rumor saying that Beijing almost agreed. This is rumor, okay, not from me, from rumor. If that happen, right, they are laying off people after Lunar New Year. Potentially, based on experience history and, if a design house acquired by the other design house, most likely the activity will slow down in coming months. Phison not lay off people. We are keep hiring people. We make ourself much healthy, promote the project. At the end, I think we are able to benefit from their acquisitions.
Maybe another question for me. With a lot of tech companies laying off workers over the last 6 months, is it easier for you over the last several months to find, you know, new people than it was, like, obviously a year or so ago?
Yes. Yeah. Actually, I slow down the people hiring, engineer hiring since, actually since the last year March, when the pandemic happened in the second. Okay. We slow down. I keep more space for the coming, you know, more talent with make it simple, much lower cost to get for the talent. Recently, yes, we got some good talent from the market.
Okay. All right. Anyone have any last questions? Okay, great. No, I think, I think that's all the questions we have. Okay, I want to turn it over to you. Any final comments before we end the call?
Okay, my comment is that Q4, we're doing good. Unfortunately, earning not good because of investment and nothing to sell. We working hard and my observation, again, NAND supplier big suffer, NAND already a big minus and the inventory level in system side so low. Sooner or later, I don't know when, I don't know when, maybe make a call to Samsung to ask when they are going to turn the market. Sooner or later we are going to make ourself much healthy. Again, last, we keep investing in R&D. Never stop, never slow down, never lay off. Okay.
Great. All right. Thank you very much for your time. I really appreciate it, and thank you everyone for calling in.
Yeah. Thank you, Chase.
All right. Have a great day, everyone. Thank you.