Alchip Technologies, Limited (3661) Earnings Call Transcript & Summary

Okay. As usual, this is a safe harbor disclaimer and -- next page. So this meeting will be in English. So if you need Chinese presentation slides, please go to the MOPS [indiscernible] to download the Chinese version. And Johnny and I are mainly speaker. So if you are asking -- if you want to ask questions in Chinese, you are so welcome. And for the participants, please write down your questions. If you don't want to ask the question orally, you can write down your questions through the Teams message function. And if you are going to ask questions during the Q&A session, please use the raise hand function of Teams. And this video and audio content will, for this meeting, will upload to MOPS about 3 hours later after the meeting. So we welcome our CEO, Johnny Shen, to start the meeting.

Good afternoon, ladies and gentlemen. This is Johnny Shen, President and CEO of Alchip Technologies. Yes, once again, thank you for joining the investor conference meeting. Yes, we appreciate the opportunity to share our Q3 results and provide guidance for future business outlook. Let me briefly update our company again. The companies founded in 2003, IPO in 2014. The current market cap is approximately USD 5 billion. Since we found the company, we've been successfully implement more than 600 design. Amongst 600, 60 of them are ThinkPad and 18 of them was CoWoS-related design. Our current employees, about 600 people. Revenue last year $978 million, so this year, the first 3 quarters, we have achieved more than $1.1 billion already. Ninety percent of our revenue coming from HPC and AI. We are TSMC 3DFabric and a VCM member. Our current capacity, so we can tape out -- we can handle 20 to 30 tape-out annually. Our market focus is HPC networking and automotive. Okay. Allow me to give everybody a Q3 update. For Q3, we are pleased to announce another record-breaking quarter with revenue reaching $460 million, net income $55.6 million, and EPS is standing at TWD 22.46. All these numbers are historical high for the company. The detailed breakdown and comparison will be presented by CFO Daniel in the later session. For future business outlook, Q4 is a big season for NRE. We plan to tape out several design this quarter. We have also secured many design wins across AI, networking or [ pivotal ] currency application, many in North America region, leveraging the leading-edge technology at N5, N4, and N3. So in terms of mass production, demand remains strong. Even with some adjustments, the revenue outlooks remain reasonable. We anticipate only a single-digit reduction in top line revenue in near-term quarters. However, thanks for high [indiscernible] forecasts, we expect earnings growth and also improvement in percentage gross margin as well. In terms of geopolitical risk management, we've been successfully diversify our business beyond China to other regions. In 2024, only around 10% of revenue originated from China region. However, our business direction in China remain unchanged. We continuously to believe in and support businesses in China as long as they are financially healthy and comprise the right rule and regulation. To emphasize again, Alchip has not conduct any business directly or indirectly with any company on the Entity List. All our customers are founded by 3-way NDA among Alchip, foundry partner and customer themselves. DD and KYC, due diligence and know your customer process, are strictly enforced before engaging in any business. In terms of workforce, we have initiated a very aggressive revenue plan, foster our engineering resource outside of China, such as Japan, Taiwan, Malaysia and Vietnam. Currently, we have 100 engineer working in Japan. Our Malaysia office already staffed more than 25 engineer. The workforce in Southeast Asia, that will be approximately 60 people by the end of this year. It's a strategic expansion planned. It's a design to offer more flexible and cost-effective solutions to meet our customer dynamic requirement in the global market. As for conclusion, we are confident that our business is in excellent stage. Likely Q4 is going to be another earning-breaking quarter. Overall, we anticipate a strong completion for this year. Thank you very much.

Okay. Here is our third quarter detailed P&L numbers. We -- the total revenue, as you may know, reached $459.7 million, which is 9.2% quarter-on-quarter growth and 91.1% year-on-year growth. As for the operating income, we record $58.4 million for the third quarter, which is 14.1% quarter-on-quarter growth and 82.5% year-on-year growth. And for the net income, the net income for the third quarter is $55.6 million, which is a 12.8% quarter-on-quarter and 97.7% year-on-year growth. For the EPS, translating into NT dollar, it is TWD 22.46 for our third quarter earnings per share. Next page. Here is our breakdown by application. You can see that for the third quarter, HPC dominant, our quarterly revenue breakdown accounts for 97% of our total revenue. The rest, the consumer networking niche, account for about 3% of our total revenue, which indicates very strong demand from the HPC or especially AI side. For this year, first quarter to third quarter, the HPC-related revenue accounted for 94% of our total revenue and the other 3 applications combined accounts for about 6%. And for the process node, again, I'm very proudly saying that among our peers, Alchip should be the leader for the process node technology. In the third quarter, for the 7-nanometer accounts for 73% of our total revenue. And if you combine the 7-nanometer, 5-nanometer and more advanced process node, combined account for 96% of our total revenue. In the -- for this year, for 7-nanometer and the more advanced process node, which accounts -- the revenue related to the nodes accounts -- accounted for 97% of our total revenue. Next page. This is the geographic breakdown. For the third quarter, the North America revenue accounted for 87% of our total revenue. And here is a reminder that starting from the third quarter, one of our major customers are shifting from the European account to North American account. So you can see the difference is mainly from the shifting of the customers' categorization. So for this year, the North America dominates our revenue breakdown, accounted for 85% of our total revenue from first quarter to third quarter, thanks to the strong shipment to the AI-related ASIC or chip to our customers. For the business review, our CEO just mentioned, we had record high quarterly revenue and profits. The reason behind the strong revenue were because, first of all, the strong shipment of our 7-nanometer AI ASIC actually exceeded our previous estimation, which is the major contributor to our record high revenue. Secondly, the ramping up of 5-nanometer AI accelerator to our North America IDM customer is another driver for the third quarter revenue growth. And for the profit side, profit is a record high and the gross margin slightly improved from what we had in the second quarter. The third quarter gross margin was 19.5%, improved [ mildly ] from the second quarter. The slightly gross margin improvement attributed to, first of all, we have higher NRE revenue numbers than second quarter. And for the production mix and that in the revenue mix, I'm saying the production mix, by adding the 5-nanometer accelerator business, which enjoys slightly better margin than our 7-nanometer AI ASIC business. We consider these 2 factors are the main reasons for our gross margin improvement. And the nonoperating income came mainly from the interest income. We don't have too many complicated investments or the other FX risk exposures. So the numbers on the nonoperating income side is mainly the interest income we get from our deposit and the fixed income investments. Next page. And for the business outlook, I will do it very quick, and I believe many people -- many of you will ask related questions regarding to the outlook. First of all, for the fourth quarter, we believe the fourth quarter revenue will head up slightly given, first of all, the 7-nanometer AI ASIC shipment expected to go down slightly in the fourth quarter and the 5-nanometer AI accelerator shipment to keep on moving up. But by combining the decline and the ramping up, we expect the production revenue to go down slightly in fourth quarter compared to third quarter this year. And the NRE, as our CEO mentioned, the NRE one is a design revenue will be pretty strong in the fourth quarter, which means the profit market in general will be higher than what we had in third quarter. And for the next year, I knew many of the investors paid a lot of attention to our 2025 outlook. So now briefly, for the first half 2025, we will consider it is stable. And for next year as a whole, we see very strong [ in AI ] project pipeline to come in because of, first of all, the process node technology migration is still ongoing. We expect many 3-nanometer project in Sweden, many 3-nanometer projects to kick off in late fourth quarter this year or early quarter next year. And in -- starting from the first quarter, next year 2025, the 5-nanometer AI chip to the North American AI, to the North American IDMs will become the major revenue contributor to Alchip. And which means it will replace the 7-nanometer AI ASIC as the #1 revenue contributor for this chip. And because we expect strong revenue growth in 2025, for now, I will say the profit margin, especially in the gross margin side, will reasonably improve year-on-year. So that's the session from the company for today's meeting. So we will go into the next session Q&A. As I mentioned, if you want to ask questions, you can go through the message board or raise your hand and we will [indiscernible] you all the questions. Thank you.

And Hass, please. Hass, can you hear me? I can hear you.

Okay, okay. I guess to start off, I was wondering, based on your guidance that revenue dropped by single digits quarter-on-quarter, could you clarify it is -- if it is for the whole company or just for the turnkey business. And I was wondering how we should think about your NRE business when you talk about the tape-out revenue contribution in fourth quarter across 5-nanometer to 3-nanometer. And I have a follow-up question on fourth quarter.

Okay. First of all, for the fourth quarter, as we mentioned, the NRE revenue will grow seasonal demand, so which is pretty strong, which means the production revenues actually declined more than the decline in percentage, more than the total revenue decline in percentage, right? So what we guided that slightly or they say probably high single digit quarter-on-quarter decline, it means the total revenue.

Okay. Yes. That's pretty clear. And then I think just based on the business assumptions you provided, could you share your view on the revenue mix between NRE and also production in the fourth quarter? And what we should think about gross margins, will you be back to 20% plus levels in fourth quarter? And operating margins will actually be higher quarter-on-quarter?

Haas, this is where we cannot give you the numbers in the conference call due to the regulation. But since you can see our third quarter gross margin is 19.5%, so if we want to -- if we will have the improvement from this margin, it of course means above 20%, right?

Okay. Yes. But I mean that if you can provide a rough breakdown between your NRE mix versus turnkey for third quarter and also fourth quarter?

I would say the NRE revenue likely accounts for 20% to 30% of our total revenue in fourth quarter.

Okay. Fourth quarter. And then in the third quarter, it was around high teens to low 20%, we could assume that?

Around 20%.

Okay. Yes. And then I think shifting gear to 2025 outlook, it seems that you are still pretty confident on the U.S. IDM customer contribution, which is somewhat in contradicts with your customers' comment as well as the news reporting recently. So could you provide us some more update on that part of the business, especially considering that for second half of this year, the ramp seems to be weaker than expected. What gives you the confidence that it will still be the major contributor next year?

Okay. I will answer first, and Johnny will do a more detailed answer later. So for the next year, I knew that there were a lot of rumors or sayings about the IDM customer to cut the orders. It is not 100% true. However, we do see that the customer to trim their 2025 demand, and some of the orders are right now putting up [ halt ]. But for the rumor in that 40%, 50%, 70% or even cut orders, it is not true. Based on the current orders POs to TSMC, and which I indicate it is the worst case scenario, we will still have pretty decent revenue contribution from this customer. And the last, why I said for next year for the production or even for the overall revenue, these this chip, this 5-nanometer AI chip will become the #1 revenue contributor to us.

Okay. Let me try to add more. Yes, to be honest, yes, we did receive some instruction to put a certain amount of order on hold. Yes, hopefully, the customer can recover, but maybe there's still [ too ] inventory level goes up, so some amount [ offset does ] support our core. So -- but the current situation, we do some detailed calculation. I think that overall, the demand in hand is not that bad. But of course, before the -- from this earnings call to previous earning call, I think things changed very dynamic. If I remember right, we have a very high confidence to further grow our company to a certain percentage, 20% to 30%. But right now, I think the situation changed a bit. I can say we still have a chance to grow our company in terms of revenue. But overall, like I mentioned before, the NRE is quite promising next year. So we have higher confidence to further grow our company in terms of earning. In terms of revenue, hopefully, we can now be -- hopefully, we can be flat or a little bit better than this year. Order pretty continually [indiscernible]. Please leave some opportunity to others. We will also go back to you later. And Robert, please, Robert Hsu.

Yes. Daniel, Johnny, can you hear me? So I want to follow up on this IDM project. So I think you previously talked about if things go smooth, it can be as big as the 7-nanometer U.S. CSP project runs this year. So in your bear -- the bear case scenario, what would be the [ REM ] contribution now after this [ down forward to cut ]. And similarly, for this project, in 2026, how should we think about the revenue trajectory? Because the AI product road map from the customer appears to be pretty unclear and some of the customers are holding back on adopting this program.

Our saying will be the same. I guess most people understand that we are under strict NDA. So what we can say is, for the AI, I could say, the radar market, we do secure some projects. And one of the most important projects is the 3-nanometer projects. We are working up right now, and for this project, the schedule is so far so good. Hopefully, hopefully. And we are confident that this 3-nanometer AI accelerator would likely to go into mass production in very early 2026. That's what we can deliver to you the most.

Sorry, I was asking about the U.S. IDM project.

Okay. For U.S. IDM project I would say 5-nanometer, as I mentioned, is the major revenue contributor to us next year. And for the project beyond that, the same thing, I would say the next generation to the current 5-nanometer AI chip, supposedly 3-nanometer, if the project base in TSMC, we have pretty good chances to still be the ASIC partner with this customer. But if the customer, assume may know that it is an IDM player, if the customer wants to bring the project back into their own fab, I would say, the chance for us to support the project will be smaller. But for now, in our view, we see if a 3-nanometer AI chip wants to be competitive in the market, TSMC is a better choice.

And moving on to the U.S. [ CSB that we now ], I think you shared some light. And could you help us understand the nature of this project? You think is still only one winner in the project or could eventually be the split between you and the other competitor. Because the reason I'm asking is about your competitor seems to be vocal about retaining the project after what they have on the [ find-out ] right now. So can you help us understand what's the nature of it?

If I answer the question, which means I am indicating somebody else business, right?

No. Do you think it's still you winning, or is that still...

3-nanometer project, as I mentioned, but I cannot confirm with you we are the only one or we are one of the multiple. I cannot do that.

Okay. Okay. Yes. I have a final one, on your NRE. So I think, yes, so first, congratulations on your recent 3-nanometer project wins with the AI [ czar ], I think last week. So looking into 2025, how should we think about the NRE growth? I think you mentioned it would be strong, and would it be above the trend that you guided before, like 20%, 30%? Can you be above this number?

Yes. Let me try to cover that. So technology migration, I think, is still ongoing. Recently, I see before, majority of our desire N7 or N5. Now the new RFQ will receive so many from N3. Yes, as you know, the N3 NRE in terms of everything is much, much higher than N5. So I think based on current demand and also the -- we calculate our NRE numbers the next year, the NRE growth is quite significant. Some customer, for example, the biggest customer, they even think about N3, they are talking about -- they are thinking about N2 now. In terms of NRE, in terms of resource, I think that's -- the cost of -- cost for design will be much higher than before. Even we maintain the same capacity or little bit less, the NRE increase is quite significant. And next one, Charlie, please. Charlie Chan, Morgan Stanley, I guess. Charlie, are you there?

Okay. Yes, congrats on for a very, very good fourth quarter outlook. Yes. So my first question is a little bit mid to long-term outlook. First of all, to engage with the future 3-nanometer or 2-nanometer project, do you think you need to consider to add some front-end design engineers or there's a kind of CTO level of people? And would you consider to do some spec-ing type of partnership with your customers?

Okay. Yes. Let me try to answer this. So for front-end design, I'll be categorizing into many fields. Using our #1 customer, for example, they don't need any front-end support at all. For other CSP, yes, potentially like Google, Meta, they may need some front-end support from their side. But mainly on the subsystem side, for example, using the [ UCIE HPN D2D ] interface, they need some help on the subsystem, to writing out the IP to the verification and do the -- even do the system level bringing in. Yes. For that area, we do some investments, working with a cross-partner. And also, we have working with the front-end partner. Internally, we don't have too much intention to build a front-end team because the front end, as I mentioned before, that involve architecture, RTL that will infringe the neutral position. I don't want to touch customers' architecture. I don't want to get involved for their aspect design. That's why I can take many projects. If we involve too deep, later on, I think that our usual position, I think, will have some challenge on that portion. So to answer you, again, most of the -- some customer does need some front-end support on the subsystem. We have a partner, we're working with the partner closely, try to take this kind of project.

Got you. And I know you kind of have some front-end design partners in China, right, for example, for China auto projects. But for the U.S. project, do you consider to work with other [ of the sensors ] company like -- just remind me. I didn't hear anything like [indiscernible]. It seems like also one of the TSMC growing important partner. Do you see that kind of collaboration with some U.S. coming for front-end designs is possible?

Yes. We don't guess. In China, we have a partner, in Singapore, we have a partner, in U.S., I think Synopsis is our front-end partner as well and also they're doing a lot of subsystems with us already. The company you mentioned about, yes, we don't guess. Actually, personally, I also have a tight relationship with them. If a business is making sense, I don't mind to work with them as well.

I see. And my second question is about the -- a little bit details about your 3-nanometer project wins. So of course, you have one major focus, right? But can you give us more detail about the numbers of 3-nanometer project wins? Who are those companies? And I guess, investors are very, very clear whether or when you can win another CSP customer. Can you comment on those fronts?

Okay. For the most important project we are having right now, and I would say the earliest one for into -- for getting into the best production and in large scale is the 3-nanometer AI accelerator to the CSPs in North America. In addition to that, we have multiple 3-nanometer project win from North American customers, such as networking customer which -- who is also a listed, quite [ scaleful ] company in North America, and the major networking equipment chip players in North America and Europe. So there are multiple opportunities. To be honestly, for the pipeline, we -- it is quite fruitful for now from the North America. Normally, it is AI or networking or the networking used in AI data center. And for the other CSPs, we are currently engaging with discussion or let's say compete for a couple of projects with the industry peers. Of course, the strongest competitor is Broadcom. So we do have winning chance. But right now, I would like to be conservative by saying if we want some projects, we will talk to the investors. But for now, we are competing.

Yes. As you know, most of the CSP project in North America is dominated by Broadcom. Yes, Broadcom -- Broadcom is a very respectable competitor, but somehow most of our customers does have some concern to only use the Broadcom. So they are open, a lot of opportunity. Before, it's very difficult for a company like us receiving RFQ from the CSP. But right now, I think whenever they have a project ready, yes, we have a chance to compete.

I see. So I will be back to the queue. If I can ask some second one question, I will do it later.

Next one is [ Chao Ren-Chen ]. Please unmute. [ Chao Ren-Chen ], are you there? Can you hear us?

Yes. Sorry. I had a couple of questions, some of which you kind of already answered, but just to go through those. So first, you said for the U.S. IDM customer, if their 3-nanometer project is still done at TSMC, there is a good chance that you will participate in that, correct? And to be competitive, most likely, they would do that at TSMC rather than insourcing that again? That is correct? My understanding is right, right? And that's scheduled for late 2025?

That's our view. That's not in the -- that's not new. That's not the view of our customer. That's ours.

Understood, understood, understood. So there should be a continuation here. Okay. Understood. My second question, which Charlie was touching upon, is the new 3-nanometer or even, I don't know, 2-nanometer customers, you mentioned you're competing with other designers for the CSPs. You mentioned the networking customers. Is that going to be a switch chip? When you talk about networking customers, are you working with them on their networking switch chips? Or what would that be specifically? It's not an AI accelerator, correct?

Okay. Let me first clarify that, first of all, what we are saying, we are competing with projects from CSP, which means the not existing customer. And for the existing customer, we will do the projects generation by generation. And for the networking projects, I would like Johnny to elaborate it a little bit. But to be honest, because all the big customers, especially in the big U.S. customers, the confidentiality requirements are hard.

I understand.

Yes. So there are many opportunities, I think, for -- from CSPs Our team is very busy to prepare the proposal and working with them. Yes, some of -- one of them are networking switch, yes, you are right.

Okay. Got it. So if I look at 2026, 2027, who is likely to be the 3rd -- or, I don't know, could be second largest customer. Would it be like a second CSP? Would it be the networking partner? Or could it be, I don't know, some auto guy, right? Because I don't want to name names here, but could it be like a Chinese auto company? Could it be a U.S. auto company? Who's likely to be the next big customer after our U.S. CSP, existing CSP and existing IDM. It sounds like it's going to be a networking customer.

If we are talking about 2026, yes, I would say if we win the networking project, the contribution from the chip would be quite significant if they have chance to be top 3, I'd say.

Okay. Okay. Got it.

For next year, I think IDN will be number one customer. Number two pretty much will be original number one. Then number three, I think many customers has a chance.

Okay. Understood. And my last question, if you don't mind. So regarding the old number one, next year's number two, for their 2026, when will we know with higher certainty? So when can we know that they've made the decision on their next generation? When do we get more visibility on their next-gen AI ASIC on 2026, whether it will be done with us or with another competitor?

So the next generation, you are naming 2-nanometer?

Yes.

I would say very soon, very soon. Yes, the design will be kicked off, yes, for sure, will be in 2025.

Okay. Okay. Okay. So 3-nanometers, just to be clear, I may have some confusion. The 3-nanometer -- there, a 3-nanometer went to another competitor right? And then we're trying to win back the 2-nanometer? Sorry, yes.

No, we are doing the 3-nanometer AI accelerator right now, and we are expecting the chip to be in mass production in early 2026.

Okay, okay, okay. Got it, got it, got it. So they're 5-nanometer -- okay, okay. So last year it was 7-nanometer, 5 went to another guy, okay. Okay, so how is it -- would it be too early to ask your view on 2026 now that you know that 3-nanometer is kicking off in 2026?

A little bit too early, but I can ensure you that it is a very promising year for Alchip.

Understood. On the back of all those we just discussed, right, the IDM customer, your view is they -- if they want to be competitive, they should do TSMC/partnering with us. So on top of that, on top of us starting the 3-nanometer with big the CSP customer and future -- not future but potentially more networking projects potentially to add one or two more CSPs and other stuff, right? So 2026 looks promising.

Yes. I would say everything looks good in 2026. Even without new winning, the 2026 will be very promising, but we will continuously try to win more customers.

I see, I see. Understood, understood. Okay. So we should really look past 2025? Understood.

And the next one is KGI, Lucas. Please unmute.

[indiscernible].

Yes?

Okay. I have one question. It is on your contract liabilities. I have noticed that your contract liabilities started from [indiscernible] in second quarter to...

[ Lucas ], your voice is breaking up. I can -- we cannot understand you.

Can you hear me now?

Yes, much better, much better.

Okay. So my first question, I have noticed that your contract liabilities have surged around $7 billion in this year. And could you clarify how much of this increase is attributed to the production revenue commitment for the U.S. IDM customers and 5 AI accelerator projects for next year?

Can you repeat your question again? In terms of revenue breakdown?

It's about the contract liabilities, because the company has recognized a huge amount of contract liabilities this year.

Okay. The contract liabilities is mainly for the projects -- the shipment for the 5-nanometer AI chip to the IDM customer. So starting from now or this is as the shipments ramping up, the contract liability will gradually decrease when we should ship to a customer.

Got it. So is this commitment or provision, as we may refer to it, noncancelable?

Yes, it is noncancelable.

Got it. Okay. So if the demand of the N5 AI accelerator were to fall maybe below customers' expectation and production will reduce, if -- would the revenue recognition be based on the proportion of the production? Or it is still noncancelable, so this is -- all the contract liabilities we recognized earlier can be transferred to our revenue?

Okay. The basics of our business model is doing the service business. So actually, the chip is only for the customer, and it can be used by the customer only. So the -- almost every contract, the customer is mandated to take the chips.

Sure. Got it. And so I only have one follow-up question. It's for the 3-nanometer ASIC from the U.S. CSP customers that we have won. Are there still 2 packaging versions that utilize the same top die, or -- and maybe another way to ask, have we secured both the training and inference projects?

Sorry, I cannot answer you this question. It's related to the chip design. It's -- as I said, we are under strict NDA. We cannot disclose the details about our chip.

Okay. Got it. That's all my questions. And I'll be back to the queue.

[ Angus Brown, MacQuarie ], please unmute your speaker.

First question, your current large CSP customer, your mass production volume was very high for, I would say, over 2 years. Do you think the 3-nanometer project, when that ramps up, will also be that long? Or is that -- do you think the projects will get shorter mass production life cycles in the future?

Yes. So in terms of revenue number, N3 definitely will be much higher than N7. But in terms of production cycle, I do some operation at minimum, I think like 1.5 year. I think average may be 2 years.

Okay. And second question, any update on your ADAS, major ADAS customer for next year in terms of ramp-up and how that's going?

Yes, everything goes smoothly, we'll be on schedule. We will start the shipment in the third quarter next year.

Okay. And my last question, your IDM customer, assuming their next-generation ramps up roughly what you think, how much mass production time frame you think the 5-nanometer will be? If it's just ramping up from third quarter this year, do you think that will actually have revenues in 2026 on mass production or close to end of life?

Yes. Like I mentioned before, there's a certain [indiscernible] but before we expect to see the production for the whole year. But I don't know, they still have a chance to restrain the holding. Before, we're thinking about this production [ way out ] less than 2 years because their next-generation is -- come late. So we expect without the big issue, the lifetime for this particular project will be longer. Okay. I guess it goes back to Haas. Haas, can you unmute?

Yes. Can you hear me now?

Yes.

Yes. Okay. I think just 2 quick follow-ups for the NRE versus turnkey mix next year. Since this year, it's pretty much like 20% from NRE and not until like fourth quarter this year, it is going to be back to 20%, 30% of your total sales. What should we think about the NRE mix as a percentage of your total sales looking into 2025? And what is your initial view or take for the NRE contribution as a percentage of your sales in 2026 if you can share -- if you could share based on your current forecast?

Okay. Admittedly, I haven't done the budgeting. But based on the current picture, I will say the next year, NRE will account for about 20% to 30% above the revenue, the NRE revenue, so 20% [indiscernible], yes. So based on my calculation, I didn't do very detailed as well, but the next year, in terms of NRE weight, will be higher than this year, but we don't know about 2026. As you know, 2026 production revenue ramping up very quick even though NRE also ramping up quick, but I'm still thinking about the production improvement will be faster than NRE, that's for sure.

Sure, sure. And then regarding your IDM customer's business contribution next year, you discussed about the contract liability will go down quarter-on-quarter throughout 2025, when the chipset starts the shipments. But I was just wondering if the customer can actually delay the chipset shipments and that will actually push out your revenue and contribution schedule as well.

If we are talking about the possibility, I would say anything is possible. But to us, to the supplier as a supplier and for TSMC as a [ function honorer ], I would say every one wants the shipment to be on schedule or even to accelerate the shipment for the current project because TSMC is running a very tight schedule for its wafer capacity. Especially for the 5-nanometer and the CoWoS capacity, we want it to be on schedule.

Let me also add some input for this. So whatever the order we are receiving from this customer, the wafer process already happened. So this is a separate way to put on hold. In usual case, people do some functional changes to put it on the contact level and waiting for the matter of change. And most of people just process all the way. So everything is in wafer process now. If they put anything on hold, there will be a consequence. Put on hold on [indiscernible], the will be storage fees. Pull beyond metal is the user's because most major cost is on the device. So if the wafer already in the metal process, most of the customers will decided to take the inventory part because not much money they can get it back, even they cancel the order. So everything is in the wafer process. I think the chance for them to cancel in [ time of ] order, I think, will not be too high. And given the fact they are working very hard to get the CoWoS as capacity from TSMC. Last year, both our chip and that end customer are working very hard to get this capacity. I think this is very precious. I believe and hope everything will be -- proceed accordingly.

Okay. Yes. And I think lastly for my follow-up question is, I think just regarding the CoWoS capacity that you have been securing for 2025, how should we think about the scale compared with 2024? And for the next 3-nanometer hyperscaler project, you are going to -- about to ramp from late 2025 or early 2026, what should we think about the technology of CoWoS that the chipset will be adopting and whether you are actually already negotiating with the foundry supply chain regarding that project ramp?

Actually, we already have projects in production that is [ chipset ]. So if you are asking me about the chipset technology, sure, we will keep our supporting customers who is the need for that. And looking forward, the -- I would say most of the advanced AI accelerators will be in chipset technologies.

Yes. I was just wondering, compared to 2024 for the CoWoS supply you secured from your foundry partners, a little bit about the year-on-year trend for 2025, even with your IDM customer is putting some of the orders on hold.

Okay. For the North American service customer, I would say it's really special and TSMC gives their best support to the customers. So for the future capacity, although the scale of the production will be huge in 2026, we are confident and the customers are confident to get very good support on TSMC's CoWoS capacity, right?

Yes. For 2025, so far, I think we have a much, much less constraint from CoWoS than in '24. But '26 will be another challenge year for us because of our increased allotment, many customers ready for production.

Okay, Robert?

So I just have a follow on the [indiscernible] customer. So how much percentage does the customer have to prepay? And if I look at your country liability, I think it's around $300 million. And then if we assume probably 70% of that or you ask for 70% of prepayment, should we assume that these targets should contribute around $500 million or so next year?

Robert, we cannot talk about numbers because it's related to our customer, so...

I just want to know how much is actually in your pocket, and how much is [ stopping here ]?

How much is in our pocket? You can see the contract liability. And based on that amount, you still have to put something more because that's for wafer and some others. And for finisher chip, they will still need some money to do the testing, something like the old asset.

Yes, let me try to answer this way for -- we already started production for this particular customer for a while. So far, everything they are paying, the credits are good. They are paying everything on time. I don't -- yes, I don't think that's a -- [ Furtively ], I also do a lot of channel checking on their funding situation. I think so far, I get a positive feedback. The total amount of number compared to the whole company, I think, is not that significant.

Got it. Got it. And secondly, on the -- I think it sounds pretty promising on the networking [ in the ASIC ], especially for the switch. So I just want to know the customers thought process. So one is, prompt them to suddenly move towards this [ customer AC ] model for the switch IC. Is that to get it by the cost or guided performance? And how should we think about the [indiscernible] IP support? Because I think the incumbents on the [ key core comments ] is the service.

No, it is a complicated question for the consideration, why the customer is choosing us as the silicon supplier. There are multiple considerations. On the engineering...

Sorry, Daniel, I was asking about the network in ASIC. So what are the...

Yes, yes. The same thing for the networking ASICs, I would say the largely is pretty much the same with the ASIC -- the CSPs. Let's assume this way, if the networking chip is used in the AI data center, and the so-called turnkey solution providers needs to charge a lot of the margin with very high price, probably the customer will consider to look for other suppliers with more flexible pricing and more flexible engineering support. Given the potential shipment volume could be huge, 1%, 2% difference in cost is a significant absolute amount of money.

Yes. Talking about specific IP [indiscernible], of course, Broadcom has a good reputation on that area. I think, again, it's a very respectful company. Yes. But right now, many other companies has to service a solution and some of them, for example, Synopsys has been proven for different generation from our #1 customer. And also, many other IT provider has this kind of solution. We're working with most of them to try to provide the most competitive solution to minimize their Broadcom dependency.

Charlie, yes, please.

My follow-up question. So we talked about there's kind of the worst case scenario for the U.S. IDN customer. But what is the base case? Meaning if I base on the current TSMC's wafer orders, what would be the implied 2025 revenue growth?

It's difficult to -- I would say the revenue from this customer will hopefully account for still over 1/3 out of the revenue next year.

It's a base case, right?

That's the base case.

Okay. Okay. Yes, that's fair. Yes, because I totally agree with you that it is not ideal to -- for their customers who can sell wafer order at TSMC if they want to pursue sort of a long-term [ part ownership ], right? And there are not many kind of valuable assets for that group. So yes, I think it's good to manage investor stations, but is also good to do what is the base case. So this are very, very helpful. And another follow-up is the 3-nanometer NRE. Do you think 2025, we are going to see any [ circuit ] of turnkey revenue from fund as a 3-nanometer projects other than a major CSP?

3-nanometer chip. Let me see. Yes, because our production number is very high, it is dictated by owning fewer comp. But even though some projects go to the total hyping stage or I think they start to produce some NPE revenue, but compared to overall number, still insignificant. Yes, I believe because some of the project will be taped out, whatever the project tape out before the first half, we expect some -- to see some total taping revenue, production revenue on Q4. There will be a few on the pipeline, yes, but it's not as significant as other major project.

Okay. So I would assume those 3-nanometer projects outside of the major CSP should be more 2026 revenue contribution.

Will be 2026. Yes.

Okay. Okay. Would those also need CoWoS capacity?

Yes. If it's AI-related, definitely, they need the CoWoS capacity. We do have a few many start-up AI accelerator. For the customer, they need the CoWoS capacity.

Okay. How about the so-called switch networking ASIC? Would that need the CoWoS as well?

No. That one is -- they don't need CoWoS.

I see. And the last one is the geopolitical risk, where I know you kind of handle this very carefully. But recently, you see the news, right, about your foundry partner in some -- China, something -- it's kind of escalated. So I'm wondering if your products with China customers incidentally used by companies in the end of day, would that still impact your business or operation in China?

I would say no. First of all, our China exposure is currently really low. You can imagine this way. Let's take the recent news as an example. In order to cover our way, not too many companies who can be the -- so-called agent to do that. Secondly, we do know, because we were -- we have been in China for many years, actually, we knew the customers in the market. So this is -- I would say it doesn't make sense for us to take the risk to relax so-called the agent as the Entity List customer. It isn't worth it.

Right. Overall revenue from China is insignificant. I think looking forward in the future, our emphasis point is -- I think automotive right now is I think they are political and sensitive at this moment.

Got it. And next, are you comfortable to talk about your potential or exceeding Japan consumer opportunity or projects?

We do have a good win in Japan and the production will be in 2025. But to be honest, it is not within the HPC area. So the contribution -- for the revenue scale as we have currently, the revenue contribution is -- I won't say not good. I would say -- how to describe it. It's good contribution from a consumer project, but cannot compare to the scale of the AI accelerators. Yes, yes, #1 customer is Japan.

Yes. I know your company is very, very successful in AI, U.S., maybe China auto, but why you are winning a Japan consumer project? And since like it was handled by another design service, so can you give us some big on why you're winning this kind of project?

I think this customer used to be our [ dream ] possible. Yes, we've been continuously working with them. Finally, they granted project to us, and we do the similar application like 10 years ago. Yes, we have some experience. And during the last time, that was our #1 customer. So we have a place in that area. But anyway, right now, the revenue contribution is reasonable, but it's not good enough to grow -- further grow our company in terms of a significant percentage. But it's a very good customer, very good customer.

Congrats on day 1.

Okay. And we have -- it's about time, so we want to finish the question through the message box. So from the -- Mike Yang, Bank of America. The question one is, can you update us about the data or schedule of the 3-nanometer budget you mentioned? And the second question is, if the biggest U.S. IDM customer does not pull their inventory from you, what will be the minimum revenue that you can bring -- that you can recognize in 2025? Should we refer to the contract liability number? So I guess I just cover, I can now cover these 2 questions. For scheduling, we cannot talk too much. So you can -- Mike, I guess, you don't hold scheduling of a typical HPC or AI chip in the leading-edge process now. As we said that the 3-nanometer project will be in mass production in early 2006 -- early 2026, which means the tape-out will be in the first half, at least the first half of 2025 maturely. And if the -- for the U.S. IDM customer, the contract liability number is a reference, but it is not exactly the same. As I mentioned, you have to still pay some others for the completed chip. And for the inventory, I want to emphasize, we are providing services. So we don't bear the inventory risk. The customer has to pick up the inventory. And from [ Brinny, Brinny Len ], he asks about can you share more about the margins and the profitability of NRE pipeline and the competitive landscape, especially with the CSPs. And NRE timing, is it more second half '25 based and how much comes from the Arm total design platform versus direct RFP? [ I would say RF too ]. For your question, I would say it is really big questions. The competition landscape with the North American CSP, I would say the -- currently, mainly we are competing with Broadcom. And Broadcom is a very respectful competitor, and we will try -- actually we will try our best to win through better engineering, better support, more flexibility for our pricing. We sincerely believe we have chance to win some projects from other cloud service providers other than our existing customers. And for the margins and the profitability for the NRE, usually, the NRE is relatively the same. We can get about 40% gross margin from the NRE revenue, but it really depends on the design content and what is the application and what is the process now. And the numbers come from the Arm total design platform. I'm not too familiar with -- I'm not understanding your meaning, but I will assume saying customer asks us to do a design by using the IP, I would say for now, no. And I want to emphasize that Arm is providing the biggest architecture IP provider in the world, but for Arm's architecture IP, it has more relate -- more relations with the front-end design. We are providing back-end design service. So for quite a long time, we don't have too many direct business relationship with Arm. You can keep on hearing that we are working with Synopsis or Cadence. That's the reason. And for [ Brian Young, EFGAM ], his question is, as the industry advance towards 224 giga service, several of your peers have emphasized service IP as a key competitive advantage. Considering that Alchip primarily relies on third-party licensed IP, how does management think about Alchip's ability to sustain its competitive edge in winning key AI HPC projects? Additionally, what implications might this have for you for the module provider?

Okay. Let me try to answer this question. 224 gigs service, it is a very important IP to win to sustain the HPC AI-related applications. Using our #1 competitor Broadcom as example, the reason everybody considers to use their IP because the IP is approved. They've already proven on their own product. Yes, the CSP, all CSP customers are very conservative. They are not willing to use any unproven IP. The IP need to be silicon-ready, silicon-proven, and production-proven, and also volume-proven in order for them to use. So many of our smaller competitors, kind of they have IP, but to be honest, I don't think they can win. Yes, even the company like a Synopsys, who we can consider is the #1 basic analog/mixed-signal IP in the world, not too many people is there to use without proven. So our strategy, I think, is like this. We are working with a smaller IT vendor like a Synopsys, Credo or others, proven their IP from the startup company. We have so many start-up company in the pipeline. In usual case, the start-up company go even faster than CSP. That's how they supply, it's how they establish a company. Once we proven on the startup company and then -- or smaller company, then we can bring this solution back to the CSP. Yes. So we already have several wins working with a partner using 224 gigs service of 5-nanometer and also 3-nanometer. So the solution, after [ CT Con ] come back, we can propose to the CSP, so that's our strategy. The companies like us, even we spent a lot of effort, spent a lot of time to make the IP solution by ourselves, after 2 years, when the designs start, I don't think we have the chance to win CSP directly. Yes, it takes a lot of effort and I don't think that's a good investment. Working with the partner is the right approach. Now that is obviously very complicated. Everybody should focus on the area on which you are more capable of. Yes, I don't want to -- and also I don't want to compete with our IT partner. But so far, our relationship, I think, is very good.

Okay. Thank you. I guess it's about time and we already answered the questions from the message board. And thank you for your participation in our third quarter earnings call. Thank you.

All right. Thank you very much. Thank you, thank you, folks, for your support. Thank you.