If you can start. Good.
All right, great. Hi, everyone. My name is Jeff Ohlweiler. I'm Head of Research at Macquarie, Taiwan. Very pleased to be hosting Phison's CEO, K.S. Pua, for their third quarter earnings. We're at a very interesting time, I think, in the semi and memory cycles, and I look forward to K.S.'s words of wisdom. With that, I'll pass the mic to K.S. for the overview. K.S., please.
Yeah. Thanks, Jeff. Good afternoon, good morning, ladies and gentlemen. Welcome to our third quarter's earnings call, okay? Let's restart. Today, I think we prepare over 50 page, so I need to move a little bit faster. Today, we are also like to bring you some more new, our transformations to share with you. Okay, we're collecting the memory companies since Q1 this year. Based on their public information, the Q1 total loss, NAND and even most likely it's the NAND, it was $10 billion. Q2, Q2 was $9 billion. Q3 up to now is -$6 billion. So we can see the loss is getting... The gap is getting smaller, so I think this is good sign.
You also realize from the market, the NAND company, they're cutting the production, and the price recently bounced back, like, over 70% within three months. Okay, let's move to the Phison part, okay. This is our Q3, our pie about our business. So few things to share with you. Controller in Q3 increased some portion just because system company, our NAND controller NAND company, they're buying control from us. They are suffer some inventory adjustments since the last year, Q4. But, inventory start to move, and after the Samsung announced to cut production, demand coming back. So start from August, September, their control demand is a little bit coming back. So our ratio in controller actually is increasing from 26% up to 29%, okay?
In consumer portion, actually, we increased it a bit because CQ3 is moving to the Christmas season. And also, thanks to Samsung saying the production cut, we are taking some more advantage, revenue increase in the consumer. Embedded side, many smartphone and the PC OEM, also the demand coming back, we also gain the share, so moving from 9% up to 12%. The only slow portion is industrial. I think you also realize from the market, industrial is a little bit—not, not little bit, it is quite slow. Maybe industrial will be back by next year, CQ3, CQ2 or CQ3. But overall, Phison, we're good because we have a good diversify.
We can foresee the controller is going to increase the modules for embedded, from gaming and for consumer, also going to increase. We are happy about our revenue growth in the Q3, and very healthy. The total revenue, I think you already get from public, Q3, the revenue is NTD 12 billion, and gross profit is NTD 3.9 billion. The good thing is, gross profit, YOY and QOQ, we are improving. We also see the cycle back to normal. I think we are able to perform much better than the last two, three quarters. This is our revenue trend. I think we suffered more over February to May. I think we passed the most difficult period.
So CQ3, we're back to our growth. I think it's around 20%. CQ3, we are working super hard. Hopefully, we can have more growth. And next year, I think we are very optimistic. Okay, this is gross margin. Our CQ3 margin is 32.2%, is the third higher in a single quarter. And we have the reversal from our write-down inventory, 0.7%. Okay, 0.7%. So, CQ2, last quarter, we are still well off inventory, but CQ3, where market start to bounce back, we are slightly, gradually to write down our inventory well. So I think this is helping to our gross margin in the coming few quarters. Okay, this is earning per share, okay? Earning Per Share is NTD 4.32.
We are growing, but we also like to report to shareholders what happened in this pie, okay, in this portion. First, our associate account using equity method, which is Hosing. Hosing Global, they turn to profit at the CQ3. As they at the CQ2 earning call, I already saying that they are able to turn to profit, so I think it's good to us. And also in CQ4, I can see they are start to enjoying their much better profit. And one thing we like to highlight, Phison keeps saying that we are investing, heavy investing into our R&D activity. We are tape-out a new controller, PCIe Gen 5, 7-nanometer, happened by September. And just one tape-out affect Phison EPS 1.85, so you can know how expensive this investment. But anyway, this happened by September.
The one is about the share-based payment, actually is a treasury share. Phison, we bought back the treasury share by last year. Last year, I think it's Q4, and this Q3, we exercise some portion of the treasury share to our executive. And this also affect the EPS is 1.36. So this is, the breakdown about our earning, but on the book is a 4.32. But overall, I think, we are back to really, normal like year 2020, 2021, 2022, first half. So we also foresee Q4, the, revenue and the, profitability will get much better. Okay, this is our, some, income, statement. We have a few highlights here.
The gross margin, actually, we still keep around 32%, which is the third higher in our single quarter. And the OpEx, we need to highlight OpEx. Actually, OpEx, just as I mentioned, the mask cost increasing around NTD 0.45 billion, and the share-based payment was NTD 0.342 billion, and mainly is for executive and R&D activity. Okay? And revenue-wise, we are growing. Gross margin, we keep steady, and overall, earnings per share is improving. For the first three quarters, nine months, again, the OpEx is almost similar last year. The reason is, we have a new tape-out, our 7 nanometer, and also we start to hire new engineers to prepare our next growth. Okay?
So, overall, the earnings per share, we are growing by quarterly. And also, I also happy to see coming few quarters, we're still able to maintain the growth, the growth trend. In the balance sheet, the cash flow-wise, we are still keep very healthy. Inventory is... Actually, we start to suffer some NAND flash component under supply. So very strange. Two months ago, supplier came to us, Phison, to buy more. Now it's the time Phison go to them to ask them: "Hey, please ship more to us." But anyway, we keep very good relationship. I believe, we're still able to get the more sufficient supply from our suppliers. Okay? So overall, this is our balance sheet. Okay. As we also disclose our non-GAAP report.
Based on the comparison, okay, this is our operating profit. The thing I need to highlight is mainly our treasury share to our employee, happened by Q3, cost us NTD 342 million. So, back to the non-GAAP, the operating profit will improve from 4% to 7%, and the net profit improved from 4.22% back to the 9%. Okay? This is the one, we also agree we need to keep heavy investment into our human resources, so we start to use our treasury share as a compensation to our employee. We still maintain, like, high portion of treasury share on hand. We only exercise by one-third of our on-hand treasury share. Okay, this is about October. Revenue is 5.15 billion.
It's up 3% MOM, and overall revenue worldwide, the YOY is down 27%. And remember, first half, YOY was minus 40+% . We are doing our best to reduce the YOY down to like 10+% by end of this year. We are keep working very, very hard, and the demand in the market is still very, very strong. Okay. Today, I'd like to share some concept, idea with you, and also we'd like to share the clear Phison, our new transformation, how to grow Phison in the future, okay? This is, today's actually is, our key point. For so many decade, two decade, Phison after IPO, many analysts, fund managers, investors, keep complaining: "Phison, you are building modules. Modules value is low.
Modules, you know, are less attractive to the investor." But we made a study about what the so-called modules. Actually, Phison, the modules we are starting from the chip design, IC design, system design, firmware, software design, as our foundations. Then we turn to business, mainly to the module business. Why? Because this able to add our value, our ASP, and also our gross margin as a dollar amount. So we keep working hard for two decades, but unfortunately, we're still not able to convince the most of the analyst, shareholder, that we have a better value in the main industry. So I take the two example to share with you. Okay? These two company, they also start with a chip design, but their revenue is not coming from chip design, it's coming from the products, from the modules.
And this to prove that chip design, if you are in the short term of a business, the investment today, just a 7-nanometer tape-out, will cost Phison close to NTD 2 EPS as an expense. This is too heavy. By selling controller, I don't believe we are able to take our ROI back within 2-3 years. If I'm not able to take back 2-3 years, then I'm not capable to keep the investment. Next year, we have several 7-nanometer chips need to be tape-out. So we need to find a way how to earn back the, our dollar amount profit. So these two examples, A company and B company, to show you. Selling a module is not a bad thing.
Selling module is helping you to get a more ASP and gross margin in total amount, but you need to have a foundation. The foundation is chip designs. So Phison, we are fully exercise our chip designs to the modules business model. So what's the key value here? Okay, we try to put the value add into the system with our design capability. At the end, what we gain? What we gain is ASP improved, gross profit improves, dollar amount income improve. Later, I will show you more about the terms of each industry, then you may more agree what Phison's our transformation turn to the much positive direction. Okay. Phison, again, since two decades ago, we are saying that we are not just a pure controller house, we are not pure module house.
We are the module house with the add-on value, capable capability in the IC designs. Okay. So, Phison, we are going to have our internal slogan to our all executive and our staff. We are going to have a foundation that accelerate innovation. What is innovation? In this four years, from the press release, from public, from Phison PR, you may able to read Phison. We announced our imagined design service. Recently, we have a partner from, a U.S. company. They announced the new Gen 4 performance SSD, which get the best review. The review, very positive review from their every reviewer and the PC company. That controller is a follow with so-called IMAGIN+ design service. Okay? We also provided a cutting-edge technology, like recently we have some, new concept on the AI and adaptive.
This try to build a NAND into the, GPU training systems, and we also build the ecosystem in the EV industry, application and gaming. Okay, this is our innovation, but why Phison capable to deliver from nothing design to the products? Because Phison, we have very strong foundation we built in this two decade, okay? We keep investing into the R&D activity. We keep working very close alliance with our, main partners, system partners, gaming partners, EV partners. So Phison is going to transform ourself from pure design house, module house, to the so-called value-added modules. But we have a IC design capability, which we try to learn from today's, GPU company, the phone company.
I believe with our keep heavy R&D investment, we can make it not very soon, but in few years, we can show you Phison are more capable to have a more service to our NAND supplier and also to the systems users. So we are going to try to grow Phison to make ourself big. Today, board meetings, we approve two motions, okay? We are. The board members, board meetings, approve Phison to make a prepayment to one of our NAND vendors to secure Phison 2024 NAND supply. Why? Based on today's the market research firms, flash was in oversupply since actually Q2 2022.
But based on the forecast, start from second half of 2024, maybe 1.5 years, the flash will be in under supply, and the gap is not just a few %, maybe close to the two-digit. Phison, we need to grow our business. We engage with the many system company. We need to have secure more NAND supply. So we approve to make a prepayment to one of our main partners, okay? Second, we learned in this last down cycle, we accumulate a lot of NAND flash, but I can share with you, by end of July, we still suffer the high inventory. By end of September, we are suffer every NAND component shortage. Why we shortage?
Because after September, we went to the NAND supplier, they are not willing to ship as many as we want to Phison. So in this two years experience, we learned we need to have a cash to keep our buying power and also keep in our inventory. And also, we need to have more cash to support our R&D activity, especially next year, we have many seven nanometers going to tape-out. These seven nanometer are request by a lot of a system company and also by the NAND company. We are going to integrate our AI engine into our SSD controllers based on seven nanometer. This is a heavy investment. Of course, the customers will test some portion of NRE, but we need to increase more test portion to help us to grow Phison, our business.
So this CB is going to apply by today after both members approval, and I believe with this CB to make the Phison stronger in finance, will help Phison's 2024 and 2025 business to get a strong growth. Again, as I share with you, July, three months ago, four months ago, we suffer low inventory. September, we suffer shortage in our inventory. So we learned that we need to accumulate more inventory when it's a down cycle to help Phison growth, our revenue, our profit, and our influence power in the system modules business. So, and for many research report, almost everyone agreed second half 2024 will be shortage. Phison, we wish we are able to collect more inventory by coming CQ1 to help us to have a growth in the 2024 and 2025. Okay. Business highlight.
Today, I think this is our new segment to share with you how Phison is going to transform ourself and what is the room Phison is going to grow. This is from some marketing data talking about client controller. The TAM of controller is a $1.4 billion+, because the controller recently, the price is dropping a lot. And the module itself, retail and PC bundling, is $20 billion. Phison, we made a study of Phison. We are gaining, like, 24% of a controller market share here. Even though Phison going to 50%, if we keep 50%, it's only like $700 million. It's good, it's good, but I feel not enough to Phison since we are invest that heavy on the activity.
And we getting the NTD 2 billion revenue last year, probably this year, I think, we still able to, we are declining, but we try to reduce the gap. But in the SSD module, Phison is only 3% of total TAM. So imagine one thing, controller investment is getting so expensive, and I don't believe any single controller house are capable to invest any new controllers with 7 nanometers if they are not able to get back their return from the business, okay? But Phison, we keep investment. Again, Phison, we are not going to sell controllers to the market, except named company and Kingston, our partner, and Hosin in China, our partner. So we only pick up few controller customers. The rest is going to modules. So we, Phison, still have a big room to growth in the module business.
I think it's a simple, if this market, if a less controller house means less module house, the reason is the first module need controllers. So Phison, we believe with our strongly investment and our transformation, I believe we have a much better, bright future in the storage business. So this is a client SSD, the TAM. Second, we'd like to show you automotive. Controller by report, actual controller in automotive is small. Mainly, it's a eMMC, and the module itself is around $3 billion+. Phison, we are good in controllers. Even though I get everything hundred percent, but still, like, $200 million. But in the module wise, we are less than 1%. And the good thing is, in these two years, Phison, we again, we work with many ecosystem partner in the automotive and EV.
We already gain 15+ of the top 20 car makers. Many still controllers, but some we already start to move to the module business. So we believe we gain few percent, few percent in this module TAM, then I think we are good to grow ourselves. And the mobile storage, okay? Controller-wise, because controller mainly is an in-house controller, we are good in the controllers, eMMC, UFS, but in the modules, we are only 2%. And since the mobile China low-end makers, they are going to use a discrete flash and the DRAM discrete to reduce the cost. High-end still MCP, but middle low-end is a discrete. So start from the August, where market turn to strong, we are gaining a lot of orders from the China mobile makers.
So if we able to grow a few more % in this business, we are good in our futures revenue and our gross profit. Gaming storage. Phison, we are the key player here, but even though key player, Phison only has 7% of the total TAM. So we are expanding our gaming business. We have a controller, of course, we are trying to get a more module business to grow our revenue. So, this is to just to show you, the room Phison able to grow in the coming futures. Enterprise. Talking enterprise is a $25 billion. I don't know how much controller revenue, because, not any single controller house can survive in the enterprise. Too heavy investment, but the return is almost nothing. Phison, we are again, in the revenue-wise, we are totally nothing in this industry.
So since the price already, price going up, start to shortage, our design-win activity start to gain the order. Recently, we get an order work from one of, data center supplier. Small order is around $4 million. So we believe when everything turn to normal, Phison can gain some percentage in this, enterprise, help to grow our revenue and again, our gross profit. Industrial storage. We also don't know how big the controllers, but Phison, actually, we are doing it quite good in this, portion, but, just only like 15%, okay, of the $2 billion. So we believe with our full range of controller development, full range of, system module development, we believe we can get the more shares in the industrial storage. Space storage.
Again, this market is very, very small, so don't expect that much, but this is to show Phison's technology muscle to the market. Since we work with one of our partner in the U.S., we launched our SSD. In this 10 months, we gain many, many orders from North America, from Japan, and from Europe. Okay? Of course, the order is a small, but at least to show Phison we are capable to move our products to the space. And we also gain a few project. It's a co-development with the space industrial company. So revenue is a small, but this is to show our leading technology to the market and our innovations.
So above is just to show you, then in the storage, if Phison, we are still stuck in the controller business, you can imagine our revenue, the ceiling is very, very low. But Phison, again, we transform ourself. We learn from the phone company, GPU company. Selling the modules is able to increase ASP and gross profit. So we are going to expand more in that portion. But the foundation is, Phison need to keep very strong IC design team, firmware team, system integration team, service team, validation team, and we are doing that quite good. And one good news to share with you in this world, other than the NAND company, only Phison built the world-class validation lab. Only Phison capable to do validation based on the NAND module system.
So because of this heavy investment, we are attract a lot of EV, gaming, phone, PC, industrial, space company, come to us to work, design from chips to the modules. So we believe with this design, with this capability, we are able to grow ourselves. This all about storage. Then we make back to the our Phison totally the new business is a signal conditioning IC market. Redriver, Gen 5 Redriver is a very small business, okay? Very small business, the revenue, but we gain around 50% in Gen 5. It's good, but the market size, to be honest, is quite small. I don't expect this can be, you know, grow that much, but this is, kind of a significant, to the PC, computing industry.
We are moving our Redriver into the EV industry, so this will help Phison to gain more storage business in the EV, r etimer. The good news is, Phison, we made so many design-in activities in this server industry, and our new tape-out, the mass production IC, is coming back by mid-December. We already has the enhanced order from the tier one server company. So we are happy to see that. So I believe once the IC coming back, we are going to ramp up our wafer production. In this case, next year, second half, we have a high expectation in our retimer business. So we believe we are based in Taiwan. Taiwan is the mainly the server company here. We have a language advantage, we have a geographic advantage, we have a, you know, relationship.
So I think we are capable to get a more share in the Gen 5 retimers. And the retimers, right now, we almost get. We just get the certificate from the PCI- SIG verification, and almost we engage every server designer in the Taiwan and U.S. So we also have a heavy design service, as we mentioned there, the new announced performance Gen 4 SSD is going through Phison IMAGIN+ design service activity. We are now doing the design activity to the EV company and also the phone company. We are working very close to the phone makers on the U.S.-UFS 4.0 activity. We have two phone companies working with us together. Okay. So last conclusion is, Phison, we need to build ourselves as a value add modules, but with strong foundation IC design activity. So this is our foundation.
With the system modules design, differentiation, value add, at the end, we are turning this everything to ASP and gross profit as a total amount. We need to grow Phison business. Okay. The last is, again, we keep increasing our R&D account, we keep increasing our, activity in the new customer account. This year, unfortunately, the R&D expense is, 21% of our total revenue. It's heavy, but, we have to. We've been suffer, since, CQ1, CQ2, and last CQ4, but I think we overcome the most difficult period, and I believe bright future to Phison is almost coming. Okay. So this is, today's presentation, and we collect a few questions to answer you, then we can go to the chat room and, live, questions.
Great. Thank you, KS. Yeah, so anyone have questions, you can either raise your hand, we use the raise hand function, or type your question in the Q&A box. So KS, I guess a couple questions for me first.
Yep.
You mentioned a few months ago, maybe too much inventory, now, not enough inventory. But if I look at your balance sheet that you put up there, it looks like the second and third quarter, the inventory was about pretty similar, about NTD 20 billion.
Oh, okay. Okay. Let me clarify that, okay? By July, we have inventory, but those inventory, we don't have a customer's placed order.
Mm-hmm.
But eventually, most likely, big portion already allocated to customers. I give you example, okay? By September, the order we collect from customers, we consume like 2.5 EB.
Mm-hmm.
Our NAND flash. January this year was 1 EB, but October, 4 EB. Okay, so it's a big growth. So inventory sitting in our warehouse is going to ship, okay? So democratic buy.
Okay, great. You know, we saw in October a good spike in both DRAM and NAND prices for contract. When did you start to see an increase in your ASPs?
Actually, ASP start increasing by mid-September. We get all the new order, of course, we bargain, we arguing with the customers. After mid of August, of course, the customer compromise something, we compromise something. So new orders start to ship by mid-September, so ASP increased after mid-September. Of course, October, the order we get, price increase again. So I believe MOM-
Mm-hmm.
The ASP keep increasing.
Okay. And if you look at your monthly sales, you had a nice increase in August, even a better increase in September, and, you know, still good numbers for October. Do you think it's real demand picking up, or do you think it's customers who are seeing prices start to go up, just essentially want product? Or do you think there's actually end demand is actually picking up?
Okay, I answer you by two, two portion, okay? First of all, customer side, they keep very low inventory. Actually, since end of June, system company, retail company, they keep very low inventory because Samsung saying that they are not going to cut, they can ship anything. So the customer thinking tomorrow cheaper, why they buy today? But after mid August, they keep low inventory. Samsung saying they cut inventory, so they start to buy, to the refill their inventory. End August is coming for Christmas season, so they prepare something for Christmas. So we believe 70% is a real demand, 30% is to refill their inventory. Second, Phison, I agree to you, September versus August, the revenue bumps up 20, I don't know, 20+% . October, almost nothing. The reason is, we have to manage our inventory level.
Actually, we can easily to clean up inventory by one night, any day in October, but we have to manage ourself. If we sell too fast, right, we are going to suffer our next cost up from our suppliers. So I believe the demand, 70% is real, but of course, economy scale is not that good. Some is going to the inventory. I believe, I believe we're still able to buy back some good inventory in December or January or February. I believe, I believe. So after that, when everything back to the spring model, the phone spring model, the notebook spring model, then the market will going to undersupply. Okay?
Okay, great. Once again, you have a gross profit margin over 30%. You know, obviously, it's been very good, especially given the difficult year. You know, I know things are turning up, but certainly third quarter is still pretty difficult. So how sustainable is that, is that very high margin that you've been putting out?
Yeah. If talking about this, right, I need to back to the seven years ago, okay? Phison was 2016, eighty percent in the consumer, but now you can see, right, we have a consumer like twenty-five percent. Okay, I want to share with you why July we suffer inventory-high inventory, September we suffer low inventory. Why? Because Phison making so many design-in, design-win. Into what? Into the gaming, into the industrial. And you don't know how many industrial system in the market and embedded ODM, many smartphone and the PC, okay? So we made a lot of design-win, but in the first half this year, demand was weak. When the market turned to good, every order coming back with a pricing increase, then we are able to keep our good gross margin rate.
The answer is, Phison diversify our business to every NAND storage. We cover full range of NAND storage. So even one product line, we suffer low margin, but overall, we can keep the good average. This is our value. Okay?
Okay, great. Next year, you know, it seems like we're setting up for a very strong 2024. Where do you see the biggest growth if you break down your products by, you know, end market or, you know-
Okay.
Not necessarily end market, where do you see the biggest growth next year and, you know, maybe top two growth areas?
Top two growth.
Whether it's, you know-
Okay.
Whether it's a client SSD or-
Embedded module-
Et cetera.
Embedded module for client, OEM, and also for smartphone, embedded, because this is mainly is a module business, okay? Gaming. We gain many gaming projects, so gaming will be big growth. But on the other hand, controller potentially will be big growth because this H1 , NAND company place less controller, but next year we already get a forecast. Next year, controller will be have the other big growth. And of course, the retimer, we are starting from nothing, right? Retimer will be the 2,000%.
Yep. And I guess kind of maybe next question on the retimers, since you mentioned that one last year. So, you know, as a newcomer to a small, well, essentially a pretty small dollar component in the server, you know, getting design-in is one thing, but how comfortable are you that you actually get, you know, pretty good sales and actually real shipments there?
Okay, first of all, server data center, right? We need to gain the trust, trust from the market, okay? We went to every server company, no matter data center, enterprise, ODM, OEM. They ask a question: "Who use your enterprise SSD?" And the answer is no. Of course, we have a Seagate as a partner, right? But Seagate made many, many design-win. Unfortunately, in the first half, no matter what price we quote, Samsung always 10% lower, always. So we are not able to get any room. But thanks to Samsung, they are saying they cut production, they are raising the price, giving some room. Phison able to ship our products to the market to prove we are good. Few more months, everything doing well, we get the trust. Then, we believe next year, flash will be tight.
We have our LTA. We have allocations. We believe some server company will come to us to ask for supply. So this is our good start. So thanks to the market. Without the market, we are not able to get any business. But also, we invest four years in this, Gen 4, Gen 5 systems. Everything doing good, customer happy. Price now, we're doing good. Then, I believe by 2025, 2024 will be the starting year. We start to get business. To get the trust, 2025, we are able to see the potential significant growth in revenue in enterprise business.
Okay, great. And on client SSD, you know, when you talk about that market, is your market in the notebook market, the desktop market, or both? And what's the main difference between those two markets?
Okay. Phison actually, everything start from consumer, okay? From retail, okay? But after we work with the AMD, with AMD on the Gen 4, 2019, we gained some trust from a CPU company and a PC company. So we gradually to gain some client SSD modules from the PC OEM tier three, tier two, now we are cover tier one, okay? For tier ones, we're starting at last year, still very small portion, but we believe Phison can be one of. Of course, we cannot be strong, the bigger player, we are not the NAND manufacturer, but if we are able to service every tier customers, 2%-4% the share, then we can get a lots of growth from a PC OEM.
Of course, the retail is still our main business. Yeah.
Okay, great. Let me, let me read some questions from the, the question box here. So do you think memory makers are able to reduce production further in fourth quarter 2023 and first half 2024? Or they have already reduced the production aggressively, so there may be less room for them to lower the production rate further, along with recovery memory price.
Again, I'm not a memory company, I cannot answer, you know, represent them to answer, but I believe, I believe the price today already bounced back from the lowest point, over 70%. Even 70%, they are still losing money. So the leader of a NAND company already announced they are going to raise more by Q1. So I don't know if either one already start to resume their capacity. I don't know, but I believe some already start to resume. Okay? So that's why I'm saying Q1, potentially may be a little bit slow because the system company start to adjust inventory and the production may be increased a bit. But anyway, we think this is healthy, the price won't go down anymore because the NAND makers, they are not willing to lose money.
But back to next year, I don't know, economy scale and many noise there, but based on the NAND industry, NAND industry, we can see the big growth still improving. The phone go to the 512 GB, the PC go to 1 terabyte, automotive go to the 256, 512 gigabyte. So we believe the demand in big growth is increasing. So I don't worry much. Next year, maybe Q1 is one of potential slow season, but after that, everything will be good.
Okay, great. Next question here: In terms of the controller competition landscape, it seems like Silicon Motion is still facing ASP and GPM pressure. Are you seeing any impacts from them if they still take aggressive pricing strategy to complete their inventory? Also, some Chinese IC design companies also introduce more controller products in the market. How do we compete with them if China also wants to increase its controller localization rate?
Okay. Talking about the main controller, we separate the two market, okay? Module company, mainly in China. NAND company, PC company, whatever is other than China, okay? No, we have no question. China, they have a few controller design house already, mature in SATA, mature in the Gen 3, Gen 4. And I look to their quotation, their gross margin is a low 10%. Low 10%. The SATA controller today, when the pandemic was, close to $3, now, I heard $0.70. In China, $0.70. So I thought to myself, "Hey, forget it. We are not going to sell anything in China." But the good thing is that Phison never sell controller to China Company, except Hosin Global. Our controller only to the NAND company and Kingston.
So we are not in China controllers, but if, if you are in China, you have to face to the China low 10% gross margin. So I think the controller ASP in China now is really ugly. Next year will be more ugly. Why? If NAND is under supply, NAND is a shortage, who is going to buy more controllers? So I doubt controller next year can be good in China, and if controller not good in China, then the gross margin may turn to minus, if you have inventory. Then talk about the other than China, the NAND company, okay? Yes, my competitors sign more recently, I don't know why, but I think I can know why. After fail in their M&A, they need revenue, they are be aggressive in the controller, according to China.
But to China, I think they cannot compete with Chinese company, either or they take loss. Then they go to main company very aggressive. I'm really clear my policy, okay? We are good in today's our gross margin. Since our modules in the gaming, industrial, and embedded, everything, we enjoy the good profit. By the way, we're still sitting with a good inventory. So if competitors willing to lower the price, I'm happy. I'm happy to follow, because controller is only like my 29%, but can be their 90%, so I don't worry about that. In China, we don't touch controller, but in other than China, we are going to aggressive if competitor, competitors going to aggressive. The reason is we are enjoying modules, good profits return.
Okay, great. I think we have a question on the line from Jason from CLSA. Can we unmute him in? Jason.
Yeah. Hello, can you hear me?
Yes.
Yeah, congratulations for the good results. So my first question is in terms of your gross margin in first half next year. We see demand is improving and also we face a pricing tailwind. So which is the major catalyst or drivers, I mean, for first half next year, I mean, for H1 or for ASP growth? Thank you.
Okay, I take this chance to give you the explanation, okay? Just a moment. Again, first, controller, we believe next year will be turned to strong because we made so many design win in the main company. Okay, so controller will be good. Consumer, I think Q4, Christmas is okay. C1 will be slow again, so consumer, just so-so, so-so, okay? And we are not much focused to the consumer anymore, because next year, NAND is shortage. We are going to move the more NAND into the industrial, gaming, and embedded, and enterprise. So next year, we believe the other big growth will coming from, again, from embedded, smartphone and the PC OEM. Gaming, yes, we gain many, many design win, so I think this is, we are expecting.
We design-win not only in the console, but also in the PC base and also the retail upgrade. Industrial module, I think it's very slow. We read the industrial PC makers, right? Very slow. I think industrial don't expect first half. First half, I think industrial still may suffer, but we okay. Flash is shortage. We move flash from our industrial consumer, mainly to the embedded, and gaming, and enterprise. Yeah.
Okay, thank you. So my second question is in terms of your gross margin. So we do see we potentially have a reversal from our inventory write-up, and we also see the pricing tailwind. So can you give more colors on maybe gross margins outlook for following quarters? Thank you.
First of all, ASP increasing from our inventory, so helping our gross margin. The inventory write-down reversal, I think in CY 2024, CY 2021, CY 2022 next year, will gradually back to our profit, helping our gross margin. Retimer start to ramp up by April next year, after wait for our everything ready, so helping our gross margin. Controller increasing, also helping our gross margin. But in module wise, I think now inventory is doing good, but our coming wafer, NAND wafer, the price is increasing, okay? That portion may impact some of our gross margin, but, but the dollar amount of gross profit increasing. So overall, by average, I think we're still able to keep our current average gross margin. Okay?
Okay, thank you. So my last question is, in terms of your NRE or in design service business, can you give us more color on it? How do you... Maybe you to get the design win or, where is the application or end market is? Thank you.
Okay. Actually, every quarter, Phison recognize our NRE income from most NAND company and system company. Okay? So, we are going to expanding. Actually, NRE, the design service will be Phison, our main business in the coming futures, okay? And next year, next year, since AI is getting popular, many system company come to us to ask, "Hey, how about putting AI engine, something customization into the SSD controller? How about putting something into the enterprise SSD controller? How put our AI engine into the mobile controllers?" Whatever. So, and also in the EV. EV is the most heavy requirement in the specifications.
So overall, I think I'm not able to answer you which product line we are able to enjoy, but any system in EV, in mobile, in computing, in IoT, in server, they're asking some customization. So this is helping us to gain a more NRE through the design service. We name this IMAGIN+, okay? So this portion is going to improve in the coming eight quarters.
Yeah. Thank you. I have no more questions. Back to queue. Thank you.
Great. Yeah. So I have one question I'll read from the Q&A box, and then we'll go to Sebastian next. So the question online is: The NAND companies are developing own controllers by own internal teams and by paying design houses. How much of NAND controller market for SSD will be in-house in NAND companies versus merchant controllers?
Again, I'm, I cannot, you know, answer in this question that much, but, some companies still insist using in-house, but some companies start to outsource, okay? We have one Korean company, they've been outsourced to one of a controller company, but they suffer, they suffer 2 years. So their policy decide back to in-house forever. So I don't know how to comment, but I still believe the main company will more focus their controller team to the high petabyte modules business, such as Enterprise SSD. Gradually, gradually, they are outsourcing their mobile controllers, they're outsourcing their Gen 4 controllers, Gen 5 controllers. And some name company, if they are weak in finance, they also consider, "Hey, are they going to take out their own 7-nanometer, 5-nanometer controller?" This costs too much, so they may talk to the outside party.
How about sharing the NRE together? So the answer is, we believe outsource will increase other than Korean company, they suffer from, third party. So policy in-house, no more outsource, only in-house. I think this is exact set. Okay?
Okay, great. Sebastian, do you have a question?
Yes. Can you hear me?
Yep.
Hey, KS. You have two questions. The first one is, maybe my memory is bad, but can you remind us that when is the last time you do this prepayment? I don't remember you did that before. Did you?
We did. We did.
You did? Okay.
2008 to Korean partner.
Okay.
And no-
All right. So-
At NTD 1,000, NTD 2,000, NTD 2,012 to Japan partner.
Right. Okay, maybe I framed my questions. You didn't do anything like this in the past decade. So it sounds like that was the time that before the more than a decade ago, when the last time you did it, right?
Yeah. Yep.
Okay. So we have been through a couple up and down cycle in the past decade, but even in some of the very bullish cycle in the past decade, and you didn't do that. And why, why this time? What are you seeing that you're going to do this? You must see something to do this prepayment, because it definitely will put a lot of burden on your working capital. And we understand that your business model, a lot of that depend on the working capital as a module company. So you're betting on this, you definitely see something coming that you're willing to take the risk by doing this. Can you share with us what are you seeing?
Okay. So I give again, I keep emphasize by, by July, end July, we still suffer in our high inventories. To be honest, the demand is very slow, inventory is so high, supplier keep asking prices to buy, we keep buying it. But by end September, most inventory allocate to the to our customers. So I just realized the good and bad thing is, we made too many designing activity. We don't know where the demand is coming, but when market turn to good, everybody come back to us to ask supply. And unfortunately, inventory gone, can be gone in one night, but of course, we manage well. Next year, when you go to this chart, okay, this chart, I think no doubt, second half next year, market will be turned to very, very tight. Actually, no need to wait until next second half.
Today, we call to US supplier, Korea, Japan, even China supplier. You ask 10, they ship you 2-3. Okay? So if Phison, next year, definitely I want to grow my business because I think we have a much better position, okay? We got so many system design-win. We have every controller design-win, but if we not enough flash supply, how can I turn to my design to my income? So I need more NAND, okay? And next year, no matter what-
Right.
Yes. Yes. And second, second is, we get so many OEM tier one design win, which they're asking for certain petabyte, we may not able to fulfill if we are not secure our supply next year. Okay?
So, right. So if I, if I interpret what you're sharing correctly, there are two elements. One is that what the company and you're doing for this prepayment is actually signaling two things combined.
Okay.
First, is that Phison is actually calling for probably one of the biggest upcycle in NAND Flash industry in the past decade. Second, is that Phison is entering into a new phase where you have much more design win that you didn't have before, that you need a lot more density of the NAND Flash. Am I right?
Yes.
Okay, great. Second question is on your gross margin. I think in the past two quarters, particularly in the recent third quarter, you end up with a margin about 32.5%. If I look at your history, this probably is probably one of the highest margin in the past decade. You did a 33%, something about 2013, something like that. But even in one of the in some of those upcycle where you probably have a good margin, but you didn't, but not still lower than the third quarter. The third quarter, you previously mentioned that the pricing only started to move in mid-September. So which means that in the third-
Hello, Sebastian, we lost you?
Yeah. Can you hear me?
Yeah, yeah. Now, okay.
Can you hear me?
Yeah.
Yeah. I'm just curious about, because the third quarter is only the second half of September, you started to enjoy some of the pricing benefit, but you actually have, probably have one of the highest margins in a downcycle, still in a downcycle for most of the part of the three Q. And now, if you're going into the upcycle, where pricing become more favorable, where you actually have some low inventory, plus there's some of the margin tail that you just mentioned about the controllers or retimer, blah, blah, blah. And are we going to see pricing moving up to like mid-thirty or high thirty, or even higher gross margin profile as a new level going forward?
Of course, this is my goal. This is my goal. But before we achieve this goal, and, you know, as a public company, I'm not able to comment that much. But what I'd like to say is, we just show you, right? Phison's a business model. Again, we transform ourselves and to so many... You, you can define as a niche application, which we're able to, enjoying the much higher gross margin. But today, back to Phison, I prefer to improve my top line first, then second will be, bottom line. The reason is, we need to grow our team. Once we grow our team, then we can enjoy our gross profit and our gross margin. Okay? And again, Phison, we already have a 3,000+ engineers. Maybe like end of next year, we still need to hire the other some portions. Why?
In this six-month, we got so many NAND controller came to us to ask Phison design something for them. We got so many system company come to us, system company come to Phison to pay NRE, to design something for them. So we smell that the market is changing. In the past, NAND company, Samsung, give a standard module, you just use it. Don't complain, don't ask, okay? But today, every system company, they're asking differentiations. And the good thing is, NAND company may not take it. I give you one example, okay? It's a EV company. EV, if you're selling 1 million, 1 million EV is a big amount, right? But 1 million EV using a 1 million SSD. 1 million SSD, let's say 5 trillion byte. You are only using the 8 million piece of die.
In order to get this 8 million P business, you need to hire a lot of engineer. Too expensive. But Phison, our niche is, we have everything. We made a new record. We design one thing for EV, we think 7 months. 7 months from nothing to CS approach, 7 months. Why? Because we have a big foundation, good skill engineers, good trained engineers that keep, you know, sustainability in Phison. The reason is we make heavy investment. So yes, the answer, answer you, I want to grow my gross margin, right? But instead of that, I prefer to gain the revenue and the share first to improve our influence power. I believe, I believe again, okay, this is my world, okay? Controller house will be getting much difficult if moving to the 7 nanometer, 5 nanometer.
Even Phison, we made a good gross profit, are still heavily, severely, very painful to invest to the advanced technology. So other than controller house, I think will be very difficult. So if no controller house, means no module house. Phison is going to take the module business. Like today, I show you in this picture, okay? We cannot name that much, but this is the model that Phison is going to learn. Okay?
That's all for me. Thanks.
Yeah.
Okay, I think the next question is coming from, Simon. Hello, Simon?
All right. Yeah. Can you hear me?
Yeah.
Yes. Okay, yeah. Congrats, great results, K.S. Good. Very quickly, sir, any color, volume increase versus price change for Q3 results?
Sorry, sorry. Can you repeat? Sorry.
Yeah. Q3 revenue up, right? But, any rough idea what portion, based on the, you know, your sales volume increase versus a price hike?
Actually, I'm controlling my volume shipment. Okay?
Yeah.
Because price can be higher, right? So mainly it's coming from the some ASP improvement.
Yeah. So what, what's the rough idea, the quarter-on-quarter, your product price change, low single digit, mid single digit? Industry data showing very minimal price increase for September quarter, but presumably, your Q3 revenue seems to be based on the price hike, right?
No, no. No, that be correct. Some portion price hike, but some portion is a new product, such as Enterprise SSD is a new product.
Mixed improvement?
Yeah.
Yeah. So, but the December quarter, should we expect, your, you know, the apple-to-apple comparison-wise, price increase for your module product, mostly?
Okay, Simon, I'll answer you this way, okay? We follow Samsung. Okay, I cannot answer. Samsung did the industry, right? So we follow Samsung. If Samsung going to raise the price, we just follow.
... Mm-hmm. Okay. And then your inventory level remained very high, NTD 21 billion. It's good when the industry shows over the trend. So, but you are issuing the new convertible bond, the NTD 6 billion. Is the bond to be used to purchase more of the NAND chips, right? With a long-term agreement.
No. Let me answer this way, okay? We keep NTD 21 billion inventory, but among these 21 billion, big portion reallocate to customers. Allocate to customers, okay? So we know how this is. Of course, on the book inventory, after two months, gone. Most portion gone, okay? We need to turn to our revenue and our income. Talking about the convertible bond, we have two main reason. One, we believe next year will be big under supply. We need to collect whatever-
Mm-hmm.
Supplier willing to ship to us. The reason is we get so many design-win next year with our commitments, where to ship it. Second, next year, I think we are still going to improve our R&D activity, mainly in the 7 and 6 nanometer controller tape-out. So I think at this moment, if we improve our cash flow, will help us to growth our revenue and gross profit by 2024 and 2025.
Yeah, very clear, sir. And then very quickly, 7-nanometer, would you share some details of when it will be commercialized meaningfully, and then, which application can be used?
It's mainly for PC computing. The IC will be ready by end of this year, so commercialized by second half, end of first half next year.
You mean the end of first half next year?
Probably May, May to June timeframe.
I see. It sounds like, what? Client SSD PCIe Gen 5?
Yes.
Okay. Sounds good. And then UMC is the supplier, right?
Does UMC have a 7 nanometer?
No. TSMC, sir.
Yes. Yes.
Just in case, double checking. Yes, but you are using the legacy node from UMC and more advanced node from TSMC, right?
Yes.
Very well balanced.
Yes.
Still partially SMIC, right? SMIC.
No, never! Phison never SMIC. Phison-
Never.
Only, only in UMC and TSMC. Now, we increase the global factory for our Redriver.
Yeah. Yeah, and then almost the last one, sir. You know, for the long term, you know, the... How about if you sell the, your controller to the chipmakers more actively? Or what, what's the current status, your controller sales, 100% internal use or 30% for external, 70%-
No, no, no, no.
I mean-
Big portion, of course, external use. We make many design-win from a named company.
Yeah. So what's the rough idea? Let's say you manufacture NAND controller, 100 unit for this quarter, and what percentage-
More than two thirds, we sell controllers. More than two thirds.
External customers?
Yes.
I see. The customers which use your own grade controller, the majority should be chipmakers, right? Memory, NAND chipmakers or OEM.
Phison controller, Phison controller only sell to main company, plus Kingston, plus Hosin Global.
Hosin means YMTC?
No, Phison subsidiary in China.
You are saying the two-thirds of NAND controller for the NAND chipmakers, right? Two-thirds.
Yes.
But you are not active, almost very minimal for the OEMs.
Well, okay, define what's OEM.
OEM means another maybe module maker or
No, no, no. Please, please, please clarify. OEM is OEM. OEM is not module house. Module house most likely is a trading company, okay? We have no selling controller-
Yeah.
Trading company. So answer is, we are not selling any controller to module house other than Kingston and Hosin Global.
Yeah, sounds good. So overall, this really means another opportunities for more, you know, the customer diversification with the NAND chipmakers.
Simon, let me ask you a question. Is that this GPU company selling GPU or they're selling modules?
You mean the NVIDIA, for example, there is a GPU and also these days, a server as well.
So which portion bigger, consumer GPU bigger or the modules bigger, in portion-wise?
I mean, the NVIDIA GPUs still bigger, I think.
No, they're mainly selling modules. They are not willing to sell more single GPU. They are selling modules.
So in that case, they need your controller.
We are not selling controllers. We are not selling to module house. We build module. We don't need module house. Any controller rely on module house at the end, is die, die. You know, die.
Hmm.
Dead.
Yeah. Makes sense. Yeah.
Okay.
Then another, maybe some question from the investors. I know the NTD 6 billion convertible bond is important for your future growth, but your balance shows NTD 15 billion cash, and also you can borrow. Of course, the interest rate very high these days, but you know, you don't worry about low- to mid-single-digit potential dilution from the CB issuance or not a big deal, you think?
... First of all, personally, personally, I believe NAND market will turn to good. Phison-
Yeah.
Potential is going to enjoy.
Yeah.
We are able to turn to the good revenue, maybe good profit.
Yeah.
If investors support, the dilution will be very small.
Yep. Yep. Great. All clear, sir. Thank you very much, KS, and
Let me clarify. I just read your report. You give a Phison target price NTD 350 is much higher than today's stock price. You'll be able to make more study, okay?
Thank you for the feedback. Yeah.
Thank you.
Okay, so K, we have a couple of questions from online here. The first one is: Today, NAND supply tight, but NAND companies have mothballed capacity as prices are too low, with negative gross profit margin. If price increases, can they quickly turn capacity back on?
Now, the weather in and out, at least three months. At least three months, so I don't know how quick. Yeah.
Okay. Another question is: How's your outlook on OpEx in fourth quarter or in 2024?
OpEx Q4, I think we are going to increase. The reason is, when we turn to good profit, we need to write off a certain percentage to the employee bonus. Okay? So we still need to take care our employees. So OpEx definitely Q4 increase because I believe gross profit increase. Next year, again, I believe we're good in the revenue because there's many module business, retimer, and the control business. And the R&D activity next year, we still have several 7-nanometer and 6-nanometer is planning to tape out. Mainly is a design service from some name company and system company. Of course, they are going to pay some NRE, okay? They pay NRE as a gross margin 100%, but on the other hand, OpEx is going to increase.
The good thing is, OpEx increase, but turn to our ASP and gross profit, we're going to increase. This is my key point. Okay?
Okay, great. I don't see any more questions online. Any last questions? Anyone, please raise your hand or put it into the Q&A box. So KS, I think that does it from the questions. I'll turn it back over to you for closing statements.
So, thanks for your time. I think we over, like, 10 minutes, but it's... Again, we are working super, super hard, try to gain a more market share next year. And also, again, I still believe, doing controller is so difficult, big investment, so we transform ourself, mainly to the our, potential value at the module. We also show you in the Phison's, share in this term is still, is still nothing. So coming years, we try to improve our R&D activity, we try to improve our capital finance cash flow, then we are going to try to capture more business opportunity. Okay?
Great. Thank you, K.S. Thank you, everyone, for joining the call. Everyone have a great night.
Yeah. Thank you.