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

Good afternoon, and welcome to eMemory's Third 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 financial results. Following that, President, Mr. Michael Ho, will share our business outlook. Next, Dr. Charles Hsu will give a talk titled, PUF Technology on National Security. Then we will conclude today's conference with the Q&A session where our management team will answer your questions. Please feel free to submit your questions in the input box on the webcast window throughout the conference. 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 all for attending eMemory's Third Quarter Investor Conference. Looking ahead to the fourth quarter, in addition to achieving record high revenue, we have also made several major breakthroughs. First, in security applications, we have secured a 10-year contract for U.S. government defense projects on multiple 3-nanometer applications, which marks a significant milestone in promoting our PUF technology. This began with our partnership agreement with the U.S. Defense Advanced Research Project Agency, DARPA, for the Toolbox Initiative in 2021. Now our technology is officially being adopted in the defense-related deployment, in addition to more than 100 applications accumulated in the past. Security application standards have always been driven by government and system level initiatives. From DARPA to the OCP, Open Compute Project, alliance formed by the major data center players and its Caliptra standard. PUF technology is now on a clear path toward large-scale commercialization. The second major breakthrough is in Flash memory, particularly our embedded ReRAM and NeoFlash technologies. As memory performance has become a bottleneck in chip computing, technologies that replace external memory with embedded non-volatile memory solutions are entering commercial adoption. Our NeoEE technology has already been designed into DDR5 modules to replace the EEPROM used in DDR4, and is expected to enter mass production next year. Recently, we've also received multiple major customer engagements for NeoFlash and embedded ReRAM as alternatives to external NOR Flash. Because security applications generate higher royalty income per wafer and drive demand for high ASP advanced process nodes, and because MTP and Flash royalties are typically 1.5 to 3 times higher than OTP, these factors will collectively lead to a structural increase in average royalty per wafer. And looking to the next year, we have new applications with our IPs entering mass production to accelerate royalty growth across major industries. First is RF chips production for a leading U.S. smartphone customer's in-house modem module. And the second is DDR5-related applications for a major Korean memory manufacturer. And another one is AI servers featuring secure BMC and also SSD controllers, and networking chips with our PUF IPs. And for the automotive applications in ADAS, networking, and infotainment. And another is in PC and notebook designs using our security IP for secure embedded controllers. And another one is numerous ASIC applications from various customers. So we have also started our Security-as-a-Service business with multiple customers. Our long-term effort to build foundational technologies and ecosystem has created a strong competitive moat. With a royalty-based recurring revenue model, the potential for future revenue growth is tremendous. We are very confident about our growth prospects for next year and beyond. So next, I would like to invite our financial officer, Joseph Hsia, to present our third-quarter performance. And afterwards, our president, Michael Ho, will share our future outlook.

Good afternoon, everyone. Now let's take a look at our 2025 third quarter financial results. The third quarter revenue was TWD 952 million, which is up 1.7% sequentially and increased 5.9% year-over-year. Revenue in U.S. dollar terms was $32 million, representing an 8.2% increase from the previous quarter and a 15.9% increase year-over-year. On the other hand, operating expenses were TWD 404 million, up 3.4% sequentially and increased 2.4% year-over-year. In result, our operating income was TWD 548 million with an increase of 0.5% sequentially and an increase of 8.6% year-over-year. Operating margin decreased by 0.7 percentage points sequentially, but increased by 1.5 percentage points year-over-year to 57.6%. Our net income amounting to TWD 487 million experienced an increase of 21.8% sequentially and an increase of 17.7% year-over-year. In result, EPS for this quarter was TWD 6.52. And next, let's move on to revenue contributions by licensing and royalty. First off, licensing in the third quarter accounted for 36.4% of our total revenue, up 9.1% sequentially and up 19.4% year-over-year. In U.S. dollar terms, this represents a sequential increase of 12.4% and a year-over-year increase of 28%. And second, royalties in the third quarter contributed 63.6% of our total revenue, decreasing 2.1% sequentially and decreasing 0.6% year-over-year. In terms of U.S. dollar, this represents a sequential increase of 5.9% and a year-over-year increase of 10.1%. In result, total revenue for the third quarter increased by 1.7% compared to the previous quarter and increased by 5.9% compared to the previous year. In U.S. dollar terms, total revenue rose 8.2% sequentially and 15.9% year-over-year. And for the first 3 quarters of 2025 combined, the licensing and royalty revenues are as follows: First off, licensing in the first 3 quarters combined accounted for 32.3% of our total revenue, up 10.6% year-over-year. And in terms of U.S. dollar, licensing revenue grew 13.6% year-over-year. Royalties in the first 3 quarters combined contributed 67.7% of our total revenue, increasing 6.7% year-over-year. In terms of U.S. dollar, royalty revenue increased by 8.9% year-over-year. In result, total revenue for the first 3 quarters of 2025 combined increased by 7.9% compared to the previous year. And in terms of U.S. dollar, total revenue grew 10.4% year-over-year. And with that, I would like to comment further on our revenue contributions by specific IPs. First of all, NeoBit technology accounted for 23.2% of our total licensing revenue in the third quarter, increasing 34.2% sequentially, but decreasing 11.3% year-over-year. The royalty for NeoBit accounted for 25.3% of our total royalty, down 6.2% sequentially and decreasing 3.1% year-over-year. Secondly, our NeoFuse technology. It accounted for 42.8% of our total licensing revenue in the third quarter, increasing 18.4% sequentially and increasing 70.9% year-over-year. And in terms of total royalty revenue for NeoFuse, it decreased by 0.8% sequentially and decreased by 0.7% year-over-year, accounting for around 71.4% of our total royalties. And next is our PUF-based security IPs. It contributed 14.5% of our total licensing revenue in the third quarter, increasing 8.1% sequentially and increasing 44.1% year-over-year, while the royalties for PUF-based security IPs accounting for less than 1% of our total royalties increased 83.9% compared to the previous quarter and increasing 326.9% compared to the previous year. And lastly, it is our MTP technology. It accounted for 19.5% of our total licensing revenue in the third quarter, decreasing 21.3% sequentially and decreasing 13.3% year-over-year. Royalty from MTP increased 0.9% sequentially and increased by 24.8% year-over-year, accounting for 3.1% of our total royalties. And for the first 3 quarters of 2025 combined, the revenue by technology are as follows: First off, NeoBit licensing revenue decreased by 7.1% year-over-year, but royalty increased by 6.3%, accounting for 24.4% of our total revenue. And second, NeoFuse licensing revenue increased by 27.7% and the royalty increased by 6.5% year-over-year, contributing to 62.3% of our total revenue. For PUF-based security IPs, the licensing revenue increased by 25.7% year-over-year, accounting for 4.2% of our total revenue. And lastly, MTP technology, the license revenue decreased by 3.3%, but royalty increased by 13% year-over-year, accounting for 9.1% of our total revenue. And now let's take a look at our royalties by wafer size. First of all, 8-inch wafer accounted for 40.6% of our royalties, down 0.6% sequentially and down 1.4% year-over-year. And for 12-inch wafers, it contributed 59.4% of our royalties, down 3.1% sequentially and stayed flat compared to the same period from the last year. And in total, we have completed 173 product tape-outs in the third quarter, and we will be providing more information regarding that in our management report. And next, I would like to invite our President, Michael Ho, to share a little bit more about our future outlook.

Okay. Thank you, Joseph. Hello, everyone. I will now present our future outlook. We expect our business momentum to accelerate. For licensing, the licensing growth will be driven by: one, a 10-year contract, including the 18 3-nanometer tape-out for the U.S. defense applications and 3-nanometer CPU for AI server will drive strong top security license growth. Two, strong license for embedded ReRAM and NeoFlash technologies that will replace the external memories. About the royalty part, the royalty growth is expected to accelerate due to the customer tape-out moving into mass production for the following items: one, RF chips for a leading U.S. smartphone customer’s in-house modem module; two, DDR5-related applications for a major Korean memory manufacturer; three, AI server featuring secure BMC, SSD controllers and networking chips; four, automotive applications in ADAS and networking; five, secure embedded controller for PC and notebook; six, ASIC applications from various customers. In technology development, for OTP part, we're continuing joint development with TSMC on the 2-nanometer technologies and IPs. About the ReRAM, we're collaborating co-developing FinFET technologies and IPs with Korea's largest company. For NeoFlash part, collaborating with multiple foundries to develop the BCD process technologies and IPs at various nodes, targeting the smart power applications. About the security part, accelerating the development of security server hardware and software for Security-as-a-Service. In the business platforms, one, we jointly developed end-to-end chiplet security solutions with multiple partners to ensure the chiplet supply chain protection. The main collaboration focused on supply chain security and chip authentication, ensuring that every chip flow can be securely verified locally; two, collaborating with Arm to develop the PUF-based security root of trust to enhance the security capability of Arm's runtime security engine; three, working with automotive system suppliers and hospitals to provide a PUF-based HSM server platform for OTA software protection and DID-based personal privacy protection. The establishment of these will contribute to future revenue growth. This concludes my comments. Next, I will pass the time to Charles.

Okay. Let's look at the video first. [Presentation]

Okay. So today, I'd like to share some information about the security on the national -- our PUF technology on national security. Since we have signed a 10-year contract for our 3-nanometer PUFrt to be used in defense application, today, I would like to talk about the hardware root of trust in national security. In many ways, a country's security depends heavily on its defense capabilities. As we build more electronics, automation, and artificial intelligence into modern defense systems, keeping them secure becomes absolutely critical. Taking drones and robots, for example, they're already being used on the battlefield. If control over these systems were ever lost, the results could be disastrous. That's why, to truly protect national security, we must make sure our weapons and defense equipment are fully secured against any kind of threat. For national security reasons, it's also essential to build a strong domestic supply chain for chip manufacturing. In the United States, Intel, GlobalFoundries, and TSMC Arizona are the major suppliers, directly or indirectly, serving national defense needs. Our NeoPUF-based security solutions have been licensed to these foundries, enabling them to meet their defense customers' growing demand for trusted and reliable hardware security. And our NeoPUF technology is not only proven at the most advanced manufacturing nodes, but also recognized as a key enabler of secure next-generation defense systems. Our defense and communication systems today are built through complex, multi-tier global supply chains. From chip design, to fabrication, to final system integration, each stage is a potential attack surface. If even one component is counterfeit or tampered with, a single vulnerability could compromise an entire weapons system or communication network. That's why PUF, the Physically Unclonable Function, is so critical. PUF creates a unique and unforgeable hardware identity for every chip. It serves as a hardware root of trust, enabling secure verification, key generation, and device authentication directly from silicon itself. In short, PUF transforms each chip, drone, radio, or satellite into a trusted and traceable element within a national defense ecosystem and protects the defense equipment and weapons. Let's now look at how PUF is applied across different layers of defense. These can be grouped into three levels: device level, system level, and supply chain level. At the device level, PUF gives every chip a unique, unclonable fingerprint. This allows us to verify authenticity and prevent counterfeit devices from entering the network. It also enables secure key generation. The key is created from the chip's own physical traits, not injected from outside, which means it can't be stolen or altered. This is vital for communication equipment, encrypted radios, tactical equipment, and field deployed systems that must resist tampering. At the system level, PUF ensures that every mission system, such as missile controllers or communication units, operates only with authorized firmware. It also supports secure boot and runtime attestation, preventing unauthorized code or firmware manipulation. PUF also enables lightweight authentication for distributed IoT or sensor networks, allowing even low-power battlefield devices to maintain zero-trust operation. Finally, at the supply chain level, PUF helps verify the origin and authenticity of the critical components. For example, every microprocessor, FPGA, or avionics module can be tied to a PUF-based certificate that proves it is genuine. This allows tracking and verification from fabrication through deployment, preventing counterfeit components from entering the system. Across all three layers, PUF brings authenticity, integrity, and traceability to national defense systems. Next, let us now connect these ideas to the defense supply chain. PUF provides protection throughout the entire product lifecycle, from silicon to system operation. At design and fabrication stage, PUF IP is embedded directly into the. Each chip generates its own unique ID, making it secure from birth. This ensures authenticity at the hardware level before the device even leaves the factory. And at the assembly and testing stage, when parts are integrated, each module can be authenticated through PUF-based ID. This process identifies counterfeit or modified components early in production. At logistics and deployment stage, every shipment can be linked to a PUF-signed digital certificate, maintaining a clear and verifiable chain of custody. It prevents component swapping or fake deliveries during transportation. And at operation and maintenance stage, once deployed, the system can perform continuous attestation using a PUF-based hardware security module. This verifies firmware integrity and ensures that every unit in the field remains authentic and secure. With PUF, the entire defense supply chain becomes transparent, traceable, and tamper-resistant. Finally, let's talk about why our NeoPUF is ideal for defense devices. NeoPUF has been carefully designed to provide stable, reliable, and secure hardware identities, even under demanding environmental conditions such as wide temperature ranges, voltage variation, and exposure to radiation. First, NeoPUF demonstrates strong reliability. Its positive-feedback amplification mechanism allows each device to reach a stable state quickly, so the variations in temperature or electrical noise have minimal influence. This ensures consistent and repeatable responses, which is critical for long-term operation in defense and aerospace systems. Second, NeoPUF shows excellent tolerance to radiation. Because it is based on quantum tunneling through the gate oxide rather than bistable SRAM elements, radiation effects which cause the soft error in SRAM commonly occur in space will not impact NeoPUF. Third, NeoPUF is inherently resistant to tampering and duplication. Its physical structure is fixed during fabrication and cannot be modified afterward. This makes unauthorized duplication or alteration extremely difficult. Finally, NeoPUF is adaptable across the defense ecosystem. It can be integrated into a wide range of mission systems, from secure communication networks and radar control units to satellites, drones, and surveillance platforms. This adaptability allows defense organizations to build a unified trust architecture across different domains, ensuring every connected system operates with consistent implementation of hardware-based trust. In summary, I would like to say that NeoPUF provides a proven and stable foundation for hardware-based trust, supporting the long-term security and resilience required in national defense supply chains. This is what I would like to share with you today. Thank you. Next, we will enter the Q&A session.

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

[Foreign Language].

[Foreign Language].

Okay. And at last, we will answer the questions about share price. So our first question is, the company just shared the application of PUF technology in the defense sector. Will this successful case create opportunities to further expand into other high-end market, please? Charles, please.

Yes. And unique ID and secret key. PUF has a wide range of applications in the field of security. Currently, we are collaborating with partners on the following projects: Chiplets, our security IP can enhance supply chain security by enabling authentication for each chip within a chiplet. And for the Caliptra, which is for the data centers, establishing a root of trust with unique ID, key storage and random number generations. And the application in PUFiot, developing passwordless authentication solution for secure identity verifications. And for the Bitcoin custody services, protecting cryptocurrency private keys to ensure asset security. And the use in the decentralization identity, DID, safeguarding patients' medical data privacy through the decentralized identity verifications.

[Foreign Language].

[Foreign Language].

The company previously mentioned that NVIDIA has reached out for potential collaboration. But since our 4-nanometer to 5-nanometer process had not yet been qualified at the time, the project did not move forward. Are we still in discussions with NVIDIA? If so, will it be based on the 3-nanometer process or could 4 to 5-nanometer be adopted now that it has been qualified? Investors are also hoping to see the company enter the ecosystem of both NVIDIA and AMD. So Michael, please.

We continue to engage actively and closely monitor the development of advanced process such as 3-nanometer, 4-nanometer and 5-nanometer. Our technology and products have matured significantly, allowing us to play an increasingly important role in the advancing AI and data center platforms. As our cooperation deepens, we are confident in our ability to further integrate into these ecosystems.

[Foreign Language].

[Foreign Language].

Have you observed customers shifting their manufacturing to the U.S.? What would be the actual impact on the company? Michael, please?

Our technology has already been licensed to all major U.S. foundries. So regardless of where customers choose to manufacture, it has no impact on us.

[Foreign Language].

[Foreign Language].

Beyond efforts with NVIDIA, are there active discussions with the major cloud service provider regarding their in-house AI ASIC chip development? Michael, please.

Collaborations are already underway with several leading companies in DPU and CPU applications. And the communication with the major CSPs remains close and ongoing. This engagement highlights the strategic value of the technology in enabling next-generation AI and data center platforms. While specific customers cannot be disclosed, these efforts represent meaningful long-term growth opportunities. Thank you.

[Foreign Language].

[Foreign Language].

Do we have customers using our PQC IP? And are there customers for our HSM solutions yet? Charles, please.

Yes. We already have 2 chip customers adopting PQC, post-quantum cryptographies. For HSM, one customer has signed the contract and 2 more are currently in progress.

[Foreign Language].

[Foreign Language].

In previous earnings calls, it was mentioned that BMC chips will adopt related IP. What is the current penetration rate in this segment, given that ASP holds the largest global market share in BMC. Is there a customer relationship in place? If not, would this affect future penetration? Michael, please.

Mainstream BMC chip vendors have already adopted our security IP solutions with a complete root of trust portfolio including the OTP, PUF and the TRNG technologies. These solutions address the demanding security and the reliability requirement of BMC applications. As the need for stronger hardware-based protection grows, there are clear opportunities to further expand the market penetration across the ecosystem.