Good afternoon, everyone, and welcome to Phison third quarter 2022 earnings call. Today we are pleased to invite K.S. Pua, CEO from Phison, to summarize the company's operation in third quarter 2022. After the presentation, we will open for Q&A. Now I would like to turn the call over to K.S.
Thanks to Annie. Good afternoon, good morning to all the attendees for today's our Q3 quarter-end earnings call. With this we move directly to today's presentation. Again, we are keep repeating about our industry that the NAND application is still expanding. We already seeing a lot of new application coming, which triggered by the 5G applications. In Phison, we are already covered the NAND application in the mature and also legacy node, which have a PC, mobile, camera, medical, surveillance industry. I think we are covered. We have a full range to cover this industry. At the same time, we also keep investing into a lot of much leading technologies, such as for data center and automotive.
This will help us to gain our market share and also to increase our revenue in the coming few years. We are, again, keep insisting to invest into the R&D activity. Since two years ago, we have increased close to 2,000 engineers, and we are trying to keep this momentum in the coming few quarters. This is our breakdown of our Q3 revenue. From this chart, you can find the controller is 34% of our total revenue. You can read our historical data. The controllers actually is increasing. Starting from 2020, after our engagement with AMD, we gain a lot of PC design win opportunity. We engage also with the NAND semiconductor customers, we get a lot of embedded mobile auto business in controller side.
Controller is getting very much one of our major revenue and also profit cash cow. Going to what we call embedded ODM, especially in this Q3, we are dropping a lot, which also fully under our expectations. China started lockdown by Q2, March and April. This really impact the mobile and the PC demand. Q3 we are suffering the inventory adjustment from our customer, which in the mobile and also the computing related business. In the gaming. Gaming is a much more highly related to the consumer business. I think everybody aware what happened to this economic status.
Gaming is weak, but looks like slightly we little bit gain back the business because Q4 is a season for the consumer season and we won some game console and the handheld game machines business, which we little bit increased in this portion. Industrial-wise was flat, actually starting the China lockdown. Now we also slowly getting back. Consumer-wise is keep like low 20% since many quarters ago. This to me is a healthy breakdown. We keep insisting to invest to controllers. By the way, we also gain some other new model from the NAND manufacturer, such as the PC client SSD controller and also the embedded for mobile.
For the data center business, now we have a very good progress. Later I can share with you. With this, our breakdown, I think we are trying to diversify our business into the every kind of a NAND applications. Since a few quarters ago, we start to explain to our partner, our shareholder, Phison's our last mile in the NAND storage business is the data center and enterprise controllers. Which we already have a very good progress. The other new growth in the future is automotive, mainly is EV application. Phison we have a very good potential position. We are working with the three of a silicon company to develop our EV's controller for their storage systems.
We believe with this heavy investment and our insistence in this activity, these two applications, enterprise, automotive, by 2025, will become our mainstream to generate the revenue and also the profit. This Q3 at Flash Memory Summit, our partners, we have a announce about the PCIe Gen4 high-end enterprise SSD with our partner Seagate. These products, we are start prepare material, for next ramp up, for mass production. We also work very close with Seagate to put this drive into the Tier 1 OEM, Tier 2 OEM, some hyperscale, and also some system integrator. We also deliver this sample to our silicon partner, the NAND makers. They test it, they just give a report to us, and they show a big surprise.
They don't believe Phison we are capable to make the drive ready, mature, and with a very high good performance. Most important to this design is our power efficiency is the lowest among all the enterprise suppliers, no matter from Samsung, from SK hynix, from Solidigm, from Japan KYOCERA, our power performance is the best. This also refer to the today everybody care about the ESG. Okay? Try to make the data center consume less power with much higher computing power. This drive now we believe is the lowest power efficiency, may also help Phison to gain the business opportunity.
This is partnered together with the Seagate, and we are happy, excited to work with Seagate to bring this into the hyperscale and also to the OEM business. Okay, by this Q3, the revenue, I think we already got our. Two hours ago, we have a press release, so the number you already get. Gross margin-wise is 33.5%. I think it's lower than our expectation, but later I'd like to explain why this is happening. Some highlight. ASIC is the 34% of total revenue, and the controller growth YoY 7%, PCIe controller growth 11%. This also reflect starting from Q3, the PC market start of adjustment. The increase YoY is declining.
Customers now start to adjust the inventory. The module-wise, we are putting a lot of effort into the BGA SSD. This will become one of our major business in next year. In gaming module, Q2 was terrible because of the lockdown and the war causing the user don't like to spend money. Now, back to the Q4 season, we got little bit improved in this gaming modules. The overall revenue by Q3 is second highest at the same period. This also refer to the whole market's economy. We like to keep. How to help Phison to get the next growth, I think only one solution, is invest. Invest in the new technology, new products, new applications. Okay, back to the gross margin.
In this Q3 gross margin was 24.4%. We go to check the adjusted total gross margin without the write-off in the LCM inventory. The real margin was 29%. For the IFRS definition, we have to write off close to 5% of inventory. This 5% of total amount were back to the finance book after we sell out this part number and this inventory. Without the inventory loss, the real gross margin is 29%. Okay? Also following our expectation. Inventory, I think already become a peak.
I think no argument and no excuse, but we are trying to make ourselves much healthier in the inventory and also try to reduce the average cost in the inventory to await our next pickup in the business. The earnings per share is TWD 6.13 (New Taiwan Dollar). I think it's also lowest because we have to cover the extra 5% of the. By this Q3, we write off close to TWD 780 million (New Taiwan Dollar) inventory loss. TWD 780 million (New Taiwan Dollar) convert to the earnings per share is close to TWD 4 (New Taiwan Dollar). Close to TWD 4 (New Taiwan Dollar). But anyway, this is why this happened. But we are trying to adjust the inventory, try to make the inventory much healthier. Back to the balance sheet. The cash flow.
Our cash flow, we still maintain is around close to $450 million net cash, which is in the coming one or two quarters, if economy turn to bad, we still have a good enough cash to cover our operations and trying to use our cash to buy the much cheaper component, no matter the NAND flash or the wafer from foundry. With the net cash cash flow, I think we are still healthy, and we are trying to be aggressive when our vendors approach us to call help. Back to the inventory. Inventory, we are actually declining close to, like, 10%. By this October, the inventory become much lower. Not talking about the amount of dollars lower, the average cost per gigabyte in the NAND wafer also declining.
This inventory, of course, we like to try to consume more inventory, lower the amount of dollars. On the other hand, by this Q4 and Q1, look to the NAND supplier. I think Q3, a lot of report already disclosed. While I read the Korean manufacturer, the NAND profit dropping more than double-digit %. U.S. player also announced they are potentially Q4, they may go to take loss in the business. This is telling us that they may need help. When they call for help to Phison. From our study, by end of September, the first price the NAND manufacturer offered to the market or to us already close to their cost. Q4, if price keep dropping, the price may touch the cash cost, which already they have a few vendors announce cut production.
This happened. I don't much worry about the write-off in our inventory by Q4. I think Q4 we still have to write off, but the number will be much smaller than the Q3. Because we don't believe the NAND manufacturer willing to cut the other 30% in the selling price. From Q2 to Q3, the price almost dropped close to 30%, which is all their margin. From Q3 to Q4, they don't have a big much room to cut. To us, if our inventory close to their cost, the cash cost, we are much safe and healthy. This will help us to able to lower the total cost to gain the more business from the market. By cash flow itself, we are healthy.
By inventory, yes, we are managing right now, but the write-off ratio were much smaller than the Q3. By Q1, if they cut production, the market realized the cut production, the wafer output decreasing. When market turn around, price start getting stable or bounce back, then we can reverse. I mean, we can take out our write-off number back to our books. Means next year we have a high possibility to gain the extra profit through our inventory. Okay. This is all the index about the balance sheet. Most concerned cash flow, we good. Inventory, now we are well managed. I don't feel much worry about coming quarters in the inventory. We go to the income statement.
By the gross profits-wise, just now I explained 5% cut down because of the inventory write-off. Talking about our non-operating gain. We have investment subsidiary in China, which also they are in the NAND industry. They suffer inventory also. They have to cut down their inventory. Phison had to recognize the loss, and this become one of big portion Phison need to recognize. I think Q3 we have to recognize. Q4, we may have to recognize it a bit. Basically, after by Q4, when Q1, the market turn to stable, the cost per gigabyte in the inventory getting lower. Next Q1, everything will recover. We'll reset. We can start to gain the return from inventory. Not only Phison, but also our subsidiary in China. The most difficult timing happened by l ast time I mentioned that either Q3, but Q3 looks like it's okay. Q4 potentially, market still go to the end of season, the slow.
On the other hand, we don't think the NAND manufacturer willing to cut price aggressive no more. Okay. Because they also got no room to cut. In the income statement, overall, I think this earning, EPS of course may disappointed, but unfortunately, this caused by the inventory cutting and also subsidiary losing, we have to recognize. This is just a temporary. No, the regular business, we are still doing good as usual. Okay. We also have supplemental information about the non-TIF, okay, which is similar as U.S. and non-GAAP. Phison we have a option, stock option to our staff, which we have to recognize the monthly write-off.
Back to the non-TIF. Our net income EPS actually back to the 6.4, which is slightly higher than 6.1. Okay? This is the only factor here is the option to the employee. October revenue we are 4.2 billion. The reason is I go to check the shipment. The shipment of a drive, of a products, of controllers. Actually, we are maintaining the quantity, but unfortunately, just the price dropping. Okay? Price when we get a component cheaper by 30% than Q2, this reflects to the products. By unit shipment, we're still doing okay, doing good, but comes to the dollar amount declining. It's 4.2 billion in the revenue. Some business highlight.
Phison's since August, we announced our PCIe Gen 5 client SSD for the PC and gaming market. We engage with the key player in the gaming business such as GIGABYTE, Corsair, MSI, Nextorage and CFD. They already carry our products. These products will go to the market by end of December. Phison looks like today is the sole supplier in the PCIe Gen 5 client and the gaming module business. Similar is 2019, which we are enable this together with the AMD. These products will help Phison to gain much better gross margin from this as a new product in the gaming industry. The other good news is we are working with the NASA project to put our data center SSD on the moon. Our data center SSD already qualified by our partner.
By next year, our drive will be on the moon for testing and deployment will happen by 2025. That means by 2025, they have a data center on the moon with a Phison SSD. This is one of our good progress. Taiwan just opened the quarantine. I made few trips to U.S. in the few months, and we have every day different group of visitors from worldwide. In these two, three months, we've been asked by many partners to develop a lot of customization products for them for coming years application, such as in the hyperscale cloud, we've been asked for PCIe Gen4 SSD customization. We also have been asked to have a boot drive customization from the business. Okay?
We also have Tier 1 asking Phison to develop a new controller, enterprise controller as a design service to support them. I believe years ago, I'm keep explaining Phison business model. We need to get proven in the data center storage by our technology, control and drive. After that, we capable to get the design service business from the key players. Now we have one project starting. It's a design service for high-end data center controllers, which is an ROE base. Then we also have a controller revenue, and we are helping them to make the modules. So we are also to get the modules business and revenue. In auto, Phison, we are working with three of the NAND manufacturers to support them in their new generation, PCIe Gen4 SSD controllers for the auto applications.
This revenue was starting by 2024, and this also need to occupy a lot of R&D resources. We never slow down, even though the economy today is low, we keep investing. PC makers also a few came to us to ask to customize storage into their laptop, which you may also agree, Apple now become the number four market share in the PC, which a lot of PC makers, they feel they've been threatened. They need to make something different on the product. Phison now helping them to customize our controllers and modules. Smartphone. Android phone, other than Samsung, the rest most likely from China. We partner with most of the Android phone made in China. We're helping them to customize our UFS controllers to make the differentiation of the phone compared with the others.
They're able to get some extra value on the phone. This just to deflect, we read in the Western companies start to lay off 10%, 20%, 30%. In the NAND industry, we also keep hearing somebody going to cut the headcount, cut budget, slow down the activity, they cut CapEx. We believe, Phison, we have a very unique position. We cover full range of our business. Every single NAND user, they ask Phison to customize for them. We need good enough of a talent. I decide not to cut, I decide not to slow down. We keep our momentum in the development. We believe in the next pickup, Phison, we are more ready to get the business opportunity.
We keep investing for the coming five years, auto, data center, enterprise, PC, smartphone. We keep investing in the people, no layoff. We continuously expand our R&D headcount. Of course, in Taiwan, we believe now we are much easier to get the talent. I believe many design house from Q3 and Q4 and next Q1, I think they have to suffer the headwind. Phison, we are healthy in the cash flow. We have many business portfolio. We are going to pick up the most good talent to join Phison to developing our future products. Okay? The NAND market, personally, I believe will back to normal very soon, and we have to make Phison ready before the market back to normal.
To share some of our Q2, Q3's design-in projects. In OEM, we put our solution into the FIPS application, which is for high-end secure PC. Our Gen4 SSD also already design-win shipping to all the Tier 1 PC makers. Gaming-wise, we also recently get some casino gaming. After the COVID, everything back to normal, the casino business slowly coming back. They start to invest in new equipment. Phison's products, we are successful in designing into many equipment there. In automotive, in the data center, we have a partner with SemiKong and also with Seagate. We believe very soon with the hyperscalers and the Tier 1 storage companies, we are able to deliver our products there.
We're also putting our high-end Gen4 into the CT scanner. Of course, this is a higher market with a much higher growth margin. We keep developing and make a lot of design win into the systems to make sure in the next pickup phase we are good to growth. The NAND market, the price, the wafer price cutting close 30% from the Q2 to Q3. Personally believe by Q4, don't have a big room to cut. Few manufacturers start to announce their wafer cutting in production. By Q1 next year, we believe the wafer output will declining. Means the market will start to feel supply is not that much. In this case, the market will back to normal. We believe the NAND in this price-wise is going to touch bottom.
In demand side, we need to wait until this is nothing we can control. Downturn in China, the war in Europe, the inflation in the U.S. We don't know what's going to happen, but overall, in the NAND application, we don't see big room to drop in this industry. We keep increasing our headcount in our development. Of course, the expense is huge, but we decide not to slow down. The reason not to slow down, we believe the NAND market will pick up very soon. Let's see what happens. Okay. Phison today looks like we are the only one player which able to manage the service from the IPs, from ASIC design, firmware design, and the full turnkey design. We are the only one survivor in this market.
The market in the NAND products getting more systems players that need to customize the product. That's why either they go to the NAND manufacturer or they can only come to Phison. We are potentially to get a lot of opportunity. In order to fulfill this opportunity, we need to have a big portion of talent to make the service. That's why I'm keep saying we are not going to slow down our R&D investment. Okay. I'd like to make today's summary. The fact is the market, I think I no need to spend time to tell you what happened in the market. You know what happened in the market. In the supply side, the NAND makers announced the production cut. They slow down the wafer input.
The cycle time of a 3D NAND is around 70-90 days. That means after two to three months, the wafer output was declining. They start to decline. This last month, I visited almost every NAND manufacturer. They are cutting their CapEx. They are slowing down to increase their capacity for the next-generation flash. That means the bit growth in the coming years is declining. I read a number. Usually, the bit growth in supply side is ± 35 %, but they may go with the CapEx cutting next year, the bit growth only like 10%. If demand bit growth maintains 20%-30%, this will make a gap. This will cause a gap, supply and demand unbalanced.
We don't know when this happened, but the fact is, wafer production cut, CapEx cut, will make the big growth in the sector after three months and after nine months declining. Back to the demand side, and no argument, by 2023, every business, PC, auto, smartphone, IoT, if you count by unit, definitely declining. Okay? Declining. Okay. Every system products, they need a NAND flash. We believe with the NAND flash price so cheap today, their new products, the flash which embedded into the system, definitely will start from 2x versus this year. Smartphone, which this year is model 120, and next year definitely will go to 256 GB. This will create the demand in the NAND industry. Controllers-wise, overall declining by unit, but modules gigabyte increasing.
Phison in controllers, we gain the new opportunity from the NAND manufacturers. Potentially, our unit in controller may also increase. On the other hand, the modules ASP also going to increase because of the demand in the content. Okay? I like to take the study on the history. If you still remember in 2008, before Lehman shock, the industry getting slow. After Lehman shock, flash market start pick up in 2009 Q1, and the foundry picked up only like Q3 2009. NAND flash industry is a early indicator. Okay? You can study this the 2008 history and back to today. We believe potentially NAND cutting in production, cutting CapEx, and NAND getting cheaper. The unit volume next year and system declining.
The unit maker, they need to improve their revenue. The only way is increase the capacity of a NAND. By this whole story, I personally believe the market in the NAND will get to a stable by Q1, and next, then we see when the demand is back to normal, then Phison is a time to take the portion increase in the market. This is my summary to deliver today. We have some Q&A we collect before, so I just finish this, then we can go to online Q&A. We keep very good healthy in the cash flow, but we believe we still need investment, and we need the cash to buy cheapest inventory. We put our priority.
Our priority mainly our cash is going to the technology development, to talent, to our business, then shareholders. We are taking our shareholders by when business turn to good. Investors also concerned about Phison, this is an impact. Okay. Transparently, by Q3, our inventory write-off is close to TWD 1 million (New Taiwan Dollar). I think this is most write-off. In this Q4 and Q1, the number will become much smaller. Okay. What we're trying to do, at this moment, we if a flash price is under cash cost, we better to buy as many as they want to sell. Okay. In this case, after they're below cash cost, they are not willing to produce anymore. The market will turn to upside very, very soon. This is our opportunity.
We keep diversifying our business into the different, many different application. Of course, controller is our mainstream, but when market turn to regular, embedded ODM will become our next growth. Enterprise SSD by next year also will become our big growth in our revenue. Investor may also worry about Phison gross margin. We are 24% still, follow 27% ± 3%. This was due to the 5% inventory write-off. By this Q4, we believe we still able to follow within this window. Okay? Then we have to wait until Q1. Everything back to normal, then we can back to our usual business. So I'm not much worried about our gross margin. Okay. The reason the equity research saying Phison's, our, next year profit potentially may go to the twenty.
Phison, we don't have the guidance in the finance. Take it simple. 2008, by September, Lehman shock. The whole market turned to super weak in the Q4. NAND market start to bounce back by Q1. I give you a number example to you. 2008, the whole year Phison earn EPS is close to TWD 4 (New Taiwan Dollar). 2009 Q1, the EPS is TWD 3 point something (New Taiwan Dollar) . Okay? We believe when market turn to regular with Phison's, our business portfolio, our readiness in the, our products, and with the low average cost in the inventory, we believe we can get a much better profit from the market. I'm not that much pessimistic about 2023. Okay?
At least just now I showed to you the NAND cap production, the demand may go to double size in the systems. Overall, what we like to wish is the market back to normal. Okay? I don't know when, but we keep waiting. During this period, we make ourselves ready in developing the new products and the engineering, and also make ourselves healthy. To be very honest, we got so many inquiries from the system makers. The only my head, my pain point today is I don't have that many engineers. Every Monday, I talk to my executive, I need this, I need that, but they keep telling me, "Not enough, not enough, not enough. Engineers is shortage," and this, that.
Now every Monday we have a priority to pick up, which is much potential business with a better profit to us. Overall, we don't worry about the business. Only worry is that they got so many businesses, but we are not able to cover. Talking about the ESG recent update. With this Sustainalytics in 2021 was 32.5. This is a high risk. Then 2022, we are medium risk. Okay. We improved. MSCI from CCC, we upgrade to BB. We improved. The SGI last year 62, now 74. We improved. In the Taiwan corporate governance, now we are in the top ranking 20% from 80.5 to 88.
We're doing a lot of internal governance policy to make sure Phison is going healthy and going transparent. This is today's our presentations. Now we can open to online's Q&A.
Thank you, K.S. Now we begin the Q&A section. If you would like to raise a question, please use the Raise Hand function. When it's your turn to ask a question, please remember to unmute yourself by clicking on the microphone icon, and mute yourself when done. Thank you. The first one to ask a question is Tate Chen. Tate, you can unmute the line. Thank you.
Hi. Just a very quick one, 'cause you mentioned that you already got rid of most of your inventory in the third quarter. In the fourth quarter, the price cut magnitude will be smaller. Does that mean your gross margin will likely increase a little bit in the fourth quarter? Thanks.
Okay. The new IFRS guidance, if you buy cheapest component from supplier, your inventory have to adjust your cost. This happened by Q3, big amount, cost end up in the write-off. By Q4, potentially, we're still able to get from different part number, which is cheaper. Of course, buying cheaper we are more than happy. But buying cheaper, we also need to write off the inventory. Okay. The ratio, Q3 was a 5%. Q4 we believe is a much smaller. Okay? Second, because the wafer price already declining in the market, especially like China module house, they have a big minus in the inventory. They have to dump. So the market, the product price still getting weaker. Okay? I expect my margin can go better, but we need to see by November, December, the module house, they keep cutting.
If they keep cutting, we need to keep the revenue, we have to follow. If follow, we have to suffer a little bit lower margin. It is what it is. Until next Q1, when every system makers, the module house realize, "Oh, wafer output declining." Okay? Next, Q3, the new generation flash because of cutting CapEx, right? They push out the new generation flash output. Next year bit growth down to like 10% or single digit. The market turn to stable. That time the gross margin will start to differ. I don't expect Q4 margin. Definitely, I believe Q4 margin may be slightly better than Q3, because I no need to cut their extra 5%. Q1 or Q2, we can turn to much better. Okay.
Okay, thanks. My second question is that regarding that you expect the demand to eventually come back. When do you think this will happen? I mean, in next year, second quarter or first quarter? Thanks.
Okay. Define the demand. There are two kinds of demand. The first demand is the worldwide economy. If economy turn to good, Europe war stop, the winter pass, the gas price going down, the China dollar policy release, then the market demand will slightly back. Okay? Second demand is, imagine if you are the smartphone makers, okay? Next January, you need to start to prepare your revenue budget for 2023. No doubt, by unit it's pessimistic. Means by unit wise, the market will turn down. The only way, if you are the Director of the smartphone makers, you need to try to put your ASP higher. Okay? How to make the phone ASP higher? The only choice is to put more NAND. This will create the other demand. Okay, I give you example.
If smartphone next year, for example, okay, cutting 30% by unit, means declining from 100 to 70. If smartphone inside the memory 2x growth, the NAND demand is 140%. You know what I mean? 70 x 2, 140%. Actually the demand in the NAND is increasing. Every new model planning starting from the Q1, then start to go production Q2 and Q3. I believe by Q1, when the market, the atmosphere turn to the stable, the buyer, they realize or the NAND maker, they are not going to cut price anymore. They need to make the plans. They will come back to talk about the demand. This will happen by Q1.
Hmm.
Okay.
Okay, got it. It's just a small follow-up. You say that the price may go down 30%, but content doubled.
No, I'm talking about unit. Unit.
Oh, unit. Is it the real number you shared?
No. I keep saying example. For example. For example, okay?
Okay, thanks. That's all from here. Back to the queue.
Thank you.
K.S. , I got a question in the chat room. The question is, how much does the exchange rate affect the gross profit margin in Q3? Will Phison buy more NAND from Kioxia to help Kioxia keep its utilization rate at healthy level, that Samsung does not cut utilization rate as other companies will NAND price fall more than expected? Thank you.
Phison accumulate inventory since last year Q4. At that time, the NT rate is around 27-28. The time went to the Q3, NT went to 32, 31, close to 32. Actually this helping Phison gain little bit gross margin from inventory. This is good. Overall, my cost in the NT actually is versus the dollars is cheaper because a lot of inventory collecting from the last Q4 and the Q1. Q2, we drew down the inventory. Q3, we also drew down the inventory. Sorry, I don't have you know, how many percent we are gaining from the currency. We don't make this a study, but next time we will prepare. NT getting weaker actually is helping us for exporting.
This is no doubt. Okay. Second question is about the Kioxia. Yeah. Kioxia is a Phison partner since 20 years ago. We helping each others for many, many years. Without Toshiba Memory, by 2002, Phison already gone. Already gone, okay. They're helping us in every cycle, 2004, 2008, 2011, 2016 to 2019, when NAND cycle turn to terrible, Phison always work closely with our partner, Kioxia, Toshiba. Then the answer, yes. Actually, by Q3, we are start to helping them to take some portion of inventory. We believe by Q4, Q1, they may have a potential big portion, okay, we're to help.
This, if Phison start to go to cover this inventory, the market may feel, "Oh, when Phison start to go to have a big buy means it's almost touch to the bottom." This is a signal we are going to release to the market. Kioxia already announced by early October they are cutting the wafer output 30% by CQ1. What I can share with you, this is the truth. Okay? Saying Samsung don't cutting production, I can't comment because the transparency of Samsung is yeah, I don't know how to comment. Personally, I don't believe because with this inventory level, Samsung is highest in the NAND industry. Okay?
If they keep producing, they are not able to sell, this will force the NAND price go below the cost, the cash cost, which is, I don't believe Samsung also able to suffer for long term. Anyway, no comment. Okay? We are working close with our partner. We are helping them. We try to take their flash to make the more design win, which is similar to 2008. We able to enjoy 2009, the bit growth in the profit. Yeah. This is my answer.
Thank you. There's another question from the investors. What's the impact of the U.S. ban on sending chip tech to China for Phison, and what's the advantage and disadvantage? For how long it will impact the SSD business in China and around the world?
Phison's our products actually never touch to the so-called U.S.-mentioned national security industry. We are not going to the military. We are not going to the high computing AI. We are not going to go to the kind of sensitive business in China. Basically, Phison products in China market, we're still very, very safe. Okay? Talking about current trade war, the sanction in the China, personally, I think Phison potentially can take the much better position in the market. The reason is, I think no doubt, eventually China will build their own systems. They will have their own ecosystems, which Phison still as a define is a Taiwanese company. I don't know how to define if the tech is local or foreign. I no comment. We have our subsidiary, our partner in the local China.
They, because of a reason, the trade war, they are successful to get almost every phone makers' 2023 major business. Major business, okay? Today, if talking about China industrial, phone is mainly dominated by the China. I don't think PC dominated by China. PC is still dominated by U.S. Data center is still by U.S. China is a kind of a consumption. Talking about the phone, actually is mainly dominated by China manufacturers in the phone makers. Our subsidiary, I'm proud, excited to read now they are become the key supplier to work together in the phone. Phone is a consumer products, nothing related to the national security issue. Basically, we think we are good at this moment. Yeah.
Thank you. I see we have questions from Jason. Jason, you can unmute the line. Thank you.
Thank you for taking my questions. Can you give us more color on your SSD controller business? Do we see any price pressure or achievement slow down in third quarter and in Q4 or coming quarters? Thank you.
Yes. To that PC, which from every public information, big inventory. Those big inventory actually is a previous generation model, which is a PCIe Gen3. The material is a PCIe Gen3. In the market, they have a huge number of PCIe Gen3 drive. Gen4 is a new model, still picking up, but due to the demand slowdown, the PCIe Gen4 demand also slow down in the PC industry. Personally believe, we talked to all the PC makers, we believe by Q1, they may start to talk about next year's business. Right now, the controller itself for PCIe Gen3 is almost gone. Luckily, Phison, we are not in the PCIe Gen3 PC OEM. Okay. We are not. We are starting from PC PCIe Gen4. PCIe Gen4 wise, we are still doing okay.
We also gain some extra NAND manufacturer project for the PC PCIe Gen4. Now we are developing for them. In PCIe Gen5, we also requested by the two PC makers to develop the PCIe Gen5 for 2024, second half of business. To make it short, PC market, PCIe Gen3, gone. Luckily we are not a supplier there. PCIe Gen4 still growing, but recently a little bit slow. I believe by next year, PCIe Gen4 will be back to the momentum. Okay?
Yeah. Thank you. Do we have any plan to control our wafer input to reflect or to control our supply from our foundry suppliers?
This is a very embarrassing question. Unfortunately, foundry saying they are going to raise the price by Q1 again next year. We personally, we are not able to raise the price due to the weak demand. As a business partner in the ecosystem, we need to help our customers. If market turn to slow, we need to keep the price flat or, you know, make some discounts to support them because the market is terrible. In this case, we are not able to place much wafer since foundry is saying they are going to raise the price. Who knows, next Q1, if markets still turn to bad, we don't know if foundry policy may change. In wafer, in controller, supply chain, we are now become very conservative.
In the NAND supply chain, we are getting aggressive because the NAND price already almost touches their cash cost in production. Okay.
Yeah. How about wafer input? Do we plan to cut the input?
Slow down. Slow down.
Slow down.
Slow down.
Do we face any, you know, prepayment or penalty from our foundry partner?
No. No, because the facility is not ready yet. It's starting by second half 2023.
Yeah. Okay.
Yeah.
My last question is regarding your operating margin and operating expense. You mentioned that you will continue increasing your development on the new product lines and also increasing your tailored account. Do we face any pressures on operating margins if we see you know the both top line and the gross margin pressure due to the demand headwind?
Yes. This is why I was struggling a few weeks ago. Either we slow down or we keep expanding. The reason I decide to keep expanding is because when I look to this NAND industry, I personally believe by Q1 everything will go back to stable, then the demand will rise slightly back. I may only suffer one or two quarters. As you're saying that expanding, gross margin, we are suffering, we probably, best case, we suffer one quarter. Worst case, no more than two quarters. If I slow down or I decide to freeze, but we got so many project requests by our customers, our ecosystem suppliers. If I slow down, means I'm going to lose a six-month window.
If next pick up the project for next year, Q3 MP, next Q4 MP, we may lose the opportunity. Based on today's my knowledge, my study, I think the best case is we keep our activity. We may suffer, yes, you're right, I suffer, but one quarter. Just take it. Okay. On the other hand, Phison, we have a very healthy cash flow. We have many inquiries from the customers. If today we lost the project, I mean, if customer cut project, then I have no choice, but unfortunately we got so many inquiries. I can tell you every week, new project coming in. Of course, with the new project, we start to ask NRE as a service cost. This also can help me to cover my initial investment, helping to improve the big gross margin. Yes, I take your word.
Months ago, I internally discussed where the struggle is, which way is better. Anyway, the decision made, we keep continuing. Let's see if Q1, the market turns stable. The market in the NAND, I'm talking about NAND, okay? No other. NAND, the confidence level getting higher, then I don't feel any pressure after that.
Got it. Thank you. That's all of my questions. Thank you.
Thank you.
We got two questions from Donnie Teng at Nomura. The first one is only 10% to NAND company's cash cost. Does that mean only 10% downside to the NAND price? What kind of ASP erosion will be in Q4 and Q1?
Yeah. By Q3, we believe it's touching the small gap, and then, versus the cash cost. Talking about the modules, I think I'm hard to answer this question because if they have a crazy killer, okay, from China module house, from the NAND manufacturer, they need to dump inventory. They can cut price 10%, 20%, 30%. It's hard to, you know, make a you know explanation. Phison's products, we got so many is so-called design win project, which customer, they're not able to replace immediately. They also agree with these products, they have to pay some premium. If Phison products most likely is in the retail, I can tell you, we need to cut the other 20%, 30%. Most of products is go to the embedded system with their customizations.
We just adjust a few percent in the selling price. Customer may feel good. Especially in the auto industry, customer didn't ask. They only ask stable supply and better service. I'm hard to explain how much margin may impact, okay, in our products, right? By overall quarter end, when we release a report, I think we can be good. Again, I keep reminding, we have to watch next Q1, what is going to happen in supply side. Okay.
The next question is that we suffer from a net profit loss in certain quarter during the financial crisis. Due to we have much better product portfolio and better sales scale, how does management think the downside GPM and EPS will be in this down cycle?
Of course, by Q3, we suffer 5% write-off. 5% convert to the EPS is close to TWD 4 (New Taiwan Dollar). We suffer TWD 4 (New Taiwan Dollar) in earnings per share. By Q4, I think we still need to write off a little bit, so maybe between TWD 1-TWD 2 (New Taiwan Dollar) EPS. The rest is gross margin suffer from the competitors. It's still hard to give you what kind of guidance, but I have confidence by Q4, the gross margin we're able to keep versus Q3 or maybe slightly better. Because our cost in the component decreases a lot. Earnings per share, our fixed cost is there, our operating expense is there. I'm not going to cut headcounts. Yes.
The earnings per share, we may have to face pressure. On the other hand, potentially, we still have an investment. We can go in to assess our investment to take some profit back. I'm not making decision yet, so we have to wait until December to see what's going to happen. On the other hand, the weak NT also helps us in our gross margin.
Thank you. Next question is demand elasticity to prices stronger or weaker this time compared with previous down cycles when we have higher revenue mix from retail and consumers?
Well, can you repeat? Sorry, I didn't catch the question.
Is demand elasticity to prices stronger or weaker this time compared with previous down cycles when we have higher revenue mix from retail and consumers?
Okay. I'd like to explain to you why we keep the consumer business. When next bounce back, when market turn to good, the first bounce back will be the retail business. At that time, this will help us generate good gross margin rate. That's why, you know, we have a full range of products. Okay? Every single day, some products may suffer competition, some products we may be able to enjoy. That's why in the last few quarters, our gross margin is quite stable. Even though today, Q3, the market turned to bad, take out the write-off, we still maintain 29% as a gross margin. This is because of every diversify to every different application. When next bounce back, consumer business will help us a lot in the profit side.
Next bounce back, we are going to focus to the consumer market first to earn better profit. Okay?
Thank you. What's the percentage of revenue for China by now? As the revenue all went through Hosin-Global or Phison has other direct path for China sales.
Hosin. Okay. Phison's by this year, our top 10 customers, not any single larger than 10% revenue. Okay? The top-ranking number one, number two is below 10%. Hosin is like our top-ranking number five. They are helping us to cover the China market. By this, Q2 top down, the China demand dropping, you know, big number. Overall, Phison's, our business mainly still managed by the semicon U.S. and Japan. We have started to have some Korean semicon business. The whole market talking about the cloud data center is U.S.-based. Talking about the smartphone, yes, it's China-based. I have no number to show you, China how many % in our revenue, but Hosin is helping us to cover this and they gain the good opportunity for 2023 China smartphone makers.
This will help Phison a lot. Okay.
Thank you. Will the IPO schedule of Chinese subsidiary be delayed? Will there be a subsidiary equity disposal plan this year?
It's hard to give a comment because they are managed by the Taiwan and China's declaration. Let's see next year if they are going to apply to go to IPO. I can't comment.
Got it. Thank you, K.S . That's all the question I've got from investors for now. If other investors would like to ask their questions, you can use the Raise Hand button, or you can just type it.
Okay. Yeah, just a reminder, it's 6:00 P.M. already.
Okay.
Yeah.
I see Jason still has a raised hand up. Jason, do you still have some follow-up questions?
Yeah. Yeah, I have. Thank you for taking my follow-up questions. It seems like your embedded ODM power lines still had a strong growth in Q3. Can you give us more details or outlook on this business? Thank you.
Okay. This embedded ODM mainly is a design win project to smartphone, to PC, to data center, to a lot of IoT medical systems. We define it as an embedded. I mean, this is a module business, okay? The average, the capacity per device, last year was like PC is 256, now we moved to 1 TB. For smartphone, last year was like 32-64, now migrate to 256 GB. To us, as I keep mentioning, embedded ODM will become Phison's much bigger portion in the revenue because this is a module base. Just unfortunately, start from Q2 top-down, Q3 market turn down, so that's why we suffer. We keep a lot of design win activity in the mobile, in the computing, in the IoT.
When market turn to good, this portion will become much faster growth in revenue and will become our biggest portion in the revenue. Okay?
Got it. This business may have the, you know, better or lower reductions than end market. That's right?
Yes.
Got it. Thank you.
Okay.
Thank you. We have one more question in the chat room. K.S. , can you give us some color on 2023 bit growth?
Bit growth in what? In buying, in selling? In supply side? In demand side?
In selling.
Next year, basically Q1, if market turn to the stable, then customer more willing to place the order. Today we are making the enterprise. You know, enterprise is mainly a few 10 Tb high capacity products. With the enterprise, we are starting making a lot of design win. Next year, enterprise will become one of strongest growth in our business. I still don't have a number to tell you how many bit growth we're able to achieve, but overall, supplier ask Phison for next LTA, growth 40%. They ask Phison to increase buying GIGABYTE 40%. We are still studying, negotiating the price, the supply, and also we need to make sure we are capable to enable the full range of products to the system embedded application, auto and data center industrial.
Definitely next year, Phison's bit growth will be increased, but sorry to say I don't have any clear picture yet. Yeah.
Okay. That's all the questions for today. If there's no further question, let's end today's call. Thank you all for joining us today. Thank you, K.S., for your time. Have a lovely weekend. Bye.
Thank you. Bye.