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Alchip Technologies Ltd
Earnings Call Analysis
Q3-2023 Analysis
Alchip Technologies Ltd
The company has expressed high confidence in its revenue growth for the upcoming year, backed by solid supplier support from TSMC for advanced packaging needs. CoWoS packaging, a critical factor for revenue growth, has sufficient capacity allocation, easing concerns around potential bottlenecks. An established value to TSMC and customers positioned the company as an essential client, ensuring better-than-ever support from TSMC. However, further expansion of CoWoS allocation for other customers remains competitive.
The company has decided to conduct a Global Depositary Receipt (GDR) offering, a move driven by the high cost of debt amidst rising interest rates and a relatively low profit margin. This equity financing, seen as an immediate and smooth solution for the company to acquire funds necessary for its operations, also supports profitability and avoids dilution concerns. This strategic move is targeted to empower the company to compete with Tier 1 competitors and signal financial stability to potential large-scale customers, preparing the firm to capture multibillion-dollar business opportunities.
The fourth quarter is projected to set new records in revenue and profits for the company, poised to exceed the highest quarters of the current fiscal year. Exact figures are contingent on the status of advanced packaging, but the upward trajectory is clear, reinforcing positive sentiments around the company's near-term financial performance.
With an expansion strategy in play, especially considering new setups in overseas locations like Malaysia, the operating expenses (OpEx) are expected to increase by 15% from the current year's levels. This increase is deemed reasonable in relation to the expansion, with cost analyses revealing potential savings and strategic resource allocation. Additionally, a balanced workforce distribution between China and other regions is being pursued to meet customer requirements and ensure operational efficiency, thereby justifying the planned OpEx growth.
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Good afternoon, shareholders, analysts and fund managers. I'm Daniel, CFO and the spokesman of Alchip. Welcome to Alchip's Third Quarter '23 Earnings Call Conference. This meeting will be hosted by our CEO, Johnny Shen and myself.
It is already 2:30 so we are starting this meeting. This meeting will be in English. If you need Chinese presentation materials, you may go to MOPS [Foreign Language] besides during the Q&A session, you are welcome to ask questions in Mandarin. Johnny and I are both mainly Mandarin speaker. So we can answer you and understand you without a problem.
This meeting will start with company brief and the CEO's message to investors, followed by [indiscernible] [ P&L ], business review and the outlook. And then we will announce our fundraising plan and then the Q&A session. [Operator Instructions] This page is -- again, looking to cover our disclaimer. I already said -- I already told that this meeting will be in English, and our participants, please ask questions to the raise hand function or you can write down your question through the Zoom messaging function. I can read it, and I will answer your question immediately. And the video of this presentation will upload to MOPS [indiscernible] after about 1 to 2 hours of this meeting. So if you want to review or re-listen to the meeting's content, you can download it from MOPS. Okay. I will invite Johnny Shen to start with the presentation we prepared.
Good afternoon, ladies and gentlemen. I'm Johnny Shen, President and CEO of Alchip Technologies. Thanks for joining our investor conference meeting. Yes, we appreciate the opportunity to share our Q3 results and provide guidance to our future business outlook. Therefore, those not too familiar with Alchip, let me provide a brief company update once again.
Our company is founded in 2003, we are IPO in 2014. So current market cash, a little bit over USD 6.5 billion. Employee headcount is 600 people. So obviously, we are very healthy on the revenue to employee ratio. So last year, our revenue number is $460 million. Yes, for this year, we'll grow price significantly. First 3 quarters, we already achieved more than $687 million.
Our market focus is HPC AI and also recently, we put automotive to become one of our main focus as well. Since we found the company, we've been successfully taped-out more than 500 design. And for the design we have taped-out more than 60 FinFET-related technology. And even for the latest CoWoS technology, we have taped-out more than 15 already.
Our capacity is around 20 to 30 new tapeout every year. And for the recent year, majority of revenue, more than 80% is contributed from HPC and AI area. We are the TSMC VCA member since 2009. And last year, we just joined TSMC 3DFabric Alliance. Allow me to continue. For Q3, let me give everybody a quick recap. In Q3, we are pleased to report a good result. Our revenue number reached $241 million with operating income of $32 million and net income of $28.1 million, resulting in EPS TWD 12 while our Q3 was slightly -- our Q3 revenue is slightly lower than Q2, but we saw an improvement on our gross margin, resulting in record-breaking income figures and also historical high quarterly EPS.
The primary reason for lower revenue was due to the shortage in CoWoS. Fortunately, we are making steady progress in improving the capacity. We expect smoother production of CoWoS-related products starting second half of this quarter.
For future business outlook, the demand -- the mass production demand for HPC and AI application remains robust. Our largest customer demand continuously increasing and the next year's forecast is significantly surpassing this year's figures. Additionally, several other customers has drastically increased their demand as well. We anticipate substantial revenue growth for the next 3 to 4 quarters.
But on the flip side, we are facing an operating cash challenge due to the high production demand, even though our cash flow is at a very high, high level, but it is still not enough to support the future production demands. As a result, we are planning another GDR offering to meet our customers' strong demand and also suppliers' payment.
For geopolitical risk management, we have proactively diversified our business concentration beyond China to other regions. In Q3, less than 15% of revenue coming from China region. Due to the new rule and regulation from [ USBS ] department, some of our Chinese customers has directly or indirectly impacted. Unfortunately, the potential revenue and income impact is very minimal compared to the total figures. Our future business direction in China remains unchanged. Yes, we will maintain a cautious approach by closing cooperation with IP and foundry partners. That includes detailed review for potential customers background, their end user, design spec before accepting projects.
We continuously to believe in and support business in China as soon as they are financially healthy and comply to all the rules and regulations.
In terms of workforce, we have embarked on a very aggressive hiring plan to strengthen our engineering support resources in Japan, Taiwan and Southeast Asia. Our newly opened Malaysia office already staffed more than 20 engineers. This strategy -- strategic hiring is [ adept ] to provide more flexible and cost-effective solution to meet our customers' involving requirements.
In conclusion, yes, we have confidence that our business is in excellent stage. We anticipate a strong finish for 2023 and hold a very positive outlook for 2024. Thank you very much.
Okay. Then we enter the routine financial numbers. This page is for the third quarter P&L. For the third quarter, I guess you already knew the revenue numbers, I'll still go through the P&L. We -- the revenue in third quarter was USD 240.6 million, which is the 7% order decline, but 104.7% year-on-year growth. And for the third quarter, we have slightly profit margin improvement. So the operating income for the third quarter is $31.9 million, is 12.6% quarter-quarter growth and the 71.6% year-on-year growth and contributed by the strength of the U.S. dollars in our interest income.
So the net income for the third quarter is USD 28.1 million which is 17.4% quarter-quarter growth and 92.9% year-on-year growth. The net income quarter-quarter as stated into EPS is TWD 12 dollars.
Okay. This is breakdown by application. You can see, obviously, HPC is still our focus in the third quarter. The HPC accounts for 85% of our total revenue and followed by the niche market of 4% and networking 10% and 1% for consumer.
For year 2023 until to date, 83% of our revenue exposed to HPC application. Okay.
For the regional distribution, again, we have been shifting our focus from China to North America for the past 1 to 2 years. To be honest, and probably, we have done a pretty good job. For the third quarter, the North American revenue accounts for 59% of our total revenue followed by the Asia Pacific, 27% and in Japan and in the other area makes the balance.
For this year and year-to-date as a whole, the North American exposure accounted for 61% of our total revenue, and the Asia Pacific region accounted for 23% of our total revenue. For the process node distribution, again, Alchip has been focusing on the most leading-edge technology node since day one of this company. So for the third quarter alone, more than 92% of our revenue is exposed to 7-nanometer or even advanced process node. For the yearly distribution, 88% of our revenue is exposed to 7-nanometer or more advanced process node. We can probably say that compared by -- comparing with our industry peers, we should be the #1 we think. In terms of the revenue concentration, we should be the #1 leader within the most leading-edge technology nodes.
So for the third quarter business review. Revenue as we guided in our second quarter earnings call. The third quarter revenue came in mildly declined quarter on quarter but it meet our expectation. We already guided to the outsider that we may suffer a little bit for -- on the revenue side in the third quarter. And the reason for slightly decline with our quarter revenues because, first of all, the packaging engineering and secondly, the high quarterly revenue base in second quarter.
For the margin side. For the profit margin in third quarter profit margin recovered mildly. We -- I'm not saying a very significant improvement, but we do improve the gross margin and especially the operating margin. So the third quarter, gross margin came at 24%, recovered from 21% in second quarter this year because of more favorable sales mix. And the operating margin, because we have a very good operating leverage, our operating margin improved quite a bit, coupled with our OpEx back into normal. You can see we have quarter on quarter decline on OpEx third quarter. So it also contributes to our operating margins.
And as I mentioned, the nonoperating income came in at $4 million in the third quarter due mainly to the strong U.S. dollar, coupled with the interest income we received in the third quarter. That's the review for the third quarter.
And for business outlook, as our CEO just mentioned, we have -- we are having increasingly confidence toward the 2024 revenue performance. First of all, the AI shipment to our North American service customer, not only to [ sustain ]. We right now expect we may have year-on-year growth potential in 2024 for this quarter. And we expect the shipment for the training chip to another major North American customer to gradually heat up starting in late fourth quarter '23. And the order from customers -- the order and the forecast for customers are getting better and better.
So -- and I will discuss later, it could be another reason for us to have the fundraising activity. In addition to these 2 customers, we will have multiple high-volume projects to start production, to start production in 2024. Some in the first half and some in the second half. So in terms of the revenue growth, right now, we are very confident for the year 2024 and we remain our positive view of the AI ASIC growth. We can sense that the major CSPs, especially in the North American region to gain, trying to get control of their chip and the [ system technology ]. So almost every of them are trying to do their own chip. And secondly, assuming that the current ASSP, the product supply for AI chip is in shortage. And we believe Alchip enjoys a very good position within this trend that now we believe there are not too many chip vendors who are capable to provide the most leading-edge technological design and the experience of handling large-scale production.
And for the recent release, the new BIS [ tools ], we consider it has a limited impact to our current operation. First of all, for the customer B, I believe maybe some of you already know who it is. The revenue exposure to the customer B is around 1% to 2% of total revenue this year because this customer was being put on the tentative list, who know for [ entities list ] all the business activities for both production and [ NIE ] currently put on hold already.
And our current revenue exposure to China market goes down significantly from last year. We expect the revenue contribution from China market this year as a whole, including the fourth quarter, will go down to 50% or lower. So we believe the geopolitical risk between China and the U.S., we have been doing pretty good to trying to alleviate the potential risk, but the dispute between these 2 countries [ continues ].
And okay, GDR offering, as Johnny mentioned, we plan to have another GDR offering. This is the second time we do the GDR offering. We plan to raise [ USD 1.350 million ] to GDR offering. It is about 5% dilution. We care a lot about the dilution. So this time, we can only -- to dilute 5% versus about 12% last year -- last time we do the GDR. The reason, actually, we have surging demand from existing North American customers. It consumes a lot of our working capital. And the majority of our production of applying the CoWoS packaging. The chip with CoWoS packaging require much longer process internal time than the ordinary project. So we also sink a lot of the cash into the production phase.
The current cash position will be capped based on our calculation as multiple projects in the production phase last year or dare say the later this year, we may see pretty tight cash position on our book. Even -- yes, we are a cash rich company. Honestly, we have never think about that with a cash rich company like us will be short of net working capital. But because the demand is so strong, we are facing these type cash position.
Another big reason for the GDR offering is we want to strengthen our financial structure in preparation for taking future huge volume AI projects. Because the overall demand from DC industry for most cloud service provider, getting stronger and stronger based on our information, any given project for those cloud service providers in North American region. If the project is for the data center mentioned, the single chip production volume could be huge annually. For our current cash position, we may not be able to take the projects. So we want to strengthen our book in order to convince potential customers to grant us more projects. I believe to do the GDR offering, although there will be 5% dilution, we consider it is a very positive signal to our operation. And hopefully, we will place this GDR offering successfully when we do the placement early next year.
Thank you, and we are going into the Q&A session.
[Operator Instructions] First in line is [ C Hao ].
Regarding the GDR offering, what would be the target investor you are looking for? Are you talking about the financial investor or supply chain or your customer as the potential investor for the GDR.
Okay. It is just a normal GDR. We -- of course, we want to attract some long-term long buying investors to purchase the shares, but we don't have specified targets for giving them the shares.
I see. All right. Okay. No problem. And my second question regarding the bad debt provision you made in Q2. And last time, you mentioned that there would be a provision made in second half this year. Just wondering, is this still the case?
Excuse me, can you say that again?
Yes, the bad debt for a Japanese customer that you made in Q2. Yes, last time you mentioned there was the reverse on the second half. So what's the status?
Yes. We have been recouping -- recoup a little bit of the bad debt customer but not all of the debt. We don't [ recur ]. We're going -- we didn't realize any [ AI ] in the third quarter. You may see the operating expense a little bit high compared to the first quarter. That's because, first of all, we make more money than we expected. So we have to accrue the bonus. And secondly, we have relatively more activities in third quarter like the saving up subsidiaries in Malaysia. So compared to the first quarter, the operating expense is a little bit high.
I see. And then last question from my side before going back to the queue, yes. For the production business, the gross margin tends to be lower. Do we have any plan to raise the market percentage in the future? How easy or difficult would that be the case?
Okay. I'll give the first and maybe Johnny can give you [indiscernible]. For the production gross margin. Yes, we understand it is low because we are facing customers with very good bargaining power. And to be honest, if we do the generation by generation projects with the same customer, it is really difficult to expand the gross margin from the same customer with similar generation by generation project. However, we do try our best to try to gain some margin from the supplier. We already have some shipments. Hopefully, we can expand our overall gross margin a little bit by doing that.
Okay. Let me add to that. So Daniel is right. Right now, I think the single customer in U.S. dictate a majority of our production margins and production revenue is -- and for the future business, I think for this customer alone, it's very -- it's kind of difficult to increase the profit margin and -- but right now, I think starting for next year, we've been diversified the business to other accounts. I think this customer will be no longer like to dictate total revenue. And they're also seeing our value. So starting from the next project, we're going to have more margin improved.
In parallel, our supplier also realize our value. So I think this is good talking to a very high-level people. We are starting for next year, we're going to enjoy a more margin contribute from the supplier side. So overall, the production gross margin will be still much lower than [indiscernible], but we will see a certain degree improvement, yes, we continuously to do so.
And Robert, JPMorgan, please.
So I have a few questions. First is on your largest U.S. customer, it seems like a little bit more confident this time around -- about your 2024 growth. So do you think that -- I mean, could you give an indication about the 2024 growth outlook? And regarding this solution right now in [ Gen2 ], how should we think about -- previously, there's some talk about there could be an interior solution, kind of [ 2.5 ]. Does that -- would that have an impact on your 2024 business? That's my first question.
Okay. Robert, let me say this way. We are not allowed to give any numerical guidance in the earnings call. We have been educated by the authority a lot last time. So for next year, as mentioned, we have very positive feel on the revenue growth.
First of all, the focus for the existing project, it's really, really so stronger than we previously expected. And of course, the advanced packaging capacity allocation will be a key deciding factor for our revenue growth. But fortunately, our supplier TSMC gave us very good support, given as Johnny said, we already show our value to TSMC. We already show our value to our customer. And we are already a very important customer to TSMC for each advanced packaging. So the support effort from TSMC is best than ever. So still, we worry a little bit about the CoWoS capacity but all-in-all, that's already -- we are more than satisfied with TSMC's support this time for our CoWoS packaging. So for next year, for the existing products, we don't see a big product packaging capacity allocation. For the other customers, we are still fighting for more CoWoS allocation to them.
Robert, let me add to that. So basically, for next year's revenue growth, I think, just like Daniel mentioned, we have very high confidence. Yes, to be honest, yes, if revenue growth is similar to the last time we forecast, we will never think about the GDR. But right now, I think it's -- we have to have a GDR in order to support the revenue numbers.
And about your another North America customer, I think it's the IBM customer. It seems like the project will heat up from late this year with much stronger growth in '24. So could it become a second largest customer next year? And how should we think about the production gross margin for this customer? Also, I think this customer has been indicating that the design pipeline has been doubling over the past 3 months. Are you seeing a similar trend?
Okay. Yes, this customer will become our second largest customer in year 2024. And for this customer, we have 2 projects to be in the production, actually 1 already in the production for next year. And the 7-nanometer one, the production will go up quite a bit in the first half. And then for the second half, the 5-nanometer will -- the shipment of the 5-nanometer project will heat up as so -- once we finish all the testing [ something ] projects. So for next year, our second largest customer may enjoy the biggest growth year-on-year compared to the revenue contribution this year.
Yes. And the margin stuff is better.
I would say this way, this customer also has a very strong bargaining power. I believe you all know that. A little bit gross margin improvement, combined with a little bit higher gross margin compared with the other North American customers. But, yes, still much lower than our [ largest one ].
Yes, yes. Got it. And my last question will be on the automotive. So I think you -- back in a few quarters ago, you talked about that. You have a design win with the Chinese auto OEM, an autonomous driving project. And I think there is a stacking project because you need to [ front-end ] IT to integrate. So how do we think about the production in general? If it's a stacking project then the gross margin should be much higher. Ad this customer also uses some merchant solutions like [indiscernible]. And how should we think about the adoption of the self-developed chips when it comes into production in the initial years?
Okay. So Daniel, let me answer that. So I think this project, yes, you are right, it's a spec in. The design cycle, we estimated during our time is about 1.5 years. So far in the design stage, I don't think there's a major problem and so far so good, we are about to tapeout in the middle of next year. The intense production margin and production forecast, to be honest, for this customer, they give us a very, very high forecast. But I don't know the automotive stuff is still unproven to us, we'll be conservative to estimate their production volume. But in terms of margin, I think, is much better than the HPC business from the North America.
Okay. Sorry, let me squeeze in one last question about the cloud edge PC side. So other than this existing U.S. cloud services provider, so how should we think about your breakthrough in the other 3 CSPs. Are you seeing some progress in the next probably 6 to 12 months?
Okay. Yes, let me try to answer first and Daniel, you can add more. Obviously, there are only few CSP service provider has -- out there has a huge volume. Obviously, none of them are satisfied with their current solution because the current suppliers are too expensive, and all of them has a plan to developing their own ASIC. Some of them already started, some of them has in their plan.
From our side, we can see that they are only a handful of the company, no more than 5, maybe only 3 to 4 service provider has such a track record and also capability to do the design. I think the trend is the entire revenue will continuously grow. And they try to minimize the dependency from the current chip provider and also service provider. Obviously, everybody has a chance to win those projects. Daniel?
Okay. Pretty much as I said. Again, for this question, I would say, actually, we see a very good position to -- with potential customers for either -- customers in North America.
Let me say in each way. So other competitors in U.S., their gross margin is very high. On the book, it's more than 50%. Yes. So it's a lot of incentive for those customers to diversify their concentration.
And Charlie from Morgan Stanley, please.
And also, congratulations for very, very good results. So my first question is about GDR. So first of all, why not doing a corporate bond issuance? Are you planning to introduce strategic measures. Can you explain to us why you need equity funding?
Okay. For GDR. Actually, we talked with the investment bankers for multiple ways of raise money like convertible bond, corporate bond, GDR and so on. But for the current condition, because we -- if we do the borrowing, we want to borrow dollar and the dollar interest rate is really high. So if we do the convertible bond or the corporate bond, the cost is high. And therefore, the GDR, we do consider the potential dilution. So that's why in the end, we concluded that we only dilute 5% of our shares to raise the extra bond to support our operation. So that is the whole consideration projects.
And another thing is for the GDR, since we already done it, we -- since we already did it before, everything could be do smoothly because according to the [indiscernible] may suffer tight cash position in the beginning of next year, the first quarter next year. So we want to do it quick with limited share dilution and with the lowest cost, that's the reason behind this GDR.
Charlie, let me add to that. So the GDR offering, we are thinking about many times how to prepare the cash for the operation. Yes, like Daniel mentioned, right now, the interest is so high. Given our profit margin is not so high. So I don't want to give a certain portion to the bank. And also, we consider this revenue and also production trend, it's not short term. It will be sustainable. We need enough cash instead of continuous and borrowing the cash from the bank.
Another important reason Daniel also mentioned during his presentation, when we talk to other service provider in U.S., the cash flow is always their consideration. Yes, we all know we are handled eventually. If we win, there will be multibillion type of business. And based on our current cash flow conditions is very deep -- they will not have the confidence to work with us. Right now, I think company grow quite a bit. We are no longer compete with some vendor in Asia. We directly compete at Tier 1. As you know our competitor [indiscernible], their cash flow condition are much, much healthier than us. Yes, we need to prepare ourselves in order to win big.
Got it. So yes, my next question is also associated to this GDR, right? So I can understand that next year, definitely see a revenue upside. So they -- because of more working capital. But besides that, is there any change of the kind of payment term by your vendors? And also, I know it's already a done deal, right? But your vendor TSMC, right? Doing this kind of very tight supply or strong demand, they ask us to prepay or send an [ LTA ], right, to share the cash flow burden. So would you consider to ask your customers to give you some down payments to share the burden of our cash flow?
Daniel, do you want to go first? Or I can take it.
Charlie, very good question. And yes, we already did. We talked intensively with our customers. But as I just mentioned, when you do the projects with generation by generation, the -- to change the terms is really difficult. For some other customers, we already get some progress back, for example, they may pay a certain percentage of the total payment when the waiver is asked. We don't need to wait until the whole CoWoS process to finish and then to get the money from customers.
I think right away, we will try every way to shorten, to improve the current payment term for every customer. But to be honest, when you're facing customers that with significant bargaining power, yes, it's really stressful for us.
Okay. Let me add more. Yes, when we encounter some cash flow issues, personally, I go to supplier and customer few times directly. We provide such high value to the customer. We should provide the service, provide a good design to them. We show them [ bank net ]. I think that's so obviously, but somehow when we talk to supplier right now, I think suppliers are very strong. And the CoWoS is in shortage now. Without the top dyes sitting there, they -- we will not get any CoWoS allocation. The -- once top die go out, we have to pay supplier, not only us, all other customers, even much bigger than us follow the same [ rule ]. Our supplier also has the -- are also facing some cash flow challenge. So I think this due to the CoWoS shortages, it's very difficult to negotiate with the supplier. But when we talk to customers, I think, to be honest, the customer is very supportive. They give us a lot of proposals. Since their revenue, I think, is 3 to 4x higher than their original estimation, they totally appreciate our design work. They want to help us. They were many, many different models. We can convert some of them to the -- to a royalty base. We convert some of them to the revenue base. And also we are going to take it -- we are shooting for -- to win their next generation.
So after all the consideration we're thinking about, to raise another GDR will be the easy solution. Yes, when we have a more customer, then entire revenue will be -- if it's more diversified, I think we have many ways to control the cash flow and also gross margin.
Yes. So yes, so the explanations, I'm not trying to be picky, but it would be great for investors to understand all the consideration. A great job. So just a last question on this GDR-related part. I did some calculation, right? You probably, by the end of this year, you can end up with $3 billion cash on hand. I'm not sure if that is right estimates and you are raising around USD 350 million in addition? Yes, I'm just doing some back envelope calculation, assuming you keep like $1 billion as kind of working capital. I feel like you probably need -- get an additional 15% revenue upside for this year. Is this kind of right calculation? I mean, this is around the USD 350 million additional working capital are implied.
Okay. We are unable to give confirmation to your implication. Like I said, we were educated by the authorities -- but yes, you will see -- you will by the end of this year, our balance sheet you will see a lot of inventory. The majority of that would be the wafer, move wafer waiting for CoWoS capacity. And yes, the current growth outlook is really, really good. You can see the picture that we may have a pretty good upside growth outlook for the existing project. It is already our biggest revenue contributor.
For next year, this shipment will decline and the upside potential could be -- to actually be the same or even higher. It depends on CoWoS status and for us, we have the other customer to become the second largest one of our customer portfolio. So the growth is really, really good in terms of the revenue.
Yes. So the next one is a quick one, I will back to the queue. It's about actually the near-term trend. So can you give us some sense about fourth quarter revenue trend. I know you cannot give a numeric number, right, but can you compare this quarter to any quarter in the past, right, to give us a sense about the revenue level and do you see upside to your previous full year revenue guidance?
Okay. For the fourth quarter, I think made the top line or bottom line will be the highest quarter in 2023. And for the percentage-wise, I would say higher than the same quarter, which is right now the highest quarter among the 3 quarters. But how high it can go? It still depends on the status of the advanced packaging. So yes, that's what I can tell to the investors for now. But definitely, the fourth quarter will be the highest quarter this year. Next is Laura? Please.
My first question is about like given the strong growth outlook and also so many projects on hand, I'm just wondering that what would be the OpEx -- longer-term OpEx ratio you are looking for and -- but will be more reasonable estimate in terms of the -- your R&D force spending over the place. So can you give us some idea about your OpEx trend looking forward? That's my first question.
Okay. First of all, for the OpEx, usually, we take the top-down approach to do the OpEx budgeting -- to do the OpEx budgeting. So for now, we are still in expansion, especially the expansion in the overseas sites like Malaysia and maybe early in the future, the [ G&M ] project. So for now, I plan to expand the OpEx by up to 15%, 15.5%. 15% of our current yearly OpEx. That's my [ trend ].
Laura, so I think the plan doesn't change. Our OpEx increase every year, I think, it's insignificant compared to other competitors. Yes, I know that recently, our plan changed a bit before. Majority of headcount is in China. But right now, we are diversified quite a bit. We compared the cost between China and Malaysia. I think the -- we see some cost savings out there. But in the meantime, since we need to support some project by shipping some -- by sending some engineer to Japan or to the Malaysia to do the engineering work, that will be about 10% to 15% overhead on the salary level. So I think everything, if I add all together, I think it's -- the OpEx estimation for next year, I think it will be a very reasonable increase.
Can you give us a rough idea of what's the ultimate allocation on different regions like China or Japan, Malaysia, what will be the shape maybe in 2, 3 years perspective?
Yes. I already gave out the proposal a few calls before. For this year, yes, we plan to prepare like 100 engineers to outside for China. By the end of next year, I hope between China and non-China will be 50-50. Yes. So that percentage includes the engineers sending out of from China. So by the end of next year, it's a 50-50. And just for your information, right now, we just do the calculation. Less than 15% of a customer has a specific requirement to do the design outside of China. But we believe this number will increase. But right now, it's less than 15% customer has such kind of requirement.
Okay. Got it. Very clear. And my second question is about, again, the CoWoS capacity planning. We understand that you are working with TSMC on CoWoS-R. At the same time, as you mentioned several times about the strong demand and also the high capacity on the back-end on the advanced packaging side. So my first one is about like if we go to CoWoS-R, how much benefit of the gross margin or cost can give us to support the better gross margin from the longer-term perspective? And also at the same time, [ machines ] are partly -- your smaller clients may still have some [ tightening ] on the CoWoS allocations. So are you also working with the onset players looking for their capacity support?
Okay. Let me answer first for the packaging change. As I mentioned many times that for the existing budget to North America, our biggest customer is a cost-plus margin scheme. So cost change will affect our gross margin. So there will be no difference for whatever the advanced packaging is. And for the future project, yes, we do have the program but because these type of things related to our supplier, we respect our supplier. So we cannot discuss in detail about the cost base here or pricing things here. But all in all, at the end of the day, you can think this way that given our position is getting stronger and stronger, we have more room to talk with the suppliers and the customers. So I believe there will be some room for us to expand our gross margin. And as for the onset saying, if we can buy other onset for advanced packaging, it really depends on, first of all, the customer that we serve our customers. Secondly, the [indiscernible], the strategy of [indiscernible] takes, we will work closely [ in step ].
Let me add to that. So for CoWoS-R or CoWoS-S, I think the gross margin is not -- we don't have -- we don't see a big difference but CoWoS-R will give us more capacity. I think that's the biggest incentive when we try to introduce the CoWoS-R working with [indiscernible] very closely. If CoWoS-R can go to production, I think that will solve our capacity issue for the next year. And also, there's a good demonstration for CoWoS-R to other customers for this foundry.
The gross margin stuff, I think we are talking with suppliers separately. I think no matter it's a CoWoS-R or CoWoS-S, I think we will get some support from foundry, yes, next year.
Just a very quick follow-up. I mean, during the transition from your CoWoS-S to CoWoS-R, do you see the output or revenue may hit some fluctuation even like -- probably because it's just an initial ramp stage. So will this give some like sales volatility then?
Already happened. That's why we see [ little bit ] revenue fluctuation between Q2 and Q3. But thanks for the foundry's support, if a CoWoS-R encounter some problem significantly, they will give us more CoWoS-S to cover it. Yes. But starting from next year, later this year, I think the CoWoS-R will become the majority.
And Bruce, please.
Okay. I still want to ask about the GDR things because I understand this for the working capital requirement, which basically is the top die waiting in the queue as well as the production time for the CoWoS. However, TSMC is meaningfully increasing the CoWoS capacity. And you will also do a lot more CoWoS-R in the future. So i.e., the CoWoS probably will be a lot better in the second quarter, after second quarter next year. So your working capital requirement is most like a short-term thing? Why do you need to do a GDR instead of bond borrowing or bank borrowing or anything else? I mean this -- for me, this is more like a short-term working capital requirement.
As I already mentioned, it is not for -- actually 6 months or 9 months is not considered a very short term. And we are an asset-light company. So the ability to borrow money from the bank is low. We don't have deposits for us to borrowing money. If we do the pretty light borrowing, the interest rate will be very high, especially we are trying to borrow dollars. And another big reason is, like I just said, we want to strengthen our book in order -- in preparation to take other projects from other U.S. major CSPs. So the purpose is not only to solve the short-term cash position problem but in the long run, we have to be prepared to take projects, to make us to be more suitable to compete in the North American hyperscaler market.
I see. I think my second question is for -- you heard from MediaTek stating that they will be very flexible in terms of business model. Do you consider them as a competitor? Are they going to be flexible enough to do the design services and to compete with you in the [ defense ] services business?
Okay. Bruce, actually, first of all, I don't know what the [ definition ] of flexible or flexibility. And MediaTek has been in this business for a while. So in some [ tracks ], we are competitors for sure. But we don't avoid to cooperate with MediaTek. It depends on the project. Now we are actually to -- the managements in 2 company are familiar with each other. So I'm not -- so I'm not understand -- I'm not getting what's your question you are asking if MediaTek is a competitor to us. If that's the case, yes, MediaTek is a competitor to us.
Do you face MediaTek's competition in the current project or the potential project bidding at this moment?
Let me say this way. We don't encounter with MediaTek for many projects. Usually, the competitor for the project right now, the North American market is Broadcom or Marvell and sometimes [ QC ]. We rarely hear MediaTek but I don't know. I'm not a MediaTek person, maybe they are doing other projects. We don't know. And Charlie, please.
Okay. So may I circle back the China restriction issue? Because you're another U.S. customer, which I believe is Habana, also have a very high performance GPU products. So since the new restriction rule, do you see any change for your forecast? Why and why not? Can you give us some more comments?
Yes, we are not allowed to mention any names of our customers. So we do worry but based on the current information we received from our customer, everything will be -- slow in [ guests ]. And to be honest, we don't want to give too optimistic view to investors about the North American customer. But for now, the appeal they placed to us, the forecast that get to us is really, really good. So we want to be conservative. And for now, we -- what we can do is only to talk to our customers, they say no problem. And that's my answer for this question.
Yes. This is specific customer according to them, they are not just selling the chip, they are selling the system level with the software. So they can -- according to them, they can dynamically to adjust their performance. So since after the incident, I didn't see any decreased demand but also they continuously adding more orders. Hopefully, everything will go smoothly.
Okay. Interesting. Another question is about -- also related to these accounts, right? So assuming these customers is making $100 revenue. How much can Alchip get from the design service side?
Sorry, Charlie. I don't...
Yes. So let me go through it, right? So if this customer is making USD 1 billion revenue from this chip, how much revenue can Alchip book from the design service vendors' perspective?
Okay. Our revenue is our customers' cost which is the price the customer itself sells to its customers. Honestly, we don't know that. If we compare our price to the current products, which is SSD solution, the price of us is very competitive.
So can I assume these customers will be like 20% of your revenue next year?
I'm lazy. I haven't done the numerical forecast for now. So I have to take responsibility for my words. So I'm sorry that I can't give you the answer.
Okay. Okay. Okay. That's fine. Yes, we know that you'll be strong, you'll be fine. The second largest customer, I think they should be good enough. So my last one should be -- again, not specific, right? And you can call it in the coming 3 years, right? Do you see [ n3 ], the 3-nanometer or turnkey will become a major growth driver? Because I think now your several process at a prime time, even 7-nanometer, it contributes more than half of your revenue. So I just wanted to get a sense when Alchip will migrate to the 3-nanometer era?
Yes, let me take that. So right now, we can say for this year, we consider 7-nanometer is kind of typical for us. And 12-nanometer, we can say it's [ commencing ] and 5-nanometer is more advanced. So starting from next year, we can consider 5-nanometer is our typical case. We have a few 3 and a few 7 as well. Majority of design will be sitting at 5. But we already have 2 to 3, 3-nanometer design win. So I think starting from 2024, '25, 5-nanometer, 3-nanometer, I think, will become key revenue contributor.
Okay. So for those are 2 to 3 3-nanometer design, should I assume? Or those are hyperscalers or some of them are...
All hyperscaler. I think the -- yes, only few application we use the 3, either is a cell phone or any CPU, GPU, HPC compute power-related project. Yes, we are not touching the cell phone. I think majority, everything will be HPC and AI related.
I remember the company said before that you probably will win some U.S. EV customers at [ N3A ]. Is that still the case?
[ N5A ], I think as how they're commonly known, they are using or [ N3AE ].
So do you set to win any [ N3AE ] for the automotive customers in the coming 2 to 3 years?
Yes, we are competing. We try to win, but it's no winning confirmed yet, but [ N3AE ] will come later than [ N5 ].
Okay. So the 2 to 3 3-nanometer design wins, those are all for hyperscalers for the time being?
Before answering the -- before Robert to ask a question. I want to answer some questions found in the message box. First of all, some are asking about the revenue breakdown between [ MRE ] and production in the third quarter. In third quarter, the [ MI ] and the production split is the high revenue accounted for about high 20-something percent, high 20s and the other is production. That's the split for the third quarter.
And someone is asking about the [Foreign Language] upside to [ SMA ], the biggest customer, year-on-year growth rate is 50% -- or 15%. I'm not trying to emphasize the numbers. Better this way, it is definitely not 5% to 10% of those kind of growth. We have pretty good upside potential year-on-year for the same product we are shipping right now. But is it 30%, 40% and 50% because the situation is changing every day. So I can just say 50% is not achievable. The potential for year-on-year growth is pretty good, not that 5% to 10% range. It's a much bigger percentage than that. So that's the answer to the growth rate for our biggest product.
And another is given the higher-than-expected OpEx in the second quarter and third quarter, what OpEx level would you expect this year?
I would say, by -- because we have -- we rolled out some [ AR ] in the second quarter. So for the whole year, I believe if I factor in the [ AR ] write-down, the whole year operating expense will be like in the middle of $90 million to $100 million.
Okay. And then Robert, please.
So I just have a few follow-ups. So on the [ NRE ] revenue growth. So since you mentioned customers are migrating down on probably 5-nanometer more next year and probably 3-nanometer beyond. How should we think about your [ NRE ] revenue growth CAGR? Could you break beyond kind of 20% CAGR that you had in the past few years because of the higher mass, higher tapeout [indiscernible] software and verification costs? Yes, so just to get your thoughts about the [ NIE ] revenue growth outlook.
Okay. Robert, to be honestly for the [ NIE ], the visibility not end all because you can imagine if we are discussing with the project, we are discussing the project we see customers. The time frame will be in the next 6 months to 12 months. So by -- based on our experience and the industry growth, we usually keep our sales target to grow our [ NRE ] 20% a year in a normal year. Of course, in a good year like what we are currently, we always expect higher growth rates for our [ NIE ] more than 20%. But for these 2 years, it's really complicated. Very good opportunity in North America. But for China market, the whole IT industry is kind of sluggish, so -- but anyway, we still managed to deliver the growth rate we consider is good to this industry. So if you are asking about the long-term CAGR, I will tell you 20% is our target.
Okay. My last one will be back to the other CSP customers. So I think you sound confident to compete with Broadcom, might be able to win other CSP customers for AI projects. Does that mean that your stake with the current project type, which is the full back-end design plus the packaging side? Or you've also become more flexible to do the only [indiscernible] in your term the [ PD3 ] kind of projects?
Of course, we have to be confident. Otherwise, if you want me to tell you no, we don't have confidence to rebudget. Of course, we have confidence because we are one of few that are capable to provide leading-edge large-scale design and with such a record of large scale production. And for our advantage to the competitors is very simple. We are more practical. We are quicker. And of course, our pricing is better to our competitors. And of course, our competitors have the leases to become the industry giants. They have everything. They have front end, they have software, they have IT, they have almost everything. So I think it really depends on the customers' preference of the project. And we do see opportunities emerge in recent years that we have the room or window to tap into the North American [ SBC ] chip supply chain.
Okay. Let me add to that. So yes, to answer your question, our business model also very flexible. If the Tier 1 customer come to us only asking for the packaging service to prove it ourselves, of course, we will say yes. But for -- on our side, we all know what's our expertise area. We're doing the design much better than most of our competitors and also customer itself. We've been taped-out [ 30 ] design every year, generation over generation. We can control the schedule. We can make the die sizes smaller, much higher performance. So that's our -- that's the key area, our customers like us a lot. If we're just doing a production, handling the package, we become -- later on, we'll become a [ DC ] or a foundry or supplier, means no value. So I think winning, we consider doing the [ PD-1 ] doing the design will be -- is a way to sustain the revenue, in order to sustain the customer. So we are continuously focused on that area.
I think if they want us to do some [ piecemeal ] or any inflexible business model to prove ourselves, of course, we will say yes. But eventually, we will win the design, become a true partner of that in order to sustain the business.
Okay. Since the time is late, I'll answer the question that -- the last question from the message box. What is the cash conversion cycle for your production work with HPC customers?
It really depends. Like Johnny mentioned, the whole process right now and the whole majority of production revenue. The majority of our production revenue comes from projects with CoWoS process, CoWoS packaging. So for CoWoS packaging, you have to be [indiscernible] and they're waiting and then wait for the CoWoS to stop. For now, the gap between wafer-ready and CoWoS stock is not under our control. So yes. But all in all, the cash cycle for projects like CoWoS is much longer than the normal project.
Okay. Yes, let me add to that. So the GDR offering, I don't know people consider it's a positive or negative. But for me, I think this is a positive because our companies are growing. I agree with Bruce if the CoWoS situation payment plan, I think eventually will be less and less burden. But if our revenue just stay into a certain level, we don't need a GDR. But fortunately, our company grow very fast. In order to sustain the future business and win other key customers, I think the GDR pooling will definitely help us bring -- upgrade company to another level. Yes. So overall, I think personally are very positive and dilution is insignificant. And I say we [indiscernible] a GDR company well in a very confidence level for a while.
Okay. I guess that's it. Thank you for participating in our third quarter earnings call today. And thank you for your interest in Alchip. See you next time. Thank you.
Thank you very much. Thank you. Thank you.