Hi, analysts, fund managers, and media friends. Welcome to Alchip Technologies' second quarter investor conference meeting. For this meeting, Johnny and I will cover our second quarter operating results and the future outlook. Yeah, more than glad to have you here. Okay, a few things to cover, disclaimer. I share it. Sorry about that. Okay. Okay, this meeting will be in English. Johnny and I are all Chinese native speaker, so if you want the Chinese presentation, Chinese presentation slides, or you can ask questions in Chinese. If you need Chinese presentation slides, please go to the 公开资讯观测站. You can download the Chinese version of the slides there. If you don't want to ask a question orally, you can write down your questions through the Zoom message function. We can, we can read it, and then we will answer after reading it. Please use the Raise Hand function through Zoom and wait for the host to unmute you, and you can ask questions. The video and audio content of this meeting will upload to MOPS, 公开资讯观测站, about two to three hours after the end of this meeting. I will invite Johnny to start the meeting with very short company introduction in case many some of you may not know Alchip very well. Good afternoon, ladies and gentlemen. I'm Johnny Shen, President and CEO of Alchip Technologies. Thank you for joining our investor conference meeting. We appreciate the opportunity to share our Q2 result and provide the guidance to our future business outlook. For those who are not familiar with Alchip, allow me to do a brief company update. Our company is founded in 2003, IPO in 2014. The current market cap is around $4.5 billion, headcount 600 employee. Majority of our employee are engineer. Last year, our revenue number is $460 million. Yeah, obviously, this year, we grow quite a bit. The first seven months, I think we already overachieved this number. Our market focus is HPC and AI, and recently we added the automotive category to the new focus as well. Since we founded the company, we've successfully taped out more than 500 design. Among 500 designs, 60, more than 60 is a chiplet, and within 60, more than 15 are 2.5D CoWoS-related design. Our capacity is 20-30 a year. Right now, majority of the revenue is-- 80% of the revenue in HPC and AI area. We are TSMC VCA member since 2009. Yeah, recently, we just joined the TSMC 3D Fabric member last year. Okay, please, please don't use your sketching function on Zoom. Thank you. You just draw lines on the slides. Everybody can see the lines, so can you erase the line you just drew on the slides? Thank you. Okay. All right, let me give everybody a quick cap on the Q2. Q2 marks another record-breaking quarter, with revenue $258 million. Operating income, $28.4 million. Net income, $23.9 million, resulting in the EPS of NT$10.16. While our Q2 is historically high, our income and EPS has not met our expectation. The primary reason is lower NRE to mass production revenue ratio, which caused a notable reduction on gross margin. Additionally, we are facing a account receivable issue with one of our account in Japan. Yeah, follow our auditor's guideline, we accrue a certain bad debt allowance as operating expense in Q2. Fortunately, fundraising progress for this customer has improved. We have already begun to receive part of the payment. As a result, our, our, our operating expense will return to the normal level starting from this quarter. As for the future business outlook, mass production demand from HPC and AI remain robust. In addition to demand increase from our largest customer, several other customer has significantly increased their demand as well. Overall, we anticipate higher revenue forecasts than, than our previous projection this year. The actual amount of growth is tied to a specific material yield and capacity constraint. Another enormous piece of information to share, we have begun to receive purchase order for next year. The production demand from U.S. customer for next year even surpassed this year's figures. That suggests the momentum of revenue growth is likely to continue through 2025. Update for the automotive business. Similar to HPC and AI sector, our progress in automotive business is also promising. We have secured a few design win, have a fruitful pipeline of design from many carmaker in China and also in U.S. Our main focus is the ADAS L2-L4 type of ASIC application, utilizing either N5A or N3AE technologies. Notably, we have achieved a significant design win from a tier one carmaker in China last quarter. Yeah, as I mentioned before, even automotive project has a tighter constraint with longer design and roll time compared to other applications. However, auto project can generate substantial NRE during the design phase and produce a considerable amount of MP revenue during the production phase. We firmly believe the automotive business will be another major revenue driver for us starting from 2025. A quick update for geopolitical risk management. Alchip successfully effectively diversify our business concentration beyond China to other region. In Q2, our revenue from Asia Pacific region is less than 20% now. For China's business, we are adopting cautiously approach by closely cooperating with major suppliers. That involve reviewing customer's background, their end user, design spec, before we accepting the projects. We continuously believe in and support the business from China, as long as you comply with the rule and regulations. In terms of our workforce, we have implemented a very aggressive hiring plan to bolster our engineering support in Japan, Taiwan, and Southeast Asia. Our newly opened Malaysia office is already staffed with a few engineer. The hiring strategy efforts aim to provide comprehensive and cost-effective solution to meet our customers' requirement. As conclusion, we are confident to say our business is at the best healthy state. We anticipate 2023 will be another record-breaking and outstanding year for Alchip. Thank you. Okay, before we go into the next slide, let me repeat again, please don't, don't use your sketching function to draw lines on the screen. Okay, for this page, this is our second quarter, quarter of the income statement, as usual. In the second quarter, the total revenue is $258.6 million, which is a 37.5% quarter-over-quarter growth, and a 155% year-on-year growth. For the operating income side, for the second quarter, our operating income is $28.4 million. It is 35.7% quarter-over-quarter growth and 47% year-on-year growth. As a result, the net income for the second quarter, we already announced a couple of days ago, is $23.9 million, translating into EPS of NT$10.16. For, for the breakdown, in the second quarter, again, our HPC remains our majority application of our revenue. More than 80% of our total revenue exposed to the HPC area, followed by the consumer, 10%, and the niche market, 8%, and networking, 1%. For the first half, this year as a whole, the number is identical, 81% HPC and a 10% consumer, 8% niche and 1% networking. For the revenue by process node, I would say that Alchip remains the industry leader in terms of the revenue exposure to the most leading-edge technology node. For the 7-nanometer or advanced, or more advanced process node, our sales exposure to them is 87% for the for the second quarter this year, followed by 28%, 28-nanometer. ... which is 6% revenue exposure, 4% to 16 or 12 nanometer process node. The best is the 40 40 nanometer or more legacy process nodes. For the first half this year, 81% to 7 nanometer or more advanced the process node, the rest accounts for close to 20% of our total revenue. For the region, as Johnny mentioned-- as our CEO mentioned, the exposure to China keeps trending down. Of course, there are many reasons behind, but obviously North America will be our major, will be the region for our major revenue exposure. For the 2nd quarter, revenue to North American customers accounted for 62% of our total revenue, while the revenue exposure to Asia Pacific accounted for only 17% of our total revenue. For the 1st half this year, 63% revenue exposed to the North American region, while 20% to Asia Pacific, 8% to Japan, then 9% to other regions like Middle East and Europe. I don't understand why there is still people drawing lines on the slides, so please don't. For the 2nd quarter 2023, the revenue came higher than we expected. There were two reasons behind this higher-than-expected 2nd quarter revenue. First of all, some of you may remember that in the first quarter earnings call meeting, we said there, there, there, there was a testing program renew for our major products in the first quarter. Some delayed parts for this product to our North American customer delayed shipment from first quarter to second quarter. Secondly, our biggest customer keep on pushing us to speed up the shipment to them. We try very hard to ship as many as possible parts to this customer in the second quarter. That's the major two reason for the higher-than-expected revenue in the second quarter. By comparing to the first quarter, this year, second quarter has, second quarter has slightly higher NRE exposure. In the first quarter, our NRE revenue accounts, accounted for about 17%-18% of our total revenue. For the second quarter, the NRE revenue accounts for around 20%-21% of our total revenue. You can see the profit. I knew that many of you thought that the second quarter profit performance is slightly lower than you expected. Here are the reasons. The second quarter gross margin is 21.4, given high shipment of the AI chip to the North American customer. Of course, the higher percentage of production revenue did causes pressure to our blended gross margin performance. That's the main reason for the gross margin front. For the operating profit, the operating profit, which is obviously impacted by one-time bad debt allowance accrual, for Japan customer. This bad debt allowance could be reversed in the second half once customer paying it. The good news is, first of all, this customer has very good track record in the past. This is not a new customer to us. This customer has been a long-term customer for our Japan subsidiary. Secondly, this customer is paying the receivable, already part of it. We feel pretty confident that we can gradually recoup the payment in the second half this year. The non-operating income, posed, declined lower, quarter-on-quarter numbers, given the weakness of RMB. Let me explain here again that to us, our functional currency is USD. Every other currencies, every other currency, like the RMB, JPY, and the NTD, depreciate to USD, we will record some foreign exchange loss. It is essentially a good thing to us because-... we use those currencies as the expense on the salary to our employees. Essentially, when the other currencies to USD, depreciate, we get a real benefit, although we may record some FX exchange loss. For the 2023 business outlook, Johnny already mentioned some of them, and I will do it very quickly. I believe most of you will ask about other questions in the following session. First of all, the AI chip shipment to North American customers gets stronger. First of all, the customer keeps on requesting us to speed up the shipment to them. Secondly, for the 3rd quarter, I already hint to some investors that we may have a mild revenue quarter-on-quarter decline in the 3rd quarter because of the constraint by CoWoS support. We believe the issue will resolve in 4th quarter. The decline could be very slight quarter-on-quarter in 2nd quarter. The shipment outlook for the overall second half and the 2024 as a whole, the shipment we expect to get stronger and stronger. Previously, previously, we guided for the major products currently shipping to our North American customers, we may have 30% quarter-on-quarter, year-on-year shipment decline in 2024. For now, the most updated forecast from this customer is that we may have year-on-year growth for these, for these AI chip, AI chip shipment to them. For the CoWoS capacity limitation, currently, we are talking with TSMC, and we believe the outlook is good. Currently, for the major products to our major customers, we, we already, we already, got, we already got the full support from TSMC for next year. In addition to the biggest customer this year, we believe our other customer will post heating up momentum starting from the 2Q. There will be another AI chip customer, who will most likely to post strong revenue growth to us, in 2H or in 2024. There will be four other high-volume projects could enter the production phase sequentially, starting in 4Q this year, which includes consumer product, AI chips, and main chips for mobile devices. For the NRE part, we remain our positive outlook towards the NRE growth in the 2H and in 2024. The reasons are, first of all, the process of projects keep on moving to 5 nanometer or even 3 nanometer. in the second half and in the year 2024, we expect the automotive, especially the ADAS project, to keep on flowing in, as we may win products other than the one we just won in the second quarter from a major China automaker. I guess that's the I already conclude the whole outlook part for this conference meeting, we will go into the Q&A session. Please use the raise hand function of Zoom, we will unmute you for the questions. Thank you. For the first question, Mark, please. Okay. Hi, Johnny and Daniel. Congratulations on the good results, and thanks for taking my questions. My first question would be on your seasonality for 2023. Following a strong growth in first half, you mentioned sales will decline mildly quarter-over-quarter in 2Q due to CoWoS constraint. Could you try to quantify the magnitude of the decline, and do you still expect fourth quarter to grow sequentially? Maybe you could also provide your expectation on NRE versus turnkey mix for second half and your full year sales guidance. Thank you. Okay, for the second quarter, we expect the revenue decline in single digit. For the second half, I will still say the total revenue for the second half will be higher than the first half. The question. The NRE ratio? The NRE ratio in the first half, I already mentioned in the presentation. For the second half, as you may know, that on the milestone management is quite important, the execution and the scheduling. I cannot give you a very firm number. I can only say the ratio for our NRE revenue, the percentage of the NRE revenue to our total revenue will be higher than the ratio in the first half for the second half. Usually, the fourth quarter is the high season for our NRE revenue. Okay, what about the- Go ahead. Go ahead, ask. Okay, sorry. What about the full year sales guidance update? full year sales update. You know, the Taiwan Stock Exchange post, and I don't know, they're pressuring us not to, not to guide the revenue numbers. They say it's obviously previously we guide, we're trying to achieve more than $800 million in our previous earnings call. Right now, we can, we can say that $800 million target is unrealistic. We, we definitely will go over this target. The most possible revenue goal for us will be... I can just give you the, the range, $900-$950. Yeah. Or even better. Mark, am I answering your question? Yes. Yes. Thank you so much. That's great. Mm-hmm. My second question is regarding your project pipeline for your U.S. customers. Would you be able to share the contribution from your largest U.S. customer in first half this year and your full year expectation from that customer? If possible, across your U.S. customers in 2024, what is the growth outlook? Would you be able to provide some positive and negative factors impacting your U.S. business next year? Thank you. I will say this way, I will say this way. For the revenue contribution from, by our biggest customers this year, we expect this customer to account for around, around 40%-50% of our total revenue. For next year, because I haven't done the numeric forecast yet, so I can't give you a number, but for the, for the, for the, for the revenue they can contribute to us, previously we guide, we may have year-on-year decline in 2024. Right now, I will say the revenue contribution from this customer will post year-on-year growth in 2024. For the other projects, I will say for next year, two AI project, AI chip, AI chips project to another North American customer will contributes, will contribute us pretty good. I cannot disclose the numbers, but comparing with this year, the growth will be very, very significant. You may know that there are other projects like the Image Signal Processor chip to Japanese customer, which is considered high-volume project in next year. Actually, the shipment would likely to start in the very early of the first quarter next year. We will also have two HPC projects to China customers. One main chip project, the application processor chip to, for mobile devices to another North American customer. The shipment will likely to start in the middle of next year. In the same time, the chip for the same customer for the smart device will also start its production in the middle of next year. That's the overall picture for the second half and next year. Okay, a quick follow-up. what about Habana Gaudi projects, which Intel mentioned a strong pipeline? Back to 3Q, how much of your business was impacted by the CoWoS constraint? Thanks. Mark, it is better for us not talking about the names of our customers and the project names of our customers in the earnings call. Okay. Maybe I'll just ask a different way. What about your, U.S. semiconductor company's, startup projects? How much of the volume, expectation or the opportunity there do you expect, in second half of this year or even into 2024? I, I, I also have a separate follow-up on the third quarter. How much of your business was impacted by the CoWoS constraint? Thanks. For sure, the revenue contribution is not comparable with the contribution by the current customer, for the, for the customer you mentioned. It's quite significant. I cannot give you the numbers. For the CoWoS, I think Johnny can talk about the CoWoS situation. To be honest, our revenue, the total revenue, especially the mass production revenue, is dictated by the CoWoS capacity. I think for the past months, we've been working with the supplier very closely. Fortunately, we, we can say we start to get a very reasonable support. The reason behind that, as we all know, in terms of the CoWoS, right now, we are one of the biggest customer for the, for the supplier. Right behind the maybe top three customer. If you look at us, we are representing more than five customer. Supplier also want to diversify their CoWoS concentration. Yeah, we've been quite successfully grab a certain capacity, yeah, to support our current biggest customer and also the customer you mentioned about. Next year, right now we have a R&D project to work with them. If this CoWoS solution proven, yeah, we will start to receive a very fair amount of allocation, not only for the number one customer, but also for other customers. Q3, we still suffer a bit, but starting from Q4 and next year, we expect everything will be very smooth. Okay, got it. A quick follow-up to my second question would be on your largest U.S. hyperscaler customer. Beyond the existing 7-nanometer AI project and a few other customer projects you mentioned, could you provide some update on the new AI projects with the largest U.S. customer? Thank you. No. As you know that we cannot provide the details. Okay, no problem. Probably, hey, Johnny, do you have anything to add or? Yeah. The specific pro... the customer name, we cannot mention, but obviously the AI inquiry is getting higher and higher. Yeah, many system companies start to do the ASIC chip for sure. Surprisingly, many startup companies, they are used to face a lot of problem. Recently, the fundraising situation for them become much, much better, so they come back to us as well. I think the AI opportunity, I can say for the past quarter, yeah, it was incredibly high. Okay, let me, let me give you others opportunity to ask questions. Charlie, please. Thank you. Hi, Johnny and Daniel. Congratulations for great results and business outlook. Probably I just use some kind of public comments, information to ask a few, few follow-up. At the- I believe in your AGM, right? When you answered to media's question, whether you're confident to secure next generation project from the big customer, you said the confidence level is high, right? I'm just checking that whether the kind of confidence level is, is changing. Hmm. Okay. Yeah, I mean- The confidence level is better. Better. Mm-hmm. Yeah. Okay. better, better than, than like... Better than before. I think this particular customer, continuously give us, more constraint and also the more game rule, which, we try to. We, we already follow one by one. So right now, we have 100 engineer ready to do outside of China per their request. I see. Thank you. Yeah, you know, I, I don't want to be too specific, right? When do you expect, you can see the, the first N3 NRE revenue to, to contribute, to, to Alchip? The N3, I believe, probably we have chance in the second half this year. Mm-hmm. For N3 revenue. Mm-hmm. Okay. Okay. since I, I wouldn't go into further detail, that, that should be very, very sufficient information. Over the past 10 minutes, I already got the two, two questions from investors. There seems to be a little bit confused about your weird revenue updates, because you kind of mentioned the previous $800 million, right? I, I believe what you just said is is that is a much much better-... could be even above $950 million. Let, let me, let me test your, your limits. Do you think you can get to, like, $1 billion in 2023? You know, Charlie, the reality I'm facing is, if you say a number, Mm. The second day, the media will quote the number. They don't care about the context. TSMC will read the numbers in the columns. I'll say this, we mentioned that the second half's revenue should be higher than the first half. You can calculate that for the first half, we have $188 for the first quarter, and we have $258? Mm-hmm. Yeah, 258 in the second quarter. If you double the numbers, I think we are pretty confident and comfortable for delivering higher numbers than 2 x of the first half. Hmm. Okay. Okay. Yeah. Okay, yeah, I, I think, maybe some investors just need that clarification. No, no doubts that this year is a very strong year, but how about next year? I, I think you already provided a lot of context, right? You know, big customer- Mm-hmm. going up next year, other U.S. customer, mass production, other four, chip, right? If we want to put, put those in, in kind of a numeric number, right? I, I, I think, you should have some, some, sense, right, about the next two years, revenue CAGR? Can you, can you provide that, that, number? Okay. For, for next year, I will say this way. I think every company is seeking for growth. Do us. I would say this year's revenue is like a baseline for us. For this year, previously, I worried. The thing worries me the most is, with how can we make up the gap generated by the year-on-year decline of the major products we ship to the our major customer? Right now, fortunately, last year, the contribution for this product will not go down. We may even have, certain amount of increase for this product next year. Besides of that, as I mentioned, there are about four to five high-volume projects into production next year. For the production part, next year definitely will be a very promising year for us. For NRE, of course, during, I would say, the doing this ASIC market status, we have a very good position to win projects. There is no reason for us to have year-on-year decline for online numbers, especially when the process node is still moving. All in all, I cannot give you a numbers for the year-on-year growth right now. I would say, first of all, definitely the growth rate, the percentage, will not be that high compared to 2022 to 2023. Obviously, we can deliver, we can deliver pretty strong numbers next year. Hmm. Okay. Yeah, Charlie, let me try to add more. Yeah, just like Daniel mentioned, yeah, please try not to expect us as a same growing rate compared to this year. Yeah, unless our another project hit a home run. Otherwise, I think the growth rate would not be as high as this year. In terms of mass production, number one customer give us a higher forecast. I think that's very good news for the company. Yeah, in addition to that, we already starting to receive a manual order from other customers. I think that's that for sure will boost the MP revenue. The NRE, I think that area is under our control. The MP, honestly, is a little bit out of our control. It depends on customer demand, it also depends on yield and constraint, and also capacity from supplier. NRE, I think that area we have confidence to continues to grow because more project pipeline and also the technology migration. Yeah, for the past 10 years, our NRE keep growing. I don't worry about next year. I think for sure that will grow to a certain degree. Mm-hmm. Got it. Thanks. Last one, I will move back to the Q. gross margin and operating margin trend, because I, I know this quarter kind of hit the kind of low for gross margin. Do you think the gross margin can re improve next year? Also operating margin, I think that is most important metric for your business model. What, what would be the long-term goal for your operating margin? Thank you. Okay, I've been keeping on explain the business model or the structure of our book to the investors. I will say, for example, for this quarter, you can see that our gross margin is pretty similar with the number in first quarter for the gross margin front, but we have much better operating margin in second quarter, even impacted by the AR accrual. It has been a very debatable topic for us and for the discussion with you that because the production revenue, production revenue is, to us, is like an effortless revenue. The gross profit for the production will trickle down directly to the operating level, which means as long as we have the production, the profit will go directly to operating, we will have higher EPS. To me, personally, I, I want to make more money. To me, I, I don't really care that much about the gross margin. I care about how much money we can make. I can understand that the capital market, from investor point of view, gross margin is really important. Do, so do us, so we try to balance the gross margin and the, the EPS. The most effective way for us to boost the gross margin is to have more NRE revenue. We try, we think, starting in the second half, the gross margin will improve. Starting from next year, I would say for other high-volume project, the gross margin of them will be better, will be higher than the current product we are shipping. For the gross, go- for the direction of the gross margin, I'm, I'm pretty optimistic on the future trend. Okay. Okay, yeah. What's the target for long-term operating margin? Is that any. I will see- for this? I don't have a, I don't have a target. If we can record $2 billion, $3 billion, $4 billion production margin, I'm happy to have it. Yeah. Mm-hmm. At that time, I think our growth, our operating margin will be very high. Okay. Yeah, so just to make sure, right, what's the pro forma operating margin in 2Q? Can you tell me what was the write-off number in 2Q, so we can, you know, calculate? let me give you, let me give a range. Okay. Because, because we cannot, we cannot, we cannot say it in on this call. Okay. It could cause problems from the authority. Right. The range could be around $5 million-$8 million. USD? Hmm? USD, U.S. dollar. U.S. dollar. Okay. Okay, great. Yeah, thanks. I, I will be back to the queue. Thank you. Right. Thanks. Okay, next one is Szeho. Szeho, please. Hello, hey, Johnny and Daniel. Yeah. I think the first question, yeah, based on your interaction with your customer or the major customers, if there's a choice between, let's say, the third party, off-the-shelf IPs and proprietary IPs, would they prefer one over another? Szeho, sorry, sorry for interrupt. Hey, hello. Your voice is not is... I can barely hear your voice. Can you be louder? Is, is it better now? Yeah, yeah, yeah, much better. Hello. Oh, yeah, yeah. Sorry. Yeah. Actually, first question regarding the IPs. Yeah, when you deal with your customers, if there's a choice between, let's say, the third party off-the-shelf IPs and proprietary ones, would they prefer one over another, and if there's an option for them to choose? Okay. Szeho, I believe it's really depends on the customer's strategy. Different customers has different strategies. For the IP part, I would say Johnny can give you some color about the IP parts. Our thinking about the IP part. Mm-hmm. Talk about the HPC and AI, yeah, to be honest, the IP is very fixed. For the interface part, it's a very straightforward IP. People use HBM, SerDes, PCIe, and et cetera. I think, for us, our IP strategy, I think, remain the same. We would not make connectivity or, or make analog, mixed signal, complicated IP to compete with our partner. We are working very tight, yeah, with the IP partner to provide the ultimate solution to our customer. Yeah, I think that's a, that's the right way to do. If we start to do the IP, even approaching, it's no way for a company like us to provide a total IP solution for our customer. If you touch the IP, you will end up to compete with the major IP partners. Right now, we have a very, very good relationship to a number one IP maker in the industry with current design and also with the future roadmap. Yeah, nowadays, I mentioned many times, SoC design very complicated. Everybody should focus on their expertise area. I think there are dedicated IP house pre doing the IP for them. There's a dedicated foundry, and we are the one doing the back-end implementation. Yeah, we have a confidence that nobody doing better back-end than us. Yeah, because we have a such a proven track record, more than 30K+. Yeah, in terms of CoWoS, yeah, we are pretty much, in terms of experience, we are pretty much top 3 in the industry. IP strategy remain the same, yeah, unless later on, when we grow to a certain degree, we may consider about to think to involve, for, for any specific field. Right now, we are quite confident, yeah, to, to work with our partner, provide a comprehensive solution. I see. I see. Very clear. My second question, right? The company definitely is benefiting from the AI mega trend, right? I just wonder if the company start to deploy AI in our workflow to improve design productivity? Hmm? Yeah. Can you, can you slowing down? Your voice is now. Oh, sorry. Yeah, yeah. Maybe, I repeat my question. Yeah. I think, AI, yeah. Is the company starting to deploy AI in our design workflow, yeah, to improve their productivity? You are saying if we are deploying the AI into our design flow? Yeah. Right, right, right. To use some AI technology. Yeah. Okay. Yeah. Let, let me try to answer that. I think, right now, using the artificial intelligence to reduce the workforce, reduce the design turnaround time, I think, that's a hot topic. Yeah, for, for us, for the mainstream technology, yeah, just using a design, current design as an example. Yeah, for, for the mainstream technology, 28 nanometer, few years ago, like five years ago, when 28 become the most leading-edge technology, yeah, we need about 40 people to do one design. Right now, if we want to do a 28 nanometer design, we only need eight people. Yeah, because of a stronger EDA tool, because of AI technology, they have a lot of reference, they have a lot of data, statistical data, to improve the design turnaround time. In the other word, if you tackle the most leading-edge technology like N5A, N3AE, unfortunately, the database is so few. There are no database. You have to do the design, everything from scratch. AI engine cannot do any inference. They don't have a statistic to try to solve, try to inference. When we're doing the 5-nanometer design, yeah, we need about 60 people. When we do the 3-nanometer design, we even need 100 people. Yeah, so using AI, they can improve the machine turnaround time, but in terms of design, because they don't have a current statistical database, so it's no way to do the significant improve. When the three-nanometer become mainstream, I believe by then, they only need like 10-20 people. Right now, we need a lot of workforce in order to do the most leading-edge technology. AI can help you to solving the existing problem, but AI cannot be creative to solve the future problem. Yes. I don't know. Do I answer your question? Yeah, yeah. It's actually a hypothetical. Yeah, that's typical. Yeah, it's still if I have hope. Yeah. Thank you. Yeah. Mm-hmm. Thank you. Okay, the next one is, Robert. Robert, please. Okay, thanks. Can you hear me? Yes. Yes. Thanks, Daniel. I got a couple of questions. The first one is on automotive. It's quite encouraging to hear that you have one automotive project from Chinese customer. I'm just wondering how big it is for the engineering resource that you have to dedicate compared to the normal HPC projects? Also, how should we think about the size of the turnkey revenue and how fast will it start to contribute to your earnings at the earliest? Thanks. Robert, for the automotive projects, I would say the supporting effort, not only from back-end, but also for the front end. We will partner up with the front end partner to do the NRE for sure. ... obviously higher than a normal HPC project. The total contract value for automotive, especially the ADAS project, will be higher than ordinary HPC type of projects, for sure. For the yearly contribution from mass production, okay, my position is not to, not to give very, very optimistic view to investors, because it has not happened yet. We do receive forecasts from customers. The forecast is quite significant. Too good to be true, let's say this way. I would rather not to talk that into numbers for the contribution. I can guide that the yearly contribution is quite significant. Mm-hmm. Okay, let me add to that. Automotive design, I think now, we need additional resource, not only for the design phase, front-end, back-end, for the safety manager, security party, they all need additional resource. Many new tool need to be implemented to do the design. Design take a long time longer and design effort are higher. Honestly, and personally, I think about it's really worth it. Just like Daniel mentioned before, the amount of forecast they give us is incredible high. I, I really hope we all have a multiple number one customer in the near future. In order to diversify the concentration for the automotive, I think right now, we have a chance to win multiple account. I think 2022, 2025, like I mentioned before, I think now automotive will become another strong revenue driver for us. Okay, Thank you. If you have, Yeah, I'll leave questions for others. That, Ke Tao, Principal. Hi. Okay, thank you. Just a question of CoWoS capacity. If you are looking at 2024, how is the CoWoS capacity allocated to you compared to 2nd or 3rd quarter this year? I cannot give you numbers, and I can only say for next year, the CoWoS capacity is tight. It is the, it is the reality. As Johnny mentioned, our position within TSMC is the best than ever. We have very good support from TSMC for the CoWoS capacity allocation. Okay, got it. Second question. Socionext. Socionext also compete with you on the same space on the auto site. Is there any-- if you look at the two, and you're competing with them, is there any project they have, they have stronger opportunity in winning? Or what kind of project do you have, bigger opportunity of winning the type of project in the auto compared to Socionext? Okay. In the earnings call, we had better not mention the names of the customer and the projects of the customer in the pipeline. Yeah, it will cause big trouble to not only us. Yes, I understand. Also our customer. Yeah. Socionext is a competitive... Okay, in terms of competing with project with Socionext, do you see them as a competitor or they are not a competitor because you work on different projects? Yes, Socionext is a very respectable company, and its strength is in the automotive application for sure. I would say for the physical design parts, I think, I think we are, we are, we are the leaders in this industry. We don't, we don't rule out any possibility to work together with Socionext. Okay. Thank you. Mm-hmm. Next one is Jeffrey. Jeffrey, please. Yes. Thank you, Johnny and Daniel. One quick question for me to follow up on automotive. Would I be right to assume that if you do, do an advanced ADAS project and get through NRE and mass production, that that would be like a several year, way, way longer than your normal projects for mass production for automotive? Yes, automotive project, especially for the ADAS, because there are several type of different products for the automotive-related project. For the ADAS, usually the design turnaround time will be much longer than a typical HPC project. Mm-hmm. Would also the mass production length also be several years, you know, much longer than a normal mass production project? Yeah, for sure. We expect the, automotive type of project, the product life cycle will be like four to five years. Mm-hmm. Okay, great. Thank you. Thank you. Mm-hmm. Next, next one is Susanna. Susanna, please.... Susanna, I, I, we cannot hear you. Susanna Chui? You may have some connection problems, so, let's jump to Jo- Joey. Can you, can you hear me? Yeah, sorry. Susanna. Can you hear me? Okay, please. Mm-hmm. Sorry, I mute myself. Hi, management, I would like to ask, TSMC CoWoS capacity should be slightly up QoQ. May I ask why you expect your revenue to decline QoQ due to the capacity constraint? Thank you. You are asking about why we can get support from CoWoS, from TSMC? Say TSMC is the- Yes, for, for 3Q. For 3Q. For 3Q, we don't have a problem. For the CoWoS, actually, for this year is pretty much set, the CoWoS allocation. Of course, we have some flexibility, but the range is not wide. Mm-hmm. Yeah. I think her question is, TSMC continuously increase the capacity, why we facing Q3 declines on. Yeah, Susanna, because your voice is not, is not, is not very clear, so we are guessing your question. Correct. Are you asking why TSMC keeps on expanding the CoWoS capacity, but in the same time, the CoWoS capacity is not enough for allocating to customers? Are you asking this? My question... can you hear me, once again? Yes, please. my question is, yes, TSMC keep expanding its CoWoS capacity, especially in 3Q and 4Q as well. I do expect the the the your revenue decline QoQ, and because of the CoWoS constraint on the PPT, I would like to ask, what is the reason behind? Yeah, it's a complicated question because there are different type of CoWoS. Some, some are new, some are already running for a while. Multiple reasons, because for the CoWoS, the technical, technical details, I, I believe we cannot discuss in, in the earnings call, 'cause it's related to TSMC. Yeah, we can only say TSMC is working very aggressively, try to solving the CoWoS constraint issue. Mm. Capacity, EO, everything. For Q3, we are facing certain challenges for CoWoS, bringing up. I think the working with the TSMC and related supplier very closely, try to solve. Unfortunately, unfortunately, the July and August is almost done. Yeah, we... It's not too much room for us to recover. Starting from September in Q4, I think the mass production revenue will go back to the normal, projected stage. Hmm. Maybe I, can I, can I have a follow-up question of, actually, because TSMC CoWoS capacity going up, but your revenue going down, can I, perceive that, you are losing the allocation, for the CoWoS capacity in Q3? If yes, how are you- No, incorrect. Yeah. Susanna, you're guessing. Your, your logic is incorrect. For the CoWoS questions, I would suggest you to ask TSMC directly. Mm. I, we, as a, as a customer and as a partner of TSMC, it's not suitable for us to discuss the CoWoS into too detail here. Hmm. Okay. Thank you. Mm-hmm. Thank you. Okay, next one is Joey Chai. Hi, Daniel. Hi, Johnny. Thank you for taking my question. Hi. Yeah, it's really good to hear that, you know, there are lots of inquiries, you know, for the project specifically. It seems extremely strong. What would you say the% chance, like, for an NRE project enter into production? The question is, like, more specifically is, how committed are your customers that are currently in NRE process? Mm-hmm. like, for production into 2024 and 2025? Thank you. Okay, let me try to answer that. The most of project we are taking are mostly leading-edge technology, which is very high NRE. I can say, because of the investment, then go through the production, chance will be higher. The project we are doing, on seven, on five. At the end, every company does the same thing. Top five customer dictate majority of the, the revenue, but we still, for us, we still try to take the leading-edge technology customer as much as we can, in order to- ... continuously position us as the number one backend leaders. Yeah, we need to build out the ecosystem. We need a many project to do, to build out the methodology, and we need more and more track record. When we taking a project, if it's a good project with a reasonable NRE, most likely we will take. Yeah, we are not only consider about the production chance and the possibility. Overall, based on the current trend, the leading-edge technology, we are taking seven nanometer, five nanometer, majority of them are going to production. Whether the MP revenue can give a can contribute to our overall revenue too much or not, I think that really depends on the customer's forecast and the customer's view. Okay, let me say, the project I mentioned into production phase last year, which, that means we already, we already knew the forecast by our customer. That's why I said we consider those project I just mentioned are high volume projects. Understood. Thank you very much. Sorry, one quick follow-on. Do customer, like, have to pay, like, sort of, like, penalty fee if they back off? Let's just say, you know, like in a small chance scenario. You mean back off? Mean, what do you mean? Um- Back off means? Sorry, back off from, from, mass production, like scheduled mass production. no, there, there will be no penalty, but if that's the case, which means the customer is in big trouble. Understood. Their starting investment is totally waste. Mm-hmm. Understood. Understood. That's. Okay. Yeah. Thank you very much. All right. Let me add to, try to add to your previous question. I think different customer, we have a different rule for them. For example, the China customer, especially startup customer, during the production, everything is a pre-pay. They have to pay us before we place any order to TSMC. Yeah, for some, credible customer in U.S. and something, we just, prepare the material, material based on their forecast, but they have to pay us, when we ship out the, the project. In usual, for the Based on past experience, everything is, goes very well. Yeah, if they delinquent any payment, then the new, the penalty will be higher. Chinese- Thank you. For China customer, everything is a pre-pay. That's including, like, for the MP part, not just the NRE part? That's the MP part. Mm-hmm. Okay. Thank you. Mm-hmm. Yeah. The next one is Bill. Yes. Hi, Johnny, and also Daniel. Thank you for taking my questions. My first question will be on your NRE, also, turnkey mix. First half seems like it's like 20%, 80%. Just wondering, how are we looking into 2024? Also, do we have a potential target or the, the mix that we'll be looking at ultimately, in the next three to five years? I just want to get to a sense, a sense this year, you know, how much growth are we looking at? Thank you. The NRE to mass production ratio. Bill, honestly, honestly, it really depends on the application, the customer, and it's hard to tell. Usually, when we discuss the projects in the very beginning, we will have the rough forecast by the customer. 'Cause, you know, the shipment volume in the future is the key points for us to discuss the pricing of the NRE. We will know if there will be production or not in the very beginning, when we talk about the projects. Of course, customer and the Alchip may have different view- Okay ... on the future production model. Pushing the It's a, it's, it's a, it, yeah, it's a process of negotiation. Okay. Let me add more to that. I think your question is the total NRE versus mass production ratio right now is around 20-80. To be straight, even we have a very high confidence to grow our NRE, but NRE can be only grow linearly. It depends on the process technology improvement and also depends on our exact capacity. Mass production revenue can increase exponentially. Eventually, when our business is getting higher and higher, I think the NRE to mass production ratio will keep reduce. yes, I, I, I think that's... I'm trying, I'm trying to get, get into, Yeah. If you look at next year, we are seeing a lot of project kicking off. Does that mean that, you know, for 2024, we're gonna see a lower NRE% versus higher turn-key revenue contribution? Would that be the case? That's possible. That's possible. Okay. 2024, NRE number will be higher than 2023. I see. I see. Mm-hmm. That, that, that comes in my second question, will be on the your NRE growth. How, how should we look at it? Given the R&D capacity that we have, are we looking to further expand our capacity overseas? I, I do mean outside of China. You know, what's your plan on this one? Thank you. Yeah, our target is always, like, at least minimum 30% as an internal target. We try to staff more engineer outside of China. Keep in mind, not all the customer requests design outside of China, but right now we only have 3-4 as a specific ask this kind of question. So our Malaysia, eventually Vietnam office will establish and doing the staffing. We have a very aggressive hiring plan, yeah, in that region. I see there are 2-3 people on the line for questions. I would say because of the time constraint, we just take questions from those people. The next one, I'm not, the next one, Charlie, you have extra question? Yeah, just, just wanted to help to clarify the CoWoS comments, right? Mm-hmm. Yeah, so I guess, the key message from management is that, you know, first of all, your allocation support from TSMC is increasing, number one. Based on those industry information, TSMC's CoWoS capacity is also expanding. Mm-hmm. I guess the, I guess, you know, just based on our observation, right? Maybe there was some technology transition in July or August at TSMC, maybe like CoWoS or those type of transition. I just want to make sure that the investors getting the right message. It's just a short-term hiccup, and your business will ramp up in September and onwards. Is that the right interpretation on the CoWoS comments? Yes, Charlie, it is right. It is one of the reasons. Another reason is because, as I mentioned in the presentation, earlier presentation, the second... If you compare second quarter and the third quarter, in the second quarter, we have the delayed shipment from the first quarter. You see, quote-unquote, a decline. To us, we, we, we really don't consider the decline is really, really significant. Right. if we follow the very original plan. Mm-hmm. Right. Right. Yeah. Mm. Understood. That, that's super helpful. Yeah, yeah, we can leave it to the next time, but if we have, like, one minute, would you mind go through a little bit China business? Because I feel like even under the kind of current U.S. export control, as long as- Mm-hmm ... you comply with the EAR rule, there are still- Mm-hmm amazing opportunities there. Can you give us some color about the, the, the opportunity next year from China? Okay. Let's, let's say this way: we, we, our philosophy is to keep the usual position. Mm-hmm. As long as. Okay ... we comply all the rules and the regulation, we don't rule out to support China customer. In order to avoid the geopolitical risk, I will say we try not to touch projects with high sensitivity, very high, computing power, or some customers that has complicated holding structure. That's, those are what we are trying to avoid. In the same time, we're also trying to win more projects from some insensitive segment, like automotive. We consider automotive is not that significant to the geopolitical issue. Mm-hmm. Right. Yeah. Daniel said, right. In China, for sure, we are focused on automotive. Yeah, for HPC or AI, any high compute power requires a leading-edge technology. I think, when we get the RFQ, I think the stage, we will conduct a three-way NDA with the major supplier. Yeah, if we sign all together, everybody's thinking about, it's the right customer to do. Yeah, for sure, we will take. Yeah. As long as it's a leading-edge technology, which as we consider is a good project, yeah, I think we will take, even if it's from China. Okay, one more thing I want to add is, for the geopolitical issue, we try very hard. I guess in the same time, some suppliers in the supply chain is doing the same thing. You know, let me give a, let me give a number. For the second quarter, the China revenue only accounts for single digit of our total revenue. However, however, let me say this way, we are not trying to intentionally to avoid the projects from China customer. The overall situation in China IC industry is a little bit difficult. I guess every one of you knew that the overall macro environment in China is facing some difficulties. That's the current situation. Got it. Thanks for taking extra questions. Congratulations for very good execution. Thank you. Thank you. Thank you, Charlie. Next one, Tina. Tina Chen. Yeah, no, no, sorry, sorry. That's, that's me, sorry. Tian. Hi. Hi. Yeah. Yeah, sorry. Hi, Daniel and Johnny. Just very quick one, because no one is asking. Talking about the, the CoWoS capacity, because the fabless customer- ... actually asking the OSAT to add the CoWoS capacity. My question is, is your will be very proprietary to the TSMC, will you be able to work with OSAT, if the OSAT also can do the CoWoS? Yeah, just have your views on this. Yeah. Thank you. I think currently, TSMC does the CoWoS by itself. Mm-hmm. Of course, we are trying very hard to, to, to get as many CoWoS allocation as possible in many different ways. We leverage our personal relationship, we leverage our position to represent multiple, multiple customers. We represent our position right now for TSMC's CoWoS customer portfolio. In the same time, our customers will work with us together for the CoWoS capacity allocation. When you say the OSAT, I'm not so- That's it. Yeah, yeah. Yeah, let me try to take that. Because the CoWoS capacity, I think many customers, especially big customer, consider or use other alternative solution. To be straight, some of our customer are also thinking about this approach, but when we talk to TSMC, basically, TSMC, they are trying to offer. They are working very hard, trying to increase their CoWoS capacity. Those, right now, CoWoS-S, facing a capacity issue, they have proposed CoWoS-R. Some of the design is CoWoS-L. For customer, specific customer, if they want to use the OSAT solution, from TSMC's standpoint of view, they have to first of all, they cannot support the capacity. Second, the bumping, the COW of Chip-on-Wafer size, they are in TSMC. For the OS portion, they may thinking about using the OSAT cap, like ASE. Even TSMC, they have a plan to do this. Few of our customer, I think, already start to do the OS part, out in the, using the OSAT solution. So far, most of all the CoWoS production design -wise, is everything is still coming from TSMC. Starting from next year, I'm not surprised some of the OS portion, TSMC may partner or our customer may use the other OSAT solution. Just, just simple one. If next year, some of the stage or the OSAT capacity come in from the OSAT partner, will this loose up the capacity for you, or is more or less TSMC is still the single determining factor of your capacities? So far, based on our, our production projection, I think TSMC are still the single supplier for our CoWoS design. Yeah, We have five or more customer requests CoWoS. Unfortunately, only first two are big customer. I think we get a, we get a pretty much good support from TSMC so far. For the smaller customer, I, I, I don't think they have a too, too much position to go for the OSAT. That's very clear. Thank you very much. All right. Thank you. Okay, next one is, Chris. Chris, please. Chris Tai. Chris, are you there? Chris, you need to unmute. Go ahead. Chris, we cannot hear you. Okay, that's the case. I've been, demuted? Oh, yeah. Hello? Go ahead. We can hear you now. Okay. I'm not Chris, but I don't know why my name shows Chris. Okay, my question is related to the growth potential of CoWoS. Yeah. Do we see a substantial growth in terms of project numbers related to CoWoS in 2024? I would say yes, but it really depends. It really depends on the customer, and it depends on how the AI trend goes. For the AI type of product, usually the design will apply for CoWoS. Whatever the design requires, the high-speed memory interface using, like, HBM type of design, they have to be CoWoS. Yeah, the reason I ask is that the bottleneck being solved can be, okay, increase the capacity or the other way around, right? Because the project number decreased. Right. Obviously, there's still a huge growth potential on the edge, PC area. Am I correct? You are correct. Mm-hmm. Okay. The next question, you sort of answered it. I'm curious whether this application related to CoWoS has been expanded into other area, or it's still just within this HPC area? Again, like Johnny mentioned, if the project requires high speed intercommunication between the processor and the HBM, usually it applies CoWoS. It's not limited to the application. Okay. Got it. Thanks. Mm-hmm. Okay. Jeffrey? Jeffrey? Mm. While we waiting for Jeffrey, there are some questions in the message board. The first one is for the, for the, for the CoWoS, Alchip use your own vendor code, and for tomorrow, the code name will be customer's code. Actually, it is in Chinese. About this question, we may not be able to answer. Another part is that I would suggest to investors, I know you are all very capable, and there are many ways to ask TSMC about various information. But as for whether this information is accurate, I would suggest you to be cautious. Okay. The next question may have already been asked: How much was the bad debt in the second quarter? I, we already answered it. The next one is: What's your goal and the target NRE% in 2023, full year, and 2024? We don't have a target for 2024. We will try very hard to grow our NRE. Naturally, because of the process node migration and the increasing demand from the high-end application HPC design, we do have commitment to keep on to further grow our NRE revenue. In 2023, we gave guidance for you in the first quarter's earnings call meeting. For now, I would say the demand for mass production is really, really high. We will try. We will try to be in the high 20s% for NRE revenue to our total revenue. The next question is high management. Third quarter CoWoS capacity should be slightly up, quote, unquote. Actually, we already answered the question. People are curious about why the capacity expansion in TSMC, while we have relatively lower production revenue in third quarter. Yeah, I think we already answered the question. Another question is: AI server chip are expected to grow by 30% CAGR, and the penetration of ASIC chip in this market is expected to double from 12% to 24% over the next five years, translating to an ASIC growth opportunity of 70% CAGR. Is this representative of Alchip's growth potential going forward? For your question, I would say, we are just a IC design company. I knew all the numbers, but for us, our position. Our answer is, first of all, our position is very good. Not too many companies can do the most leading-edge technological design, and has the track record to prove it to the potential customer we are capable of doing large-scale design. We don't want to go into the, the, the, the, the numeric growth rate for the next couple of years. I would say that we, we just try our best to, to achieve the maximum growth we can do. Okay, I, I would say the last question from the message board: Do you have guidance for OpEx this year? Not counting. Not counting the bad debt in the second quarter. Actually, we do have it. We guided that the full year operating expense will be about $83 million-$86 million for the whole year. I think we are still on track with this operating expense plan. Okay, somebody asked one last question. Quarter one earnings guided 20% year-on-year revenue growth for 2024. I don't understand your question. Q1. Hey, I think if... Can people hear me? Hello. Yes. Please go ahead. Yeah, I think, I read it in the Q1 earnings transcript that, you know, you originally Q1, during Q1, you guided, like, $800 million revenue for 2023, right? Then you said. Mm-hmm. Oh, I see, I see. You would be- I can understand your question. You, you, you would be targeting 20% year-over-year growth, from year 2024 onwards. You know, I understand that. Mm-hmm. you know, we talked about 2024 revenue guidance. You said, you know, probably not as strong as this year, but still quite confident. I'm just trying to understand, is it gonna be more optimistic than what you guided in Q1, or what's it gonna look be like? I would say more optimistic since I said that, the current shipping, the biggest revenue contributor this year, we will have, we will have even more next year. To us, we are, of course, more optimistic, compared with the expectation, one quarter ago. Even based on a high- higher base for this year, right? Because before you were comparing to the $800 million number, now you're comparing to a $900 million-$950 million number. Even based on the higher 2023 revenue number, you are still more optimistic on the year-on-year growth going forward to next year. That's correct? Yes. Of course. Yes. Thank you. Okay, thank you. Thank you very much for taking my question. Thank you. Okay. You're welcome. I guess that's that's it for the Q&A session. We already running out of time. Thank you, and thank you for your interest and participation to our second quarter earnings call. Thank you. Thank you very much.