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

Welcome to eMemory's 2020 First Quarter Webcast Investor Conference. Today with us, we have Chairman, Dr. Charles Hsu; President, Dr. Rick Shen; Vice President of Business Development and Spokesman, Mr. Michael Ho; Director, Ms. Lin Ching; Director of Finance Department, Mr. Teresa Kuo. We will start off today's meeting by an opening remark given by our Chairman. Next, our President, who will summarize our operations in the first quarter, followed by an outlook for the future. Dr. Hsu will provide a closing comment at the end. [Operator Instructions] As a reminder, this conference is being recorded, and a webcast replay will be available within 3 hours after the conference is finished. Please visit www.ememory.com.tw 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 that are subject to risk factors associated with semiconductor and IT business. Please refer to the cautionary statement as shown on Page 3 of today's presentation. Now I would like to turn the call over to eMemory's Chairman, Dr. Hsu. Dr. Hsu, please go ahead.

Okay. Thank you. Welcome all to attend our Q1 investor conference. Good afternoon, everyone. Our revenue and the royalty for Q1 was historical high. And our reported April revenue grew more than 20% over the last year. As we mentioned in the last investor conference, in result of flourishing new tape-outs accumulated in the past several years, we are confident that a new renewal multiyear growth cycle has already begun. In addition, with the mass production of the 16-nanometer and below later this year, the adoption rate of our IPs in FinFet process nodes are anticipated to accelerate. Security IP NeoPUF, our next growth engine that has been designed into IoT and AI applications by industrial leaders, are expected to commercialize by the end of this year. These new developments will mitigate the impact of a global pandemic. Next, I would like to invite our President, Rick, to report our operating results of Q1 and the future outlook of our business. Afterward, I will spend a few minutes to introduce the application of PUF-based security in 5G. Okay. Please, Rick.

Good afternoon. Thank you for attending eMemory's 2020 First Quarter Investor Conference Webcast. In today's presentation, I would like to report our operating results of 2020 Q1, followed by the status update of our technologies and the future outlook. Q1 revenue was TWD 415 million, an increase of 14.8% sequentially and 5.2% year-over-year. In terms of U.S. dollars, Q1 revenue was USD 14 million, a growth of 17.2% sequentially and 8.1% year-over-year. The operating expenses of Q1 was TWD 221 million, up 9.4% sequentially and 10.1% year-over-year. Q1 operating income increased 21.6% sequentially and remains flattish over year-over-year. The operating margin was 46.7%, a decrease of 2.4 percentage points year-over-year. This is due to the increase in costs incurred by the establishment of a 100% wholly-owned company, PUFsecurity, in May 2019. EPS of Q1 is TWD 2.38 and then the ROE at 39.5%. In the following session, I will break down the revenue contribution by licensing and royalty. Licensing from Q1 is TWD 106 million, accounted for 25.6% of the revenue, down 8.2% sequentially, but up 0.6% year-over-year. In terms of the U.S. dollars, licensing revenue is USD 4 million, up -- down 6.7% sequentially and -- but up 3% year-over-year. Royalty contributed to 74.4% of total revenue, is TWD 309 million, increased 25.6% sequentially and 6.8% year-over-year. In terms of the U.S. dollars, the royalty is USD 10 million, up 28.4% sequentially and 9.9% year-over-year. If we break down revenue by technologies, the results are as follows: NeoBit accounted for 22.6% of total licensing revenue of the quarter, decreased 24.5% compared to previous quarter, but up 20.5% year-over-year. Its royalty accounted for 64.5% of total royalty, increased 19.9% sequentially but decreased 17.7% year-over-year. The decrease was due to some PMIC customers switching to NeoFuse technology. NeoFuse accounted for 70.1% of the total licensing revenue of the quarter, up 13.5% sequentially and 15% year-over-year. Its royalty increased 40.8% sequentially and 187.8% year-over-year, because of the increasing contribution from 28-nanometer process nodes. The royalty of NeoFuse contributed 31.8% of total royalty. Our new technology PUF-based security IP has contributed to 0.6% of licensing revenue. Although this new technology has not contributed royalty yet, engagement with industrial leaders are still actively ongoing. Thus, we expect more significant contributions from PUF this year. As for MTP technology, licensing revenue decreased 49.2% sequentially and 66.1% year-over-year. Royalty from MTP increased 14.8% sequentially but decreased 12.6% year-over-year. This is because the focus of MTP is in the collaboration with leading customers for automotive applications and the engagement period is relatively long. In addition to that, our MTP team is working with partners for -- on developing MRAM, ReRAM and the AI memory. If we break down royalty by 8-inch and the 12-inch wafers, 8-inch wafers, which accounted for 64.1% of royalty, increased 15% sequentially and 3.3% year-over-year. Royalty from 12-inch wafers contributed 35.9% of royalty, increased 50.4% sequentially and 13.7% year-over-year. Our results for single-quarter tape-out is a record high. There was a total of 115 (sic) [ 116 ] product tape-outs in Q1, up 18% from the previous quarter. This indicates that the pandemic has little impact on our R&D activities and operations. We will provide more information in the management report that will be released later today. In the next session, I would like to address our future outlook. We expect the growth of revenue to accelerate in the second quarter and beyond, as accumulated 249 tape-outs between 55-nanometer to 7-nanometer are on the pipeline, including OLED drivers, Tcon, ISP, Bluetooth, switch, Wi-Fi, TWS, SSD, set-top box, video processor, digital power, IoT security processor, FPGA and then the others, which are moving into production stage and will drive our royalty to grow this year and beyond. For licensing revenue, we anticipate that the NeoFuse and the NeoPUF will continue to drive -- to grow due to increasing advanced technology platforms and a more comprehensive cloud-based PUF-based security IPs. For royalty revenues, royalty of DDI will increase due to a higher penetration rate of OLED DDI of existing customers and a new customer that is the largest Korean OLED panel company. PMIC will continue to grow due to content increases in: 5G devices and the higher ASP from the migration into more advanced process nodes; new applications like multimedia-related products, such as DTV, set-top box, surveillance, ISP; networking-related, such as switch, Bluetooth and Wi-Fi; and then DRAM will also continue to drive royalty growth. On top of left, the global pandemic has also driven the recent increase in production of 8-inch medical-related MCU sensors and OLED type -- related applications. For new application development, our new applications are centered around the development of PUF-based technology. The first being NeoPUF, which was designed into leading customers' products for IoT applications. PUFrt, the IP of NeoPUF-based root of trust was also adopted by customer for AI application last year. With the pandemic changing our behavior patterns, both in life and work, there is an increase in Internet activities that will accelerate the demand of -- for the PUF in security applications. As mentioned before, our PUF-based security IPs have been adopted by several customers. For example, NeoPUF was designed by the largest Chinese chip company into its IoT platform to protect edge devices from external attacks. A Chinese AI customer applied NeoPUF to secure AI training models. A leading European company used NeoPUF to protect sensitive data in connectivity chips. A U.S. customer used the NeoPUF to protect their FPGA IC design from theft. A U.S. customer applied NeoPUF into their industrial automation application to ensure data security and increase its attack-resistance ability. Aside from our development efforts, we also collaborated with ARM to embed our NeoFuse into its -- in its securities platform, which already has customer adoption and has entered the product verification stage. Contribution from the developments mentioned above will be seen this year. For new technology developments, first, we are continuously improving our technology platforms. In addition to 5-nanometer technology platform, MRAM, ReRAM, ARM security IP platform, which we mentioned in previous quarter, we are developing 6-nanometers and 5-nanometers plus N5P technology with our leading foundry partner, and have already completed the 6-nanometer development tape-out. Second, we are developing new security IPs. After the completion of PUFtrng, that is a PUF-based random number generator. And the PUFrt, that is a PUF-based root of trust. We are working with foundry partners to incorporate the PUFrt into embedded flash platforms to protect the data stored in embedded flash. Our PUF-based IoT security solutions, security elements and the hardware security module IPs are also under development. Lastly, we are in process of creating an open platform. This open platform focuses on PUF-based hardware security by integrating OTP and PUFsecurity function IPs, and cryptographic algorithm IPs to provide total security solutions for AIoT and the 5G applications. Before we end, I would like to take a moment to share with you my thoughts on how the global pandemic is affecting our business and the measures we are taking to address these challenges. First of all, our most precious possessions are the health of our employees. To safeguard the health of our employees, we continue to take precautions and measures to ensure our employees are working in good health conditions. During the peak of Taiwan's COVID-19 crises, we switched to working remotely to protect the employees from potential exposure to virus. I'm particularly pleased by their execution and efficiencies in these challenging times. And I'm extremely grateful for their dedication and their continuous hard work. As you all know, we are an R&D company. Our business is mainly focused on providing our IP designs and the technologies. With that being said, we are not involved in purchasing raw material and facilities, fabrication, testing or packaging, thus our business risks in this situation are relatively low. So we see very limited impact on daily operations. Since as all our employees are based in Taiwan and our R&D cooperation with our customers are mostly conducted via phone calls, conference call or e-mails with no absolute necessity to -- of physical contact. As you can see, our company is doing relatively well under the global pandemic. With that, I will conclude my presentation on our operating results and the future outlook. Thank you.

Thank you. Dr. Shen. Now I would like to invite Chairman, Dr. Charles Hsu, once again, to give an introduction of PUFsecurity application in 5G. Dr. Hsu?

Okay. Okay. Thank you. In the next 5 minutes -- a few minutes, I would like to explain PUF-related security application in 5G. Since 5G uses network function virtualization, so 3 big span of applications: one is ultra-reliable and low latency communication; and the second is enhanced mobile broadband communication; and the third is massive machine-type communication. So there will be -- we'll have billions of devices connected in the network. The attack practices by hackers will increase -- will be increased drastically. So to ensure the network and the individual users are -- to secure the network and the individual users become imperative in 5G applications. So to sum up our security, let me begin from the root of trust. Please turn to Page 25. What is the root of trust? Root of trust is a source that can always be trusted within a cryptographic system. And the fun is the cryptographic system -- cryptographic security is dependent on keys to encrypt and to decrypt data and also perform functions such as digital signatures. So from these 2 segments, we know that the most important for a system to be secure is to have an always-trusted key in the system. So what can be an always-trusted key? Is it a key generated by software algorithm to be trusted? The answer is no, because it uses algorithm. Can the key inject into a system by an operational engineer to be trusted? The answer is no either, because it may be disclosed through the human operation. So what kind of a key can be always trusted? The answer is a key generated or derived from nature of randomness in a chip. By doing this, no algorithm and a nonhuman theft can cause the theft of the key. So our new PUF is generated in the chip by using the randomness of highest quality during IT processes. Therefore, this service has always trust to the key, because it is random generated, and that it is already on the chip without operators to inject it into the chip. But after we know that -- we know what is the root of trust and how to create very -- security for the root of trust. Next, I would like to explain how 5G uses such keys. In the 5G application, all users request the service from 5G. The first step is authentication process, who led only authorized party to access the 5G network. So the simplest way is to give users a unique ID from the telecom operator, such that user can use this ID to request service. For example, when we register to use a telecom service, we will be issued a SIM card. And user ID is given in this SIM card. So if you turn to Page 27, it shows 3 cases of how a user ID, a unique ID, UID, can be stored in the SIM card of the cell phone. One is the method used now, and the cases 2 and 3 proposed a new method, which used PUF to significantly increase the security of the applications. Case 1 is the one I have just talked about to have operator to write the ID as the root key and stored in the eFuse. In such method, the attack services are obviously exposed. One is on the operator and then the other is on its storage in eFuse. The eFuse is visible from its storage of data. So hacker can get the unique ID directly from eFuse using reverse engineering. For the case 2, we can improve the security of case 1 by using PUF in the SIM card to scramble the unique ID injected by operator to become a new ID, such that the attack service on the operator is eliminated. In addition, the new ID can be stored in OTP. Here, we call it a PUF key storage, which is nonchangeable, and the data will not be disclosed even after reverse engineering. And the even secure case will be case 3. In case 3, no operator need to inject the key. The SIM card can generate the unique ID from its embedded PUF. So the PUF is stored -- the key, the unique ID is stored in the PUF. So there's no additional storage needed for the -- for storing the unique ID. So once you have the very -- you have a separate storage for the unique ID then afterward, you can do use that for all kinds of key generations. And in Page 28 and 29 is for the authentication process in 5G. And since it's a little bit complicated, and they will take much more time to explain, so I will leave this to you. You can go through this step-by-step and learn how the authentication be processed after you have a very secure key or secure unique ID generated in your SIM card. And I can give you some examples. When you use your credit card to purchase online -- for the online purchasing and the store will send you, or the company you want to buy goods from, will send you the number, ask you to verify. Actually, when they send those numbers to you, they actually -- they are encrypted. And when you receive -- when your telephone receive those encrypted numbers, you can use the sent key you have and the service company has to decrypt the number they sent you. So after you receive those numbers, then you type in. And then the key will encrypt those numbers and send back to the service company. So they will -- after they use the same key to decrypt, and then they get the number you type in. And if that number is equivalent to the number they sent you, then you are authenticated, then all the purchase process will be complete. So I think that is what I want to explain, the application of PUF-related security in the 5G. And in PUFsecurity, our new company, we also offer Security 101 lectures. So if you are interested to learn more about the fundamental of securities, I think you can get on the website and get the information from our website, and then we can offer those courses online or we can visit your office and to give the lecture to your companies. Okay. I think that is what I want to say about the PUF-based security in 5G.

[Operator Instructions] There is a question from Mr. Wu. Why there was low revenue from royalty in March?

Okay. This is Rick. Let me answer this question. If you check with our website, I think you will find that there is a -- there's no royalty revenue in the third month every quarter. So in general, we collect royalty based on foundries or customers' royalty report. So we -- in the contrast, we, in general, we request our LICs to deliver the royalty for the previous quarter in the first month or second month of each quarter. So that is why we will not have any royalty revenue in the third month in every quarter. Yes

Still from Mr. Wu. So the buyer of the PUFsecurity should be the telecom operator who make a SIM card? When do you think the revenue can be generated?

Okay. So I'll just give an example of how to use the -- our PUF-related security IP in the SIM card. But actually, our customer is not the telecom operator. Actually, it's those companies who design the SIM card, then there is a chip in the SIM card. And then they sell the chip to telecom company and the telecom company have, I don't know, ODM to make the SIM card. So our customer is those IC design companies who design -- who produce the chip for the SIM card. And because the PUFsecurity is only par for 1 year, and then we create all the different kinds of PUF-related IP and the solutions. So at this moment, we only have a very small amount of revenue, but we will expect that the second half of this year and the beginning of -- and the start from the next year, we will have more customers who will use PUF-related security. But currently, the most customer requests our PUF-related IP is from IoT and AI. Thank you.

From Peter, okay. I have a question about the outlook of the rest of the year. Do you expect the strength you saw in April to continue for the rest of the year?

Yes. As I mentioned in my presentation, we expect a growth of our revenue to accelerate in the second quarter and beyond. The main reason is we already accumulate more than 200 product tape-outs in the advanced process nodes. And the loss application, including the -- not only for the smartphone, but also for some digital consumers and thus IoT and the FPGAs. So we expect this kind of the product application will drive our revenue and royalty to grow in this year. So I think this is our perspective on our outlook for this year.

Another question regarding ISP. What -- do you expect revenue generation from ISP-related products in this year?

Okay. Okay. This is a very good question. We always have global customers for the ISP application for years. And you can finalize that the ISP product tape-out with our IP, since last year, we have more and more ISP-related product tape-outs. So we expect not only for the upfront fee contribution, but also for the royalty, production royalty in the production stage will be -- will contribute in this year.

Another question is regarding the product growth momentum. Between the OLED and DDIC, which has the bigger growth this year?

Okay. I think in terms of the bigger growth or growth rate this year. I think the OLED DDI will be bigger because that we -- the customer might let go of the old generations to address node and more and more adoption of OLED in the smartphones.

And also, we gained through the largest OLED...

Yes. Yes. Right, right.

So of course, there will be a very high growth.

Yes, we anticipate the biggest Korean OLED panel makers will contribute more royalty to eMemory, because we successfully introduced our solution into their -- in their product design. And up till now, we already see some good progress in the product verification. So there will be a significant driving force for our future revenue growth.

Next question is from [ Jerry ], which is our very good investor. We very appreciate. Okay. Can you please give example of some of these new IoT customers? And which specific type of IoT product is driving the development here?

Okay. This is a very good question. Yes, for the IoT applications that at the end of the day, we are very happy to share with you like the biggest Chinese design company in the south side of China, and a double OTV and also powerful NB-IoT product designs. So hopefully, we can see the IoT, especially for the NB-IoT we will use all our solutions to enhance their superiority label.

A question from Mr. Wu again. For ISP market, which NDN solution did the cops may used before? And what is the reason they start to use your solution?

Okay. This is a very good question. In the past, some of the ISP product use eFuse, which provided by foundry, free of charge. But as you know that the eFuse cannot provide several features, which -- they cannot provide some features, including the memory densities and also security level. Because the eFuse will cause many to burn out the fuse so that the code, i.e., UIDs and some security code will be reversed in case someone want to know the data. So when the ISP product move to more demands, more high end, then customer need to use OTP NeoFuse as a replacement. So that is why customers, when they move to 22 and below, they need the NeoFuse, our solution, to enhance their product competitiveness.

[Operator Instructions] A question from Peter again. How much of the royalty revenue flow currently from the leading edge? And how do you [ expect it to contribute ] in the next 1 to 2 years?

Okay. As I described previously that the -- our royalty contribution from 12-inch is about 30% of the royalty revenue. If you look into the detail, the royalty contribution mainly come from the process nodes in 18-nanometer to 40-nanometer. So in terms of a leading-edge contribution, yes, at this moment, it's very few. So we expect the leading edge contribution in the next 1 to 2 years will be significantly low and will contribute more portion to our royalty income.

The question from Mr. Wu. Process node advances, how does it impact our financials? If the node is advanced, the total chip size per wafer will go down. I think this is negative. But I guess the ASP can rise if the process node becomes smaller. Normally, only how much more revenue can be generated if the advance happen?

Okay. I think this is a very good question, and a lot of investors have a similar question to us. So -- but let me explain. Although everyone knows that the technology migration is based on the Moore's law. So the Moore's law tell us that when the product moves from one generation to the other, the chips size will become half, about 50%. But please understand that nowadays, most of the semiconductor products, they do not -- customers and the providers do not consider the cost savings from one generation to another. They are considering how to increase their functionality in the chip. So as you can finalize, in the AP, for example, for some smartphone application processors, when they move from 7 to 5-nanometer, the chip size will not become smaller. They will become more complicated and the chip size will be even bigger. So we also see the same situation in our customers. For example, for the LCD drivers or OLED drivers, when customer move from 55 to 40-nanometer, the chip size will become bigger, because they want to increase -- invest more SRAM into the chip to enhance the chip's performance. So when we go with our customer for the process migration or advance for the process -- advancement, we will see the chip size become bigger. It means that more wafers will be produced and the ASP will become higher. So it means that the royalty contribution to eMemory will become higher. So I think that when customers move to the more advanced process nodes, the royalty contribution to eMemory will become bigger and larger compared with if customers stay in the same process node.

[Operator Instructions] A follow-up question. On fast-forward advancement, for example, if the DDIC is using 35-nanometer versus 40-nanometer, how much ASP rise can happen?

Okay. In general, 40 -- 55 to 40, in general, for the general foundries, the price offering is about 20% to 30% increase on one generation to the other.

In the interest of time, we now begin closing comments. Mr. Hsu, please proceed.

Thanks. eMemory was established in the year 2000, and our first invention NeoBit led us to a very high penetration rate in 8-inch and 90-nanometer process, making eMemory a global top 10 and the largest semiconductor intellectual property company in Asia. In 2010, we developed NeoFuse for 20 -- 12-inch applications. After 10 years of process technology development and customer engagement and adoption, we have successfully extended our IP into various allocations, as mentioned earlier. We expect a multiyear growth cycle ahead. To do so, we are paving the way for the next growth engine after NeoFuse, which is PUF-based security IP technologies, hoping to extend our growth curve 5 to 10 years later. There is a series of brief introduction of PUFsecurity application in 5G from Page 25 onwards. eMemory has always been a company that focuses on the development of technology platforms and innovations in silicon IP that will bring more value to customers and the industries. I believe our PUF-related IP will play an important role for 5G, IoT and AI applications in the future. We hope to see -- use our innovation to ensure all online activities are secured, and this is our company's vision, embedded everywhere and secure everywhere. Once again, thank you for your patience and to support eMemory.

Thank you. Ladies and gentlemen, thank you for joining us today. You may now disconnect. Goodbye, and have a good day.