Welcome everyone to Phison 2022 second quarter analyst meeting. I'm Leo Wu from Westcomb. Today, we are glad to have Chairman Mr. Pan with us to share about the business outlook and his view for the industry. Please note that this is a 60-minute meeting, and we'll have Mr. Pan for the company recent business update and also followed by the Q&A sessions. Let me pass the time to present. Thank you. Okay. Thanks to ladies and gentlemen for attending Phison's Q2 earnings call. Okay, let's get right to today's report. Okay, Phison, we are in the data storage industry, and we all agree we are growing in the data storage field. According to a lot of analysis report, this is still a big growth. Looks like Phison, we are in the good industry, the right industry, and we need to play the better positions. Again, according to the report, the NAND application from 20 years ago, mainly in the removable, then moving to the embedded mobile PC. The next will be data center and automotive, which Phison we are aiming to these two industries, and we also have heavy R&D investment into both data center and automotive application. This is Phison's our CQ2 revenue breakdown. You can read our controllers revenue portion is every quarter growing. This quarter we are around 33% in controller business. The reason we keep growing controller just because since we work with the AMD from start from 2019, we have heavy R&D engineering investment. Then we got many projects from the NAND producer. After two, three years development, is a time to start to ramp up our controller business. In 2023, we are still very optimistic in the NAND controller's portion. We believe we can achieve very high level. The next is about the embedded ODM. We start this business from 2020. Right now, this portion also keeping growing, and we believe this controller and embedding will be our main cash cow in 2023. Gaming is slowing down. This also reflect the total inflation, which impact the consumers weak buying power. Gaming in the CQ2 is weak. I think we need to wait until Christmas season. Industrial module actually been impacted by the CQ2, the China lockdown. A lot of assembly material component shortage caused a lot of industrial system not able to assemble. Right now, we already feel the demand is slightly back in the CQ3, so hopefully by CQ3, CQ4, we're able to get some more growing in the industry. Overall, consumer is remaining 18%. This also reflect that CQ2, the consumer market is very, very weak. Consumer market to Phison, I think still one of our main business. We hope by CQ3, the Western country back to school and the China Double Eleven in CQ4, then following by next Christmas season. This consumer industry will able to help Phison to move our inventory. Anyway, Phison, we have so many different business revenue combination. Overall, CQ2, I think this is very healthy, and we hope by CQ3, CQ4, the market will able back to normal. You're familiar with Phison. From day one, we are starting from the USB consumer, then we start migrate to the industrial. After we work with the AMD, we are more focusing into the embedded development. Next, our last milestone is the data center and enterprise business. We invest a huge number of engineering resources into this enterprise application, which we are also glad to have our partner, Seagate, announce their branding Nytro enterprise SSD products a few weeks ago. They start to promote this through their sales channel. Coming up next week is FMS in San Jose. Our partners is going to announce our Gen4 x4 enterprise SSD going to sampling and also going to ship with a small volume going up to their server and data center customers. Okay, we move to our Q2 financial report. Revenue-wise is TWD 16.2 billion, which we have year-over-year 2.4% growth. Gross profit is TWD 4.9 billion. This is also our second highest at the same period. These are some highlights here. The controller is 33% of our total revenue, and the controller growth year-over-year is 71%, okay? By unit, which including the mobile and the PC Gen 4, we are in the very high growth. In the PCIe overall Gen 3 and Gen 4, we have a 6% growth. Modules-wise, I need to highlight about the BGA SSD. BGA SSD is very niche application in the PC and some smartphone and industrial applications, which the NAND producer, they are not much interest to carry develop these products. Looks like Phison become the major key supplier in the world. We are successful to put the BGA SSD into the mobile phone and follow up by the thin type notebooks. We are going to work with our CPU partners to promote this to the Chromebook applications. We believe Phison will become the major BGA SSD key supplier in this industry. The next is about our embedded ODM module business. We have continuous growing and believe by 2023, this will become our major cash cow. Overall, the revenue is TWD 13 billion, first half is TWD 33 billion, little bit growth versus Y-o-Y last year. Gross margin-wise, by Q2, Phison's gross margin is 30.3%. Still remember in Q2, many investment analysts, they are questioning Phison, "Oh, Phison may be impacted by the gross margin rate." Overall, at the end, we're still able to maintain the high level margin just because Phison has so many NAND controllers and application modules. Even though Q2, China's lockdown and worldwide heavy inflation, we still able to manage our business with a better gross margin rate. The earnings per share in the Q2 is TWD 9.17. First half is close to TWD 20, okay? This is also the highest in the same period. We agree Q2 is very challenging, but overall, with the TWD 9 EPS, I think we are happy on this, and we still need to keep working very hard for our second half. Okay, in the balance sheet, the cash flow, cash-wise, we are versus the Q1 sequentially reducing a lot because we accumulate more inventory. Q2, we have good earnings. Overall, the cash back to TWD 13 billion by end of June. Inventory-wise, which a lot of shareholder investors, they may have a question. Okay. Back to six months ago, Q4 2021, Phison already announced to our shareholders we are going to build up our inventory just because we got so many designing project and we have a big forecast from customers. At that time, we set a target by Q1, Q2 this year, our inventory goal is TWD 24 billion. That was setting up by the Q4 last year. Anyway, we make it. Unfortunately, after Q2, the market suddenly turned down to very slow. Revenue-wise, we are not able to hit our target. That's why it caused at the end inventory is high. Overall inventory is just following our forecast. The only difference is the revenue not able to achieve our forecast, okay. I'm not much worried about inventory, but I mean, inventory is a heavy pressure to not only Phison but to everyone. We have to work very hard to consume this inventory and keep buying back from our supplier with more materials, with a much lower price to leverage our total cost. By the end Q2 earnings, our net value per share is TWD 198, which is our record high. Overall, the turnover rate, inventory turnover days is 170 versus last year, just because inventory increased but revenue didn't follow up. I believe the main market still will be very weak in Q3, maybe also Q4. Sooner or later, NAND go back to normal, then this inventory problem can be easy to resolve. By the income statement. Overall, the earnings per share. Okay, first of all, the gross margin rate, we are, I think we have a very good achievement in the gross margin rate. By the earnings per share is little bit behind my expectation, but overall, Q2 is a very challenging quarter. Okay. In the coming Q3, we think we still able to try to gain more business, but inventory still can be a problem to us. Okay, we also in the coming earnings call, we are going to also disclose our Q3 results. Let's say Phison since two years ago, we have issuing the stock option to our employee that will cause some OpEx. We start to highlight about this. Based on this cost expense on the options, without that, Phison will be able to gain the other extra 0.6% of the growth, the OP and also the net profit. In order to get a more good talent, Phison will keep issuing our stock options. We also have a buyback program as a treasury stock, and that treasury stock will transfer to engineers stock. In coming many years, we also will keep highlight about non-GAAP result so that the shareholder more transparent understanding Phison's what is our OpEx. This is for a difference. This is highlight Computex by end of May. AMD, Micron, and Phison, we co-announce the world's fastest PCIe Gen5 most advanced technology modules with 232-layer NAND, which Micron announced yesterday. 232-layer flash is going to MP, and also is a most advanced 3D NAND flash in the world. Phison, we feel proud we're able to work with AMD and then Micron on this much more advanced technology, and we become their ecosystem partners in their gaming and computing platform. This also to show Phison through our heavy R&D investment, we're able to achieve as a key ecosystem players in the most advanced technology platform in the future. We're also happy to win the Computex design award for the thin type notebooks, which using the Phison's BGA SSD product. Just now I also mentioned Phison become the key player, and we are able to design controllers. We build the BGA packaging, and we're able to service major design win into the platform. In the coming years, Phison, this BGA SSD will contribute more revenue, of course, the profit, and also to build Phison's highest positions in the notebook and also in the server and in the mobile phone. Some business highlight here. In the Q2 retail market, we're working with our partners, supplier partners. We build the 1.5 TB microSD to the market. This is the highest density in the world. In the OEM side, in the mobile, we're able to put our lowest power consumption eMMC controller into the smartphone, which is key player in the China and Japan. We're also successful to put our fastest, the world's fastest PCIe Gen4 controller modules into their gaming notebook. We have a few gaming notebook key brand. They are using our platform with our E18 Gen4 SSD up to 4 TB. This is a high ASP product. In the gaming wise, we work out with the new start company, Steam Deck. They just announced a handheld gaming console, which Phison is a key supplier in their internal SSD. In the server data center side, we are success to work with our partner to launch our Enterprise SSD PCIe 4x4. So my partner will make the big event at the next week at the next. In the industrial application, Phison, we gain a lot of design win in the medical systems. Medical system using a lot of image, and then the image that needs storage, which able to help them to do a lot of AI computing. Phison's, we are the key player in this field. Okay, the total industry outlook. After Q2 2022, the lockdown, the war, the inflation, we agree the market turned to very slow. The NAND looks like at this moment, I think NAND is not oversupply, just we define as under demand. The demand is getting slow, then cause the huge inventory stuck in the supply side. We believe the NAND price in the Q2 2022 will keep dropping. After a few more months, when price are cheaper enough, we believe NAND producer may announce to cut down production. This may happen, but we don't know when. Personally, my perspective will be happen by Q2 2024. After the NAND start to announce a cut production, by the Q2 2021, the new platform, no matter the PC or notebook, will start to increase device content to attract the consumer to buy that kind of systems. If these things happen, the NAND will back to normal again. We believe in the past year, 2008, 2012, 2016, 2019, these things happened. We believe again, this will keep happening again. Most investor analysts are questioning Phison about OpEx. Yes, by Q2, our OpEx still keep in a high level. This is Phison's policy. We agree the market turn down, and we also read from the public a lot of big guy in U.S. start to decide not to hire people or start to cut down the employee number. But Phison, as the only key player today in the third-party NAND controller business, we've been requested by so many NAND producers, system makers, to make a service, customize the NAND controller module for them. We still need over 1,000 engineers, new headcount. We are keep trying to hiring more talent in coming few months to make a better service. We believe by middle of next year, first half next year, Phison will able to achieve maybe 3,500 headcount R&D. After that time, every engineer well-trained, then we're able to have more capability to service to our main customers and also to the system customers. After that, Phison will slow down the R&D recruitment. For now until next first half, we are going to keep hiring. Of course, this will impact our OpEx, also impact to our profit, but this is our strategy. You also know Phison from before 2018, we are just defined as a consumer players. We are just followers. After AMD ecosystem event, Phison now become kind of leading technology in the PCIe Gen 4 and Gen 5. Our next goal is enterprise SSD. Phison would like to be the most important console supplier in the world by 2025. Means we will have to keep investing to make our R&D teams much stronger and able to make a good service to the main customers and also to the system customers. Okay, this above is my report. We call some Q&A. After this Q&A, we can go live. This morning, we have a board members meeting. We approved the cash dividend about our first half earning. This cash dividend will distribute by next year, early January. This is TWD 10 per share. Okay? Followed by Phison's our principal 50%, around 50% of the profit will share to our shareholders. Also, we've been questioned what is Phison's cash flows priority. Okay? Phison's our capital priority first is on the technology development. Okay? Second is try to recruiting the global talent, okay, to make sure our R&D capability is strong enough to make a good service to all the key customers. Then ESG, we are expanding the green energy to follow up the request by our western U.S. customers' requirement. Second priority is we need to use our cash to maintain our liquidity, especially like right now, the market is going down. The main supplier, they are coming to us some programs with our own enough cash, we're able to make a good deal. Okay, this our cash second is for our business growth. Then we are going also to have a dividend, every half year dividend to the shareholders. Okay? Now Phison still keep good enough of cash flow. We believe this cash flow will help Phison to get more business opportunity and to grow ourselves rapidly. A few weeks ago, Phison we announced to have buyback our treasury shares. This treasury shares is going to as a extra bonus to employees. This is a five-year program. We are going to buyback up to TWD 10 billion shares and transfer to engineers. The total potential cash spend will be like TWD 3.25 billion. I think with this good kind of incentive program, Phison will able to get a more good talent to help Phison improve our in-house technology. For our long-term scope, we still hoping we're able to consume 6% of total NAND production by year 2025. Okay, this is our goal. We still looking to our gross margin 37 ± 3%, and the ROE is 20%-25%. We agree we need to work very hard, especially right now there is a strong headwind in the semiconductor and the IT system business. Q2, Q3, Q4, we believe it's more challenging. No matter what, insist our R&D investing is a policy, and we believe with this strong investment, by 2023-2024, Phison will be able to become the only key player in the world. Relate to our competitors been acquired. I think Phison, we have a better room to play our positions. The only way is keep strong R&D investment. At the end, Phison will able to occupy most of market share and enjoy the profit and business. We've been questioned by the about the inventory. Yes, we have high inventory and followed by IFRS. Every end of month, end of quarter, we have to review our inventory, and we need to have a write-off. By this Q2, Phison probably write-off close to TWD 600 million of our inventory. Q3, probably if the market keeps going down, we still have to write off. This may impact to our gross margin. Overall, we believe this still under our control. After we sell the components as the modules, this trade-off will come back to our profit. Impact may happen immediately, but after the market back to normal, then everything will be solved. Talking about today's market is low, inventory high, what can we do? What we have to do is again keep make a more diversified business, more designing projects, more controller project and modules development. Keep insisting to strengthen our R&D capability. This is only way. The good thing is, Phison, we have very strong cash flow, very healthy organization. Also, thanks to our competitors being acquired, they may have something change very soon. We keep ourselves solid. Means after we overcome the current headwind, I don't know when, maybe one quarter, two quarters. After that, Phison will start to enjoy the return from our hard working. The gross margin, even though with the Q2 market still bad, we are able to keeping 30%. Q3 is challenging, but we're doing our best. Phison, I define the industrial, the IT semiconductor business. They have a so-called unit and capacity. We agree smartphone, PC, TV, automotive, IoT, whatever, that by unit in coming years, we do believe it's going to grow. Okay. Each system, definitely, needs to use storage, and storage is equal to NAND. NAND, due to the price going lower, the content of each system will keep increasing. I name this as a capacity business. Phison, we have a unit business, meaning we are selling controllers. Besides, we also have a module business. This module we count as a capacity business. Capacity able to help improve our ASP and also improve our gross margin. We're happy we have combined these two businesses in Phison's business model. Also, we keep asking why semiconductors are willing to outsource controllers to third parties. The reason is about their internal R&D cost is getting higher. The return on investment through the controller looks like getting lower, may go to negative. If they have a good talent, they prefer to use the talent to design the enterprise SSD, not client SSD. The reason enterprise SSD has a higher ASP per GB, highest profit per GB. Phison, we're happy to work with their semiconductor to service them our controller design service. Competitors being acquired may create some kind of competition to the NAND producer. I think we have a better position at this moment. Talking about ESG, we are still waiting the DJSI and MSCI's new ranking. But Phison now looks like we are improving ourselves in the ESG performance. Okay. Above is the Q&A we collect from advance, but now we can go to the online questions. Let me do it. Okay. I read some question in the chat room said that we go to the chat room first. Anyone, you can raise your hand. Ray, if anyone raise a hand, please let me know, okay? Okay, sure. Okay, the question here is, can you give us some color of 2022-2023 big growth expectation. CK will provide, I see. Okay. Basically 2022 versus 2021, we have a high expectation in the big growth in our business. Unfortunately, business was stuck in Q2 due to the China COVID and also the inflation. Q3 looks like it was slow, still slow, but they have a few opportunity there, Western country back to school. We believe the demand will start gradually coming back. Next coming by Double Eleven and the Christmas season. Overall, 2022, we still able to have a big growth, but I'm not able to have an accurate expectation how many% we are going to grow. By 2023, we believe inflation will be able to manage very soon. The market back to normal. Look to the 2020, after COVID lockdown, six-nine months later, everything become stronger. 2023, personally, I think is. I'm more optimistic. With our enterprise SSD start to NT$, we're able to have enjoyed a much higher big growth in the 2023. Second question about the CK. We are providing the modules. We are not selling controllers to them. We're providing the whole modules, combining the client SSD, industrial SSD, and the enterprise SSD. Okay. Yeah. Simon, you can write down the question or you can raise a hand, unmute yourself. Ray, any question online? Yeah. I think some investors, I also received some question from here. Some investors are asking about the overall industry, sorry, the inventory level. It seems like it's still much higher than previous quarters. What is our strategy going forward for the inventory build or how do we get to adjust inventory? My strategy is keep buying more and keep selling more. This is only strategy. First time we start to accumulate the inventory from a CQ4, and this inventory build up just followed by the forecast by 2022, CQ one, CQ two is too strong. Unfortunately, you know, suddenly everything back. This happened. My strategy is we keep pushing moving inventory. Of course, this may suffer some low margin, but we've got no choice. Then we keep buying from our suppliers with the better cost structure of our inventory. Yeah. Got it. Thank you. I think also there's a pretty nice discussion about previously in past few quarters we don't have enough foundry supply from foundry players due to the high demand. What is the situation now? Looking forward for next few quarters how do you expect the foundry supply? Also what's the demand side? What's the supply-demand ratio for you? For instance, we are the key player in the PCIe Gen 4 controllers, and we have a big demand in this second half and also the next whole year. By this second half we are still under supplied, like 2-3,000 pieces of wafer. By next CQ1, we still need to have passing double supply from our suppliers due to the strong demand in the PCIe Gen 4 controllers shipment. Overall by PCIe we are tight. I hope by CQ1 we're able to solve this problem, then we're able to gain the better revenue and gross margin. Talking about the mobile application. We believe mobile already accumulate too much inventory. Controller for mobile in the second half will turn to weak. We believe this will be balanced or maybe kind of a little bit oversupply in the second half. Got it. Thank you. Yes, maybe can you also talk about, for the new business, like for the redriver and also for the retimer? Okay. First one, we have a driver sample since end of last year. We successfully design win to almost all the motherboards in Taiwan and also in the U.S. customers. By this April, we can get a strong forecast and order from those customers. Unfortunately, our foundry is still under supplied. We pay little bit higher price to get the more wafer allocation. At that time we're able to fulfill the whole year of 2022, the supply demand. Turn to the June timeframe, due to the inflation again, customers' forecasts start to cut back. Even though they place order, they also ask to push out the shipment just because the motherboards are not that strong again in the market. We have to carry our drive inventory maybe from CQ3, CQ4, little bit some portion to next year. Again, this is a healthy inventory. It's not very much, but we believe this year we will become the key player in the market. Which will help us next year, like, with drive, we can play the better position. Talking about Retimer, now we are aggressively to cooperate with the server makers to collect their spec and to understand what they need. The chips will take off by end of this year, so MP can only happen by second half next year. Got it. Thank you. Mr. Pan, I can see Simon raised his hand, maybe he can take questions. Thank you. Yes. Yes. Hi, Simon. Would you like to take question? Maybe he's on mute. He's muted. I think he did ask questions in the chat box as well. Yeah. Okay, Simon, you can either unmute your speaker or you can write in the chat box. Okay. Let me read the one in chat box. He asked that double counting of NAND controllers given your module sales already includes controller while your sales breakdown shows NAND controller sales. No. The modules, double counting NAND controller given your module sales already include. No. Controllers is controllers, modules is, this. Our module sales exclude the controller segment. The controller we are counting into the controllers. We are not making the double counting. Okay. You're selling controllers to OEM and chip? Yeah, we are selling big amounts to the chipmakers. Who's the chipmaker? Is the NAND designer, right? Okay. Might have said chipmaker equal to the NAND producer. NAND producer is Phison's key customers. Yes, we are selling controllers to those NAND producers. Not only the name you write here, but also other NAND manufacturers. To OEMs basically they are not willing to buy controllers, they buy modules. We are selling modules. Yeah. Simon, the answer is yes. Okay. Other than Simon's question, anyone? You can either raise hand or jump right out here. Maybe let me follow up, so what was the overall controller prices back in the second quarter? And what's your expectation for the third quarter and the fourth quarter by sequential magnitude? According to foundry, they still believe demand strong, supply constraints, so they keep their wafer price, or they try to raise their wafer price. Overall, in the system side we believe market trend weak, so we're talking to the foundry, but they keep insisting right now the price is the price there. When we look to our customers in controller side, we believe they also start to suffer some price pressures. Phison, we are willing to work with our customers to lower controller price back to much reasonable price to help them able to get the more business to sell more SSDs. We believe keep discussing to foundry, maybe sooner or later we're able to get better treatment from the foundry. Okay. It seems like these like foundry players, they already started to have some price negotiation for like DDIC sectors, but not sure when do we expect that like this controller industry also have will start for this SSD discussion. We keep discussion but, again, up to today, it's still not happened yet. We don't know tomorrow. Let's wait and see. Got it. Thank you. Two questions from Simon about SSD demand risk. SSD demand basically in the PC OEM side, the SSD Gen 3 high inventory. Gen 4 is a new product, no inventory, but they have to ramp up. They have to track the Gen 4 demand. Looks like from this year, most PC notebook platforms have to move to the PCIe Gen 4. Okay, this actually is good for us to expand our business. If Phison will be good in Gen 3, now definitely we have to suffer the high inventory. But in Gen 4 we are good. Supply is still tight. Game console outlook. Game console, what they keep saying, they are suffering the component shortage, they are not able to improve the shipment. We believe by the weak demand in the industry, game console guy may be able to get more than enough components to build a system. I think by 2023, console is more optimistic in next year. Okay. Any other questions? I think if not, maybe you can close today's earnings call. Yeah, sure. Okay. Thank you everyone for your time and also thank you, Mr. Pan, for your time. Thank you. Yeah, thank you.