eMemory Technology Inc. (3529.TWO) Earnings Call Transcript & Summary

Good afternoon, and welcome to eMemory's Second Quarter 2025 Webcast Investor Conference. Joining us today is our Chairman, Dr. Charles Hsu; President, Mr. Michael Ho; Head of IR, Ms. Li-Jeng Chen; and Director of the Finance Department, Mr. Joseph Hsia. The format of today's event will be as follows: first, eMemory's Chairman, Dr. Charles Hsu will give an opening remark. Afterwards, our financial officer, Mr. Joseph Hsia will present the review of our operations. Following that, President, Mr. Michael Ho will share our business outlook. Next, Dr. Charles Hsu will give up top title Chiplet supply chain secured by NeoPUF. Then we will conclude today's conference with the Q&A session where our management team will answer your questions. [Operator Instructions] As a reminder, this conference is being recorded, and a webcast replay will be available after the conference is finished. For more information, please visit the company's website under the Investor Relations section. As usual, before we begin, we would like to remind everyone that today's presentation may contain forward-looking statements subject to risk factors associated with the semiconductor and IP business. Please refer to the cautionary statement on Page 3 of today's presentation. Now I would like to give the floor over to eMemory's Chairman, Dr. Charles Hsu.

Okay. Thank you. Good afternoon, everyone. Thank you for joining our earnings call today. One of the key questions we hear from the investors is about our position in AI, why it isn't more visible today and will we have a place in the future. Let's take the smartphone market as an example. Our IP is often introduced starting from the second or even much later generation of chip's development. Over time, as more customers adopt our technology for similar chips, the scope of application expense. Even today, as the smartphone process nodes continue to advance, we are still introducing our solution into new application chips. In the HPC and the AI domain, we will replicate this proven model. So far, we have been designed into covering CPUs, AI accelerators, DPUs, smart network IC, SSD controller, BMC, PMIC and more to come. As of Q2 this year, we have achieved over 110 tape-outs related to security IP. In the second quarter, we began to see royalty contributions from mass production by a major Taiwanese networking company, and we expect more significant moving forward. At the same time to prepare the AI-driven transformation of our industry, we are implementing the largest operational reform since our founding, laying the foundation for the next 10 years and beyond. Our operation efficiency improved substantiality and we believe the results will be worth the wait. We're grateful to the colleagues who have built the strong foundation of the company since its inception, and we are also committed to ensuring a smooth transition and succession to meet the opportunities and the challenges of AI-driven industry change. This is a core spirit of this year's reform. Next, I would like to introduce our new CFO, Joseph Hsia, who will walk you through the Q2 financials. Joseph holds an MBA from Yale and is both CFA and the CPA charter holder. He previously worked at BCG where he led the operational improvement project for the several leading technology companies. Joseph, please?

Good afternoon, everyone. Now let's begin our 2025 second quarter financial results. The second quarter revenue was TWD 937 million, up 2.7% sequentially and up 4.9% year-over-year. Revenue in terms of U.S. dollar was USD 30 million, representing a 7.1% increase from the previous quarter and a 7.3% increase year-over-year. Our operating expenses on the other side were TWD 391 million, up only 0.3% sequentially and down 1.8% year-over-year. In results, operating income was TWD 546 million with an increase of 4.5% sequentially and an increase of 10.2% year-over-year. Our operating margin increased by 1 percentage point sequentially and increased by 2.8 percentage points year-over-year to 58.3%. However, impacted by a foreign exchange loss of around TWD 90 million this quarter, our net income totaled TWD 400 million, experiencing a decrease of 13.4% sequentially and a decrease of 15.8% year-over-year. The results, EPS for this quarter was TWD 5.36. And next, let's move on to the revenue contribution by licensing and royalty. First of all, licensing in the second quarter accounted for around 34% of the total revenue, increased 32.4% sequentially and up 6.1% year-over-year. In terms of U.S. dollars, this represents a sequential increase of 39.8% and a year-over-year increase of around 10%. And royalties on the other side in the second quarter contributed around 66% of the total revenue, decreasing 7.9% sequentially by increasing 4.3% year-over-year. In terms of U.S. dollar, this represents a sequential decrease of 4.6%, but a year-over-year increase of 5.9%. In results, our total revenue for the second quarter increased by 2.7% compared to the previous quarter and increased by 4.9% compared to the previous year. And in terms of U.S. dollar, total revenue grew by 7.1% sequentially and 7.3% year-over-year. And for the first half of 2025, the licensing and royalty revenue are as follows. First of all, licensing in the first half accounted for 30.2% of the total revenue, up 5.7% year-over-year. And in terms of U.S. dollar, the licensing revenue increased 5.9% year-over-year. And royalties on the other side, in the first half, contributed 69.8% of the total revenue, increasing 10.5% year-over-year. And in terms of U.S. dollar, royalty revenue increased by 8.4% year-over-year. Total revenue and results for the first half increased by 9% compared to the previous year. And in terms of U.S. dollar, the total revenue grew by 7.6% year-over-year. And with that, I will comment further on the revenue contribution by specific IPs. First of all, NeoBit. NeoBit accounted for 18.8% of the total licensing revenue in the second quarter, increasing 5.6% sequentially, but decreasing 18.6% year-over-year. And in terms of U.S. dollar, the licensing revenue for NeoBit increased 10.6% sequentially, but decreased 16.5% year-over-year. And royalty from NeoBit accounted for 26.4% of the total royalty, down 4.3% sequentially, but increasing 3.3% year-over-year. And in U.S. dollar terms, NeoBit royalties was down 1.8 -- sorry, 1.9% sequentially, but up 3.9% year-over-year. Secondly, for NeoFuse. NeoFuse accounted for around 39.4% of the total licensing revenue in the second quarter, up 6.3% sequentially and up 25.5% year-over-year. And in terms of U.S. dollar, increased 12.1% sequentially and 29.8% year-over-year. In terms of total royalty revenue, NeoFuse royalties decreased by 10.3% sequentially but increased by 4.1% year-over-year, accounting for 70.5% of our total royalties. And in terms of U.S. dollar, royalties decreased 6.8% sequentially, but increased 6.2% year-over-year for NeoFuse. And third is our PUF-based security IPs. It contributed 14.7% of our total licensing revenue, increasing 176.3% sequentially and increasing 24.7% year-over-year. And in terms of U.S. dollar, this represents an increase of almost 200% sequentially and a 32.4% year-over-year growth. And PUF-based security IP royalties accounted for less than 1% of the total royalties, down 5% from the previous quarter, but increased 238% from previous year. In terms of U.S. dollar, the royalties were flat sequentially, but surged 216.7% year-over-year. And lastly is our MTP technology, it accounted for 27.1% of our total licensing revenue, increasing 77% sequentially, but decreasing 3.1% year-over-year. And in U.S. dollar terms, licensing revenue grew by 86.2% quarter-over-quarter and edged up 0.1% year-over-year. Royalty from MTP accounted for 3% of our total royalties, up 30.4% sequentially and increased by 15% year-over-year. In U.S. dollar terms, that will be 34.4% sequential growth and 16.2% year-over-year growth. For the first half of 2025, the revenue by technology are as follows. First, NeoBit licensing revenue decreased by 3.9%, but royalty increased by 11.3% year-over-year, accounting for around 24.4% of our total revenue. And in terms of U.S. dollars, licensing revenue decreased by 4.6%, but royalty increased by 8.6% year-over-year. Second is the NeoFuse licensing revenue. It increased by 10.7% and royalty increased by 10.2% year-over-year, contributing to around 63% of our total revenue. In terms of U.S. dollar, the licensing revenue increased by 10.1% and the royalty increased by 8.3% year-over-year. Next is our PUF-based security IP for the first half. The licensing revenue increased by 14.2% and royalty increased by 346.5% year-over-year, accounting for around 3.5% of our total revenue. In terms of U.S. dollar licensing revenue increased by 17.7% and the royalty increased by 322.2% year-over-year. Lastly, for MTP technology, the licensing revenue increased by 2.7% year-over-year and the royalty revenue increased by 7.2%, accounting for around 9.1% of our total revenue. In terms of U.S. dollar, the licensing revenue for MTP increased by 3.3%, and the royalty increased by 5.4% year-over-year. And now let's take a look at the royalties for 8-inch and 12-inch wafers. First of all, the 8-inch wafers accounted for around 40% of our royalties, down 13.4% sequentially and down 2% year-over-year. For 12-inch wafers, on the other side, contributed around 60% of our royalties, down 3.8% sequentially but increased 8.8% year-over-year. In total, we had 160 product tape-outs completed in the second quarter, and we will provide more information in our management report which will be uploaded to the website shortly after this earnings call. Next, I would like to invite our President, Michael Ho to share a little bit more about our future outlook. Michael, please?

Thank you, Joseph. Good afternoon, everyone. In the following section, I will address our future outlook. Regarding the licensing revenue, we anticipate the licensing revenue will continue its growing momentum due to a very strong demand from both foundries and fabless customers for our IPs. As for Royalty revenue, we expect royalty revenue to continue its growth trend as the accumulated tape-outs in the time line that are moving into production. Particularly, we have started receiving the PUF-related royalties, which will be -- will accelerate our royalty growth momentum in the future. For new IP technologies. One, our new post content cryptography has been fully developed and certified under the NIST’s CAVP program, covering the published FIPS 203, ML-KEM and FIPS 204 ML-DSA standards. This marks the official launch of our full stack PUF PQC architecture. Two, on TSMC's N3P process, our NeoFuse OTP, NeoPUF and PUF-based root of trust have been qualified, enabling secure PUF-based solutions for advanced AI, HPC chips, and chiplet designs. We are also advancing development on N3C and N3A process to secure the value tier products and automotive applications. Three, in partnership with leading foundries, we are advancing the development of 2-nanometer technologies. This concludes my comments. Next, I will pass the time to Charles. Thank you. [Presentation]

Okay. After watching the video, I'd like to walk you to the how PUF technology can secure the chiplet supply chain from end to end. As we know, the shift toward chiplet-based architecture has brought many benefits, greater flexibility, modularity and performance optimization. But it has been also introduced new security challenges because chiplet maybe design, fabricate and integrate across different vendors and geographies. This creates multiple attack surfaces throughout the supply chain. By embedding physical unclonable function or PUF technology directly into each chiplet, we can establish a hardware-based root of trust that protects against the threat from design to deployments. So let's first look at the types of security challenges, chiplets face. This fall broadly into 2 categories. The first category is supply chain security. This includes IP privacy and where proprietary chip design can be slow and legally replicated. There are also the threats of malicious parts, sometimes referred as Trojan chiplets, which may be insert during the manufacturing and could compromise the entire system. And finally, counterfeit chips, where unauthorized chiplets introduced into the supply chain potentially undermining reliability and security. The second category is authentication between chiplets. In a multi-vendor environment, primary components such as cores or accelerators enable component like I/O modules and the supportive components such as memories must all be verified to ensure they are genuine and trustworthy. Without strong authentication, malicious or incompatible chiplet could be integrated into the system, compromising performance or security. And the NeoPUF addresses these supply chain challenges across all 3 stages of the chiplet life cycle. In the design phase, the main risk is IP piracy. Traditionally, hardware unique keys require manual handling, which is vulnerable to leakage. NeoPUF eliminates this risk with its inborn hardware unique keys, removing the need for external key injections. In the fabrication and the packaging stage, one concern is the malicious parts being inserted where NeoPUF ensures each chiplet carries its own unique ID, enable traceability for device management throughout the manufacturing. In the deployment stage, counterfeit parts may attempt to infiltrate the network. NeoPUF can be used to generate critical cryptographic keys and the certificates to authenticate components and maintain supply chain integrity. This end-to-end approach allow us to track and verify every chiplet throughout the life cycle. And when we talk about chiplets security, it's not just about the supply chain. Each chiplet also needs its own safeguards to protect the way it communicates with the rest of the system. The level of security depends on what the what that attribute actually does. For supportive components like memory dies, basic security is enough. They don't perform computation, but they still need to be verified by the CPU or accelerator. Basic security is achieved by hardware root of trust with anti-tempering and secure storage, plus simple one-way symmetric authentication. Enabling components such as I/O dies, play a bigger role. They are essential for system operation and interact with other chiplet all the time. To increase to moderate security, unique ID and the true random number generators are added while still using one-way symmetric authentication. And finally, primary components such as CPU and accelerators acts as brain and the engine of the system. This demands the highest level of the security, the full set of hardware root of trust functions. And the 2 ways asymmetrical authentications to ensure both sides verify each other. And overall, by matching each chiplet's role with the right level of protection, we can keep the system secure without adding extra complexity where it is unnecessary. This slide shows how NeoPUF based solutions come together to secure die-to-die communication in a chiplet system. At the top right, we have the Memory Die and Control Die, both store their keys and the certificates security in secure OTP and use hash based message authentication code for one-way symmetrical authentication. The Core Die which is high value and central to the system, integrates PUFcc for 2-way asymmetrical authentication and the cryptographic operation, establishing a strong hardware root of trust. The accelerator Die and I/O Die use PUFrt to provide unique ID and the keys along with HMAC for session-based authentication. And this ensure they can be validated quickly and the security before exchanging the data with the core. By combining HMAC for lightweight authentication, secure OTP for storage, PUFrt for hardware root of trust, and the PUFcc for advanced cryptography, NeoPUF delivers a comprehensive layered defense, securing each chiplet individually and the entire packaging collectively. To summarize, the adoption of the chiplet change, the security landscape by introducing new risk at each stage of the life cycle and at every interface between components. NeoPUF offer a silicon native unclonable identity for each chiplet enable us to secure the supply chain and authenticate die-to-die communication. By tailoring the security solution to each chiplet’, and we can maintain both security and the performance, ensuring that the chiplet based system remain trustworthy from design to deployment. And this is the point I would like to share with you today. Thank you. Next, we will enter the Q&A section.

Thank you, Charles. This concludes our prepared statement. [Operator Instructions]

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[Foreign Language]

Our first question is -- we believe most investor wants to know that is your company's operating performance has lagged behind TSMC, why is that? Given your 3-nanometer verification is complete, can we expect growth to catch up or even surpass TSMC in the future? Michael, please?

Our business model naturally involve a long lead time from technology development to royalty contribution from initial development to process verification takes about 2 years, followed by another 2 years from customer adoption to mass production and the royalty generation. It can take several more years to build a meaningful revenue base. But once adopt, the process now can generate royalties for over 20 years. We have followed closely with the leading foundry starting from the 16-nanometer in 2014, through the 7, 6, 5 and 4 to 3-nanometer with customer design in. Royalties from the sub-16 nodes are only now becomes in more significant. Over both the past 10 or 5 years our wafer shipment growth have exceeded the leading foundry by 10%. The gap in performance has mainly been due to the slower ASP growth especially in recent years as the leading foundries strong growth was driven by much higher price leading-edge nodes. Historically, our IP enters the market after advanced nodes stabilized and completed roughly 2 years of foundry replication, capturing the second or the third generation products with customer demand for security rising sharply, adoption is accelerating. Since advanced node royalties are several times our historical average plus incremental PUF-related royalties. Our growth will be driven by both wafer volumes and higher royalties per wafer going forward. Thank you.

[Foreign Language]

[Foreign Language]

With the NT dollar stabilizing, the company recorded FX losses in the second quarter. Could we see a reversal in the third quarter, Joseph?

Yes, exchange rate will still have an impact to us in the third quarter. For example, in July, our revenue grew by 19% year-over-year in terms of U.S. dollar but only 7.3% in terms of New Taiwan dollar. FX will impact us mainly in 3 areas. First is when converting U.S. dollar-denominated revenue into New Taiwan dollar upon invoicing. And second is exchange rate movements between the date of revenue recognition and the actual cash collection. And third is the mark-to-market revaluation of U.S. dollar assets, which mainly is U.S. dollar cash and accounts receivables at the end of each period. Most of our operating expenses are in New Taiwan dollar with only some R&D tools and equipment paid in U.S. dollar. So we have no U.S. dollar debt exposure. We currently hold around USD 14 million in terms of U.S. dollar assets, mainly our cash -- U.S. dollar cash and accounts receivables and the actual FX impact will still depend on the exchange rate movements throughout the third quarter.

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[Foreign Language]

The tape-out volume declined for the second consecutive quarter compared to the same period last year. Is there any specific reason behind this? Which applications and process nodes are affected? Michael, please.

In the second quarter, we have 11 fewer NTO compared to the same period last year, mainly from the consumer products such as DDI, PMIC, MCU and sensors. The number of tape-outs for these product categories does not follow a consistent pattern. In some cases, single tap out from a major customer can contribute more royalty revenue than dozens of tape-outs from the smaller customers. This is also closely linked to the broader industry trends. From a process node perspective, we have seen a higher proportion of NTOs at more advanced nodes below the 28-nanometer. This is related to our progress in completing development and qualification at least advanced process nodes, which supports a long-term upward trend in royalty ASP. As foundry continued to develop more process nodes and expand into a wider range of application chip categories, we expect the long-term trend for tape-out volume to remain upward. Thank you.

[Foreign Language]

[Foreign Language]

When will we start seeing royalty contributions from your company's accumulated PUF-related tape-outs, Charles, please?

Over the past few years, we have accumulated more than 110 tapeouts related to PUF technology, spending a wide range of applications from leading-edge processor, automotive ADAS and networking to general consumer products, covering a very diverse set of customers and the process platforms. Because security IP typically require a longer verification and the integration cycle the time from adoption to mass production and royalty is generally longer than OTP. However, the stickiness of such IP is also higher. Based on our July royalty report, we have already begun to see some customer application enter mass production and the past design wins are now converting into more stable and long-term royalty stream, coupled with the current strong demand for security IP, we expect both license fee and the royalties to enter a period of rapid growth.

[Foreign Language]

[Foreign Language]

There have been market rumors suggesting that recent workforce adjustment and salary changes have caused concern. And questions have been raised about whether your operations are facing challenges? Additionally, some have noted that several members of your management team left in prior years and wonder if they have joined competitors? Michael, please?

To clarify 3 Vice President voluntarily retired one or two years ago. They remain retired today and have not joined competitors. Our business operations remain strong. In fact, customer demand for our IP continues to far exceed our current R&D capacity. The recent organization optimization was undertaken to improve the operational efficiency and strengthening our technical R&D capabilities from the end of last year to the end of August. Our total head count was adjusted from the 360 to 346, a net reduction of 14 employees. Within that, R&D head count increased by 6, while non-R&D head count decreased by 20. We continue to expand our R&D team to meet the very strong customer demand and we are also bringing in AI algorithm talent to integrate AI into our design process and management system. These initiatives are expected to enhance productivity and result in higher average employee compensation over time. Thank you.

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