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Alchip Technologies Ltd
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[Audio Gap] little bit more than $140 million. Yes, we have -- we maintained 15% of our R&D investment. And we are TSMC -- one of the TSMC Value Chain Aggregators.
Next slide. ASIC market is very big and unique. So this time, I'm not going to expand ASIC market business model and opportunity. Alchip is doing the ASIC business since we found the company. Currently, we are focusing on HPC and AI area. We consider HPC and AI area has much higher entry barrier compared to most of our applications. Since the design always require the most leading-edge technology, currently using 16, 7, eventually we will use a 5 nanometer or below. The chip itself is very complicated and big.
Nowaday, generating and transmitter data is no longer a bottleneck. Effectively, [indiscernible] the useful data is still very challenging. Therefore, we believe HPC and AI application will continuously grow and sustain with a reasonable margin.
Next slide. Let me explain our Q1 situation. Basically, we meet our internal revenue target with record-breaking numbers. Revenue, Q1, $50.5 million, that was the record high, historical high, quarterly revenue high. In terms of net income, $5.78 million is also the record high, so does the EPS.
We have a great position in HPC and AI business. Multiple design planned to tape out soon. Yes, in fact, Q2 and Q3 is our tape out -- high peak tape out quarters. And we have -- other than this design, we're about to tape out in this quarter and next quarter. We have a lot of design in pipeline. Yes, in fact, our capacity is 120% full at this moment.
Other than China, we also have a few significant business won. In U.S., we're just new to the market, but we're doing very good. We already have a few 7 nanometer, 6 nanometer, even 5 nanometer design won. Japan, recently, we just win -- there's a significant win on games console business. Our company is very familiar with the game console business. About 10 to 15 years ago, game counsel is our #1 revenue maker. Many 7 nanometer design is in production stage -- preparation stage.
Another highlight for the Q1, we can say we're still doing very good on crisis management and control. We have no significant impact due to coronavirus. So other than Japan and U.S., most of the employees, they are working from home. The other region, we can say is almost 100% go back to normal. And -- but for the sales, is still facing certain challenges because there's still the travel ban and quarantine requirement for China and for Taiwan. But overall, as for direct execution and engineering work, there's no impact. And we're continuously receiving benefit due to the trade war.
Daniel, why don't you take over this slide.
Okay. This slide shows our first quarter income statement numbers, and It's pretty straightforward. As Johnny mentioned, the revenue is record high, and the net income is a record high single quarter profit.
So for the revenue, the first quarter revenue is $50.5 million, 7.4% quarter-on-quarter and 39.3% year-on-year. And for the operating income, the operating income for the first quarter is $6.9 million, almost $7 million, is 50.2% quarter-on-quarter growth and 88.6% year-on-year growth. And for the net income, the net income is $5.8 million, is 25.2% quarter-on-quarter growth and 79% -- 79.4% year-on-year growth, translating into a single quarter EPS, $2.87.
And this stage is about our quarterly application breakdown. You can see in the first quarter, the HPC percentage reached 79% of our total revenue, while the consumer and networking still account for not significant part, but 6% and the 4%, respectively, of our total revenue.
For the niche, I think the major item for the niche market application is the, [indiscernible] mentioned, [indiscernible] mentioned. We expect this revenue will be steady this year to first quarter to fourth quarter. And for the yearly, since we just have our 2020 Institutional Investor meeting, so the 2019 yearly mix is already shown in the previous conference meeting. So it's pretty straightforward. For last year, the HPC contributor accounts for 59% of our total revenue.
For the technology node, this quarter is pretty much similar to last quarter as the HPC -- especially the CPU revenue still accounts for the majority -- still be the majority element of our total revenue. So since this product is in 16-nanometer process now. So the 16-nanometer process now accounts for 53% of our total revenue in the first quarter. And you can see the 7-nanometer category, keeps on growing. And we expect the 7-nanometer design will gradually tape out in the following quarters, the percentage of the 7-nanometer category will grow.
This is the regional mix of our total revenue for the first quarter. In first quarter, Japan accounts for 14% of our total revenue, China accounts for 62% and Taiwan, only 3% and others 21%. We expect the others -- the others include the Middle East, the Europe and North America. We expect revenues from North American and Middle East and the Europe area will keep on growing in the following quarters.
For this slide -- this slide talk about the industry view. Honestly, since these 2 institutional investor meetings are very -- are close, so the view doesn't change too much. First of all, China CPU demand remains unchanged. Now although there is the coronavirus pandemic, the customers' still -- the customers' forecast of shipment for the whole year remain unchanged. Although now it's only -- we are only -- we are entering May, we are still watching closely to the possible forecast change from customers. And so far, we don't see any changes from customer side.
And for the China CPU market, both our #1 and #2 China CPU customers are very aggressive on kicking off new NRE projects. That's also the reason we will talk about later that in the second quarter and third quarter, even though the mass production revenue will remain strong, but since the design demand is higher than we expected. So we think the mix in the previous investor meeting, we guided the mix this year will be 40-something percent for NRE and 50-something percent to 60% for mass production. We believe the mix will a little bit shift from more NRE, less mass production.
For the AI market, outlook is still good. AI projects demand from U.S., Middle East and China is still good. For U.S., although the travel and communication and the employee attendance is kind of limited because of the coronavirus pandemic, but overall -- all in all, the feel of the demand and the future projects are still ongoing. So we don't see any changes. We don't see any change for the trend. But the short term are slowing down, is foreseeable. And we expect AI chip makers gradually enter the 5-nanometer phase in late 2020 this year.
Currently, in the existing project, we are doing for the AI are mostly 7-nanometer. And we are engaging with customers with the 5-nanometer projects. Although we don't win a lot, but many talks between Alc and the customers is ongoing for the 5-nanometer project. And we feel that those customers are the motivation for them to moving from 7 nanometer to 5 nanometer is strong.
And this page is about the 2020 business outlook.
Okay. Yes. As for the 2020 business outlook, yes, in fact, we just -- 1.5 months ago from previous investor conference meeting. Overall, we didn't see any big change. The only difference is virus pandemic happened within this 1.5 months. Unfortunately, our customers, I think, do not change their production plan, especially for the China CPU shipment. I think all the order remain very strong. So currently, NRE order project based on the tape out schedule, no delay. And next generation also kick in, and mass production order are still quite promising.
The only dependency is 7-nanometer design challenge. TSMC capacity still very tight. Unfortunately, we just received one good news from TSMC, they will successfully allocate some wafer to us. So 7-nanometer production already stopped. And 7-nanometer demand getting stronger and stronger starting from second half of this year [indiscernible] that into prototyping stage, Q4 and early next year will go to the mass production, high volume mass production.
We'll be continuously cautious for COVID-19 prevention, And right now, design stage, I don't think there's any impact, no delay and new project keep coming. The only business-related impact is in U.S. and Japan region due to the travel ban, the frequency for visiting customer getting less.
So at the end, thank you very much for believing and trusting Alchip. For the past 5 quarters, we can see we always met and outperformed the guidance. Based on current 2020 forecast, we can say this year is going to be another great year, and Q2 is going to be another record-breaking quarter for the company.
Thank you.
Okay. If you -- now we are entering the Q&A session. So if you have questions, please use the raise hand function, and I can unmute you.
And please -- Louis, please tell us your name and the company you are working with first, Thank you. Louis, I already unmute you.
This is Louis Cheng from Eastspring. So my first question is regarding second quarter, as management just mentioned that it will be a record high quarter. Are we still expecting like a minor quarter-on-quarter growth? Or it will be a more meaningful quarter-on-quarter growth in second quarter?
Okay. Johnny, I'll answer it.
Okay. Go ahead.
For the second quarter, we expect the revenue growth will be minor. We will be slightly [indiscernible] for the growth. But for the mix, we believe the second quarter mix, the NRE percentage will increase. So of course because of the increase -- because the increased percentage of NRE, the gross margin, we believe it will be better than the first quarter. That's why we say since the first quarter is already the record-breaking quarter, so now when we look into the second quarter, the revenue could be slightly better, the gross margin could be better.
And so we also expect the same quarter will be very good. And for the whole year, we expect for the first quarter to third quarter, the quarter-on-quarter growth guidance will be flat to slightly. We may see a more significant revenue growth in the fourth quarter But of course, as we mentioned, it depends on the 7-nanometer [indiscernible] support by TSMC.
Okay. Charlie, I already unmute you.
Can you hear me okay?
Sure. No problem.
Okay. So during your opening remark, you said that this year probably the mix from NRE will increase. Does that mean you see some remission fall from turnkey where there is absolute upside from your NRE business? Can you clarify a little bit?
Okay. Johnny, do you want to answer it?
Okay. Yes. So NRE getting stronger, doesn't mean our mass production order getting less. Yes, basically, we can say NRE is under our control. Based on the design capacity, based on the people we have, we can easily estimate how many design we can enable and how many design we can tape out. But for the mass production, 16 nanometer, I don't think there is a issue. Whatever the forecast, we should be able to deliver accordingly. But for the 7 nanometer, there's still certain dependency from TSMC.
Okay. So can I get a sense of which NRE projects see the kind of additional upside? Or is it kind of overall pulling of the schedule?
Schedule, I think NRE's schedule remain the same, is kind of very difficult to pull in the schedule because when we sit down with the customer, they already propose very, very aggressive schedule. The reason NRE increased because of the new business
Oh, new business. Oh, okay.
So China, U.S. and even Japan, there's a lot of new business kick in.
Okay. And I guess just related to my second question. The company SKUs are very well in running as 120% kind of utilization. So long-term journey, how big do you think the company can be, meaning in 3 years, 5 years based on your current business model? Do you think you're business size can be 2x? And what would be the bottleneck?
Yes, that's a very good question, and the question is also very big. Let me try to answer. First of all, the most efficient way to increase the design capacities, increase our design efficiency, I still believe with the same number of people, we can enable more projects. And also the company does have a growing plan. Right now, we have 450 people. By the end of this year, we'll be -- for sure, we are over 500.
So to answer your question, yes -- but right now, our sales team will be very, very selective to taking -- to choosing a customer. It's not the bad news for the company. We've been able to choose the right customer, either they have a future or they have existing production. So by the end of this year, I estimate that in the middle of next year, our capacity will increase 30% to 40%.
30% to 40% this year?
Yes, yes, to the middle of next year.
Middle of next year. Okay, okay. And if I may, one small follow-up. I think recently, there is some announcement from the U.S. government. They want to tighten the export of the semiconductor to China for military usage. I know the company and TSMC has been very careful on this one. But this time, you also mentioned that even the end customer [indiscernible] [Foreign Language]. They can be considered as the kind of embargo list if the chip can be used for the military purposes.
So how can a company kind of manage this risk, right? Because I think for your China CPU customers, sometimes it's very hard to tell their final purpose, and it seems, from your comments, they are very aggressive even in this kind of environment. So don't you think that there is some risk around these projects?
All right. Thanks, Charlie. Well, this is a very sensitive question. I try to answer accordingly. When we select the customer, we usually -- we always be transparent to TSMC and to other supplier. This is a customer we are going to take. We will sit down with TSMC and sign on the 3-way NDA before doing the design work. For sure, there's no military, no direct military usage. And that's why both the TSMC and us consider that's a customer we can take.
But just like -- Daniel always say, when you're making the -- for example, when you're making a knife, it's very difficult for us to guarantee the usage. Yes, they are making the chip. This -- all kind of application they can do.
So based on our study, our customer also tell us. Even for the military usage, usually the demand and also the number are very small. In usual case, that's a FPGA-related application, they don't need to make an ASIC. This is [indiscernible] entire design.
Right now, HPC and AI, [indiscernible], I think that's [indiscernible] for specific military usage. We can tell this, obviously, that's a cloud computing and also data analysis-related application. TSMC also consider the same thing.
This is [indiscernible] from Diamond Asia Capital. So I have the first question is related to your comment about the China #1, #2 CPU customers are getting more aggressive in tape out. Could you share with us why? What caused the sudden increase in design activity for the CPU makers?
First of all, not aggressive in taping out, aggressive in open new project.
So I -- okay. I will hand it to Johnny. Because it's expectable because -- of course, part of the reason is because the tension rise between China and the U.S. And -- but those China companies who have the ability to develop the advanced technology node chip are -- our field is to -- it becomes more aggressively in recent days. So it's not accidental things, it's pretty expectable.
Okay. Understood. And then for the China CPU, I know that they usually have a tender every year. But I think this year, we still have not seen the government tender on the global government or the government usage of PC. Is there something -- you have some clarity with your customers or any time line? And does it -- does that impact our mass production volume for that specific customer?
Okay. Let me try to answer. Yes, yes, for sure, China is going to reduce the dependency from U.S., and that's their strategy, and that's a trend. For the CPU right now, I think everybody knows is a huge dependency on the Intel and also related CPU.
So China does have a -- China plan -- China government does have a plan, gradually replace the dependency from Intel CPU using their own design. And we do receive some order -- actually, when we ship to the customer, we don't know where they ship. But when we chat with them, they already mention some government-related business unit already being enforced to use their design, and this trend will continuously grow. So that's why the 16-nanometer CPU demand and also their next generation, they put a very, very high expectation and focus on that.
Okay. Understood. And then related to your previous comment about you're closely watching about any order change situation at your downstream customers, I'm just curious which area are you referring to? Is it the China CPU, the Japan? Or which area up and down, like you are watching closely?
Still, China CPU seems the order size are very big. So we'll be watching very carefully, not only on the order, but also on the order payment stuff. Right now, I think the risk for us to take this project is very, very minor. It's almost the prepaid deal.
Okay, okay. Understood. Okay, okay. And then you mentioned the China #1 and #2 CPU makers are like getting more aggressive. Are you referring to you are not a supplier for both of them? Or you are still just supplier from the previous one, then we always know about?
Yes, for one of them, we can say we are sole supplier. The other one, they have multiple suppliers. We are one of them.
Oh, okay. So you actually are a supplier for both now, 1 and 2. Okay. Understood. And my last question is just about your -- is there any change about your hiring plan? Because I think you previously talked about 520 employee by the end of 2020. Any change about that? And would you be able to help me understand the split by different geography? I mean you set up a new U.S. office, right? I'm not sure like maybe then additional 100, 150 new employees, how are they divided by different countries?
Okay. [ Chihong ] you're really doing a good study for our company. Yes, before I mentioned about 520, but this -- today, I'm revised to 500. I did -- we did change hiring plan a little bit, being more conservative. Other than China, other region, for example, the U.S., Japan would be a little bit more conservative. But overall, We still expect to grow at about 15% total head count this year.
Oh. So actually, you maintain your China hiring, but then you basically reduce a little bit...
Other regions, other region.
Okay. First of all, someone is asking us about -- something is asking about the game console thing. It's not pacing or Pachinko CPU, it's a game console chip.
But as I know, it is not a major chip for game console, but a very good -- very -- but the customer is a very sound game console maker worldwide. So we don't expect a huge volume for this project. And for the schedule, we are just winning the project. So most likely, the mass production will be -- won't happen this year. It will be next year. And sorry to everybody that my computer seems crashing.
So if in the next moment, next minute the Zoom closes, please log up again because now my computer can only do the talking. We cannot unmute anyone. My screen shut down. So I'm trying to fix it. So if the Zoom connection is off, please log on again.
[indiscernible], we cannot take any question.
Okay. Jeffrey, are you there?
Yes. Can you hear me?
Yes. Now I can hear you.
Okay. Yes. So I guess there's not just 2 Chinese CPUs [indiscernible] right, there are several of them. And also, you mentioned that one of your CPU customers is multi-sourcing. So I guess the question is, who are you competing against with -- for those back-end design businesses?
Excuse me?
Yes. The question is your -- you have 2 China CPU customers. You said, one of them is multi-sourcing. So we're that multi-sourcing customer, who are the other -- who is the other sources? And then for the other China CPU customers that you don't have, who do they go to for the back end? Whether it's in-house or there are other design service houses like Alchip that are competing for that business?
Okay. Wait a moment. I haven't said that our customer has multi physical design source. At least for now, Alchip is the only back-end design supplier to NVIDIA, our #1 customer. For the #2 customer, based on my knowledge, Alchip is also the solo back-end design supplier to them. But both of these companies have the -- kind of has the back-end design capability in-house, but the ability of doing a leading-edge technology node is limited.
Okay. Let me try to add more on this. Yes, basically, for these 2 CPU design, we don't have any competitor. To be honest, in China, there's no competitor who has the experience doing 7-nanometer or 5-nanometer design. But like Daniel just mentioned, customer does have a COT team. They can do their own design. So for the mainstream design, for example, the 28, or even 16, they may tape out by themselves. But for the latest technology, 5 or eventually -- 7 or eventually 5, they always want to tape out through us. Yes, there's a lot of dependency. First of all, we are the only one -- has experience and track record. And second, they may not be able to take the latest technology, PDK or the fire from TSMC directly.
Okay. And what about for the other China CPU makers that are not your customers?
Oh, they are our customers.
Jeffrey, I have to say, because of the China CPU definition, is ambiguous. They talk about China CPU, they talk about NVIDIA and they talk about [indiscernible], they talk about [Foreign Language], they talk about high silicon, right? But based on our definition, the China CPU supplier to the government, it can only be on based supplier, which means NVIDIA and high silicon on the market.
Okay's. [ O. Lee ], already on your view. Please ask questions.
Thank you for the presentation. This is Oliver from the Bright Rock. So you mentioned the -- so the TSMC actually gives you some additional allocations for the 7 nanometer. And then your growth -- incremental growth may be subject to the 7 nano allocation. So just -- can you actually elaborate how do you actually interact with the TSMC in order to get more allocation at 7 nano? And then is it possible actually to get more allocations? And what is the key, actually, TSMC would like to give you more? Is it like the visibility of the project or like the pricing? Or can you actually elaborate a little bit?
Okay. TSMC 7 nanometer, I think, right now, officially, they do not make any promise to us because their demand is much, much higher than suppliers that everybody knows. So once -- every time when we receive the order, we have to sit down with the TSMC to expand the difficulty customer facing and also the potential of this design. And then we can be -- in usual case, we can get some wafer allocation.
But at this moment, I think there's no guarantee from TSMC. TSMC -- but I can say TSMC is very supportive for the company. In usual case, based on the past experience, they will -- they may not fulfill all our demand, but they always give us some in order to make -- in order to let customer doing a prototyping and doing the small volume production.
Okay. I see. So if I quantify that, is that possible like you ask 100, they give you like 70 or something?
No. If for this year, I will be very happy, honestly.
I would like to add something that usually TSMC choose -- they decide the level of support -- depends on the application, the customers and many, many considerations. But for now, it's good for us that our major applications within HPC area. This application, I think TSMC now is -- pay much more -- it has high interest in this application. It is a very important area for LAN to grow. So at this moment, we think situation compared to -- in the beginning of this year, the situation seems better.
And Charlie?
Okay. Yes, I have some follow-up questions, in particular, your NRE outside this year. So Johnny, do you mean those outside come from all those regions you mentioned above, including U.S., Japan and China? Is that from both of those? And if you can, can you please elaborate a little bit the application in the U.S. and also the application from China and their geometry?
Okay. Yes, since our capacity become full, so we're being able to select the customer. Before we -- the current project will be tape out -- a lot of projects will be tape out in Q2 and Q3. And based on our original plan, the pipeline project maybe -- used to be 16 or 28, but we also want -- to 7 and some, 16. That's why NRE total contribution will be getting higher.
So right now, we can say only if they have a huge volume, we will not take any mainstream design like a 28 or below. We only take a 7-nanometer or few 16- or 12-nanometer design. So NRE for the advanced technology is always higher than the mainstream. So even our capacity doesn't change. By changing the pipeline portfolio, our NRE number will increase.
Okay. So it means the mix from the 7 nanometer is higher. Is that the right interpretation?
Yes, the 7-nanometer design application, I think the project we take is either HPC or AI.
Okay. Yes. Sorry, I thought you said for those NRE those milestones and schedule are pretty much determined, right? But it seems you still have some flexibility to remove some trailing edge projects and squeezing some lean edge like 7 nanometer. So how should I think about this kind of disconnection?
Go ahead, Daniel.
Charlie, okay, let's say this way. When we release our guidance in the yearly investor -- this investor conference about 1.5 months ago, we are -- our approach is very conservative. And let's say, some of the upside comes from -- we are -- when the days go by, we have become more and more confident on some projects. Some of the upside comes from the confidence level increase. And of course, some comes from new projects. As you know, we may sign new projects, and we instantly can set up the schedule, the milestone payment for the next -- the whole design phase. So there are better things combined together to create upside.
Okay. I see. And then regarding your [indiscernible] in China, I think we met several months ago, your company seems to be -- you want to allocate your resource U.S. customers, except for [ VTM ] because [ VTM ] has a big volume, right? But For other China companies like BAT, Baidu, Alibaba, Tencent, you didn't seem to be very interesting. Whereas Alibaba a week ago announced a very huge CapEx increase, including developing their own AI accelerators. So do you reconsider to reimburse the opportunities in China, meaning those big BAT companies?
Okay. I will ask Johnny to answer the BAT part.
Okay. Yes, we will never give out the BAT. Yes, in fact, for Alibaba, we still continuously discuss with their key decision-maker. Hopefully, in a short period, in fact, there's no supply Alibaba will become -- will -- getting to our customer portfolio. And also the U.S. business, similar size to the BAT and seeing the -- they are still ahead of BAT right now. They have a fixed road map and also have a production plan. So we will -- if a capacity allow, we will continuously doing business for U.S. customers, but we never refuse the BAT. In fact, we still have a dedicated team working with them very closely.
Okay. And you guys already did a fantastic job, right? Just some very microscope question because one of your previous customer, Cambricon, recently disclosed that in their prospectus that they changed their sensor partner to Avago, I think, which means Broadcom. So can you explain the dynamic here, meaning why there's such a change? And do you think other design service customers -- competitors can also gain some share in China?
Okay. Let me try to take this question. I think the relationship between us and Cambricon are still very strong. What we're doing there, both 16-nanometer design, they already mention to us for the 7 nanometer due to the IP limitation, they plan to -- they would like to work with Avago. For a specific, I also give Avago a very good credit, and they are outperformed compared to other IP providers, but in usual case, people cannot afford this kind of IP costs. For me, it's not so cost effective. You will gain something, but the ROI to use those IP, I think usually, most of our customers do not consider that's a good investment. Now Cambricon is a different story. I think they plan to use the best of best. Yes. So this doesn't hurt our relationship. Yes, their current production, they'll go with us. Their next-generation, 7-nanometer, will go with Avago. That's true.
Okay. That's clear. So just to clarify, for example, your Japan game console project, which geometry is at?
It's a tower more mainstream.
Oh, mainstream. Okay. So meaning...
It's not the most leading-edge technology.
Okay. I see.
Yes. But we consider that's a significant win. In fact, we -- companies try to win this customer for the past 15 years. Finally, we did.
Well. Okay. I think it should be a huge win because you already had a great relationship Sony, so I assume it's other 2 game console vendors, one of them, right?
Right
Congratulations.
Thank you.
I'll use Chinese since this question is asked in Chinese.
[Foreign Language]
Okay, Kevin.
[Foreign Language]
Okay, okay, okay.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
Okay. [indiscernible] To follow up, just your guidance just [Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language] grow it's sustain for the past 17 years and how it's receiving repeat customer. [Foreign Language] 4 components
Okay, okay, okay. [Foreign Language]
[Foreign Language]
[Foreign Language]
No, no, no. [Foreign Language]
[Foreign Language]
Charlie, I'm muting you. Do you have further questions. Charlie Chan?
Or no. Okay.
So Jeffrey, you raised hand.
Yes, can you hear me.
Yes. Do you have further questions?
Yes. One quick follow-up. You mentioned second quarter should be revenue flat, maybe up slightly because more NRE gross profit margin should be up a little bit. What does that mean for OPM when there is more NRE? Does that mean OPM could also be up close gross margins up? Or does that actually mean OPM is down because [indiscernible] has higher gross -- higher operating margin mainly?
We believe the operating profit margin would be -- compared to the first quarter will be up.
Okay. So along with gross profit margin. Okay. Great.
So if anyone has further question, please raise your hand. [indiscernible]
[Foreign Language]
Okay. I guess nobody is raising hand asking questions. So again, thank you for your participation and your precious time for our first quarter institutional investor conference meeting. Thank you, everyone. If you have further questions, you -- or if you want to know more about Alchip Technology, please feel free to e-mail me or set up other conference meetings with me in the future.
Thank you. I guess the meeting will end now.
Okay. All right. Thank you very much, and we are looking forward for the face-to-face meeting soon. All right. Thank you.
Thank you.
Thank you.