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

Welcome to eMemory's Fourth Quarter 2020 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 of Investor Relations, Ms. [indiscernible]; and Director of Finance Department, Ms. Teresa Kuo. The format for today's event will be as follows: the first, eMemory's Chairman, Dr. Charles Hsu, will give an opening remark. Afterwards, eMemory's President, Dr. Rick Shen, will summarize our operations in the fourth quarter and full year of 2020, followed by our outlook of our business. Next, Dr. Charles Hsu will introduce the topic entitled Applications of PUF-based Security Solutions in Data Processing Unit. Then, we will go into the Q&A session where our management team will be ready to answer your questions. [Operator Instructions] As a reminder, this conference is being recorded and a webcast replay will be available within 2 hours after the conference is finished. Please visit the company's website at 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 the semiconductor and IP business. Please refer to the cautionary statement, as shown on Page 3 of today's presentation. Now I would like to give the floor over to eMemory's Chairman, Dr. Charles Hsu.

Okay. Good afternoon, everyone. Thank you for attending our conference call today. To begin, I would like to recap our technology development and provide an overview, overall view of what we will drive our growth for the next 5 years. Our technology take an average of 5 to 10 years from development to take off and our first technology, NeoBit, which we invented in year 2000 now have the penetration rate of 20% in 8-inch wafers, and they're still accounting for 60% of our current royalty. As most of our technology platform has been established and as the newest tape-out uses our fully developed IP, the RD resource required is limited. So we foresee that there will be a second growth phase as our NeoBit has been employed into various automotive platform, therefore, making room for its penetration rate to grow. And our second technology, NeoFuse, which is basically used for the 12-inch, of which we have invented in year 2010, is the main driver in our current rapid royalty growth. We'll increase our penetration rate in 12-inch from the current 2% to, at the least, 10% in the future. So from our most recent royalty report, royalties from 16-nanometer below have started to kick in. And now for our MTP, multiple times programmable, device technology, we begin it at 2013. And then the goal of our MTP technology to become an embedded memory platform, so -- particularly for different kinds of MCU and automotive and also power management applications. So we have started to see that in the DTV-based technology platform, there are requirements, many requests on the MTP technology, particularly for the smart power applications. So in addition to our MTP technology, we have also developed embedded MRAM, embedded ReRAM, with partners and also AI memory, which uses our MTP as a memory cell to simulate neural-like memory cell architecture. There will be a breakthrough on the revenue this year as license revenue and activities significantly grow. And our NeoPUF, which we invest in year 2015, will drive our growth beyond 3 to 5 years as we expected that our PUF IP will play a key role as the core component in the security Root-of-Trust for the data center, AI, automotive, autonomous driving, edge computing and IoT. And all of this paves the road for our future, and we are very confident that the growth has just begun. Next, I would like to invite Rick to report our fourth quarter and the full year operating results and then the outlook of our business. Okay. Rick, please.

Thank you, Charles. Good afternoon, everyone. I will first begin with our fourth quarter results. Fourth quarter revenue was TWD 497 million, a sequential increase of 12.6% and 37.2% year-over-year or up 15% sequentially or 45.3% year-over-year in U.S. dollars. The operating expenses were TWD 261 million, up 7.1% sequentially and 29.1% year-over-year, mainly attributable to expenditure increases such as human resource expenses, rewards, bonus and other compensation of employees and directors. This brings us to the operating income of TWD 235 million, with an increase of 19.3% sequentially and 47.5% year-over-year. Therefore, the operating margin increased by 2.7 percentage points sequentially and 3.3 percentage points year-over-year to 47.4%. Overall, our fourth quarter EPS was TWD 2.6 and ROE was 41.8%. For the full year of 2020, the revenue was TWD 1,777 million, up 26% year-over-year or grew 31.6% in U.S. dollars. The operating expenses increased 21%, and the operating margin was 46.3%, with an increase of 2.2 percentage points. EPS up 30.4% to TWD 9.52 and ROE gained 6.7 percentage point to 38.3%. Now let's move on to revenue contribution by licensing and royalty. Licensing in the fourth quarter accounted for 31.1% of the revenue, up 39% sequentially and 33.2% year-over-year or up 42.1% sequentially and 40.9% year-over-year in U.S. dollars. Royalties in the fourth quarter contributed 68.9% of the total revenue, increased 3.7% sequentially and 39.1% year-over-year or up 5.9% sequentially or 47.4% year-over-year in U.S. dollars. For the full year of 2020, the licensing revenue is TWD 490 million, while royalty are TWD 1,287 million. Licensing and royalty grew 13.9% and 31.3%, respectively, or 19.1% and 37%, respectively, in U.S. dollars. In terms of revenue contribution by technologies, the results are as follows. NeoBit accounted for 17.1% of the total licensing revenue in the fourth quarter, increased 6.2% sequentially but decreased 17.1% year-over-year. The royalty accounted for 57.2% of the total royalty, down 7.6% sequentially but up 17.8% year-over-year, mainly due to content increase of the applications such as PMIC, TDDI, fingerprint and sensors. NeoFuse accounted for 71.3% of the total licensing revenue in the fourth quarter, up 60.6% sequentially and 67.5% year-over-year. Its royalty increased by 26.7% sequentially and then 94.1% year-over-year due to the continuous production of existing and new applications such as TDDI, OLED, PMIC, DTV, Bluetooth and ISP. This brings the royalty of the NeoFuse to contribute 39.6% of total royalty. Our PUF-based security IP contributed to 1.7% of licensing revenue in the fourth quarter. Although this technology has not yet to contribute to any royalty, engagement with industrial leaders is still actively ongoing. As our MTP technology licensing revenue decreased 33.6% sequentially and 9.3% year-over-year to accounted for 9.9% of licensing revenue in the fourth quarter. Royalty for MTP decreased 3.9% sequentially but increased 8.9% year-over-year to contribute 3.2% of the total royalty. Currently, our MTP team is working with partners on developing MRAM, ReRAM, AI memory. Both ReRAM and the AI memory have been verified with proven results and definitely will have a breakthrough this year. In the full year of 2020 for NeoBit, the licensing revenue decreased by 17.4% year-over-year, but the royalty increased by 9.2%, accounting for 50.8% of total revenue. For NeoFuse, the licensing and royalty revenue grew 38% and 119.8% year-over-year, contributing to 43.6% of total revenue. For PUF-based security IP, licensing revenue increased 148.2% year-over-year, contributing to about 0.7% of the total revenue. For MTP technology, the licensing revenue declined 30.9%, but royalty increased 1.9% year-over-year, accounting for 4.9% of the total revenue. Now looking at royalty from 8-inch and 12-inch wafers. 8-inch wafers, which accounted for 61% of royalties, increased 5% sequentially and 21.2% year-over-year. 12-inch wafers contributed to 39% of royalties, increased 1.7% sequentially and 80.9% year-over-year. The full year -- for the full year of 2020, 8-inch wafers accounted for 62.3% of royalties, with an increase of 18% year-over-year. 12-inch wafers accounted for 37.7% of royalties with an increase of 61.4% compared with the previous year. There were 137 product tape-outs completed in the fourth quarter, a record high quarterly number. In 2020, there were a total of 494 product tape-outs completed, which is also a record-high yearly number, reflecting increasing demand of our IPs. We will provide more information in the management report that will be released later today. In the next section, I will address our future outlook. We expect the growth of the revenue to continue in the first quarter of 2021 and beyond. For licensing revenue, besides continuing strong demand from our NeoFuse and NeoPUF IPs, we also expect the MTP licensing revenue to increase significantly. Overall, we expect the licensing revenue to grow this year. For royalty revenues, we expect both 8-inch and 12-inch royalties to continue their growth momentum. 8-inch royalties will grow due to PMIC content increase in 5G smartphones and the demand pickup for TDDI, automotive and IoT applications. 12-inch royalties will have strong growth as customers are increasing production for ISP, OLED, DRAM, SSD controller, multimedia-related, networking-related, such as Bluetooth, WiFi 6, TWS and others. Besides, royalties from 16-nanometer, 1-6 nanometer, and below, was -- have started to kick in based on our most recent royalty report. For new business development, our new applications are centered on the business development of hardware security. NeoFuse, in advanced processes, is being adopted for secure key storage and is seeking to replace the conventional eFuse. We expect this will be a trend for hardware security. Business activities of PUF-based security solutions are in progress in the application of IoT, industrial IoT, AI, blockchain, FPGA, data processor unit, APU, mobile storage UFS and automotive. Our PUFrt has also recently been adopted by some American customers and all cooperation is in progress. Partnership with the processor IP vendors are in progress. That is collaboration with ARM and RISC-V-related. This continues to extend our PUF-based security solution platform and bring in more customer adoption. For the new IP technology development, we have demonstrated 6-nanometer silicon results successfully. Our 5-nano plus -- 5-nanometer plus, N5P, has been taped-out in Q4, and we expect to -- expect the completion of the silicon verification in 2021. In Q3, we have announced a crypto processor, PUFiot, which integrate with -- our root of trust, PUFrt, with crypto engines. PUFiot is aiming to provide IoT and AI chips with a comprehensive, easy-to-use security solution. In Q4, we have announced a joint partnership with UMC on PUFflash development by providing an integrated security solution by -- for encrypting and protecting data in flash. We will continue to develop our PUF-based solution to implement HSM, that is hardware security module, which can be embedded in the chip to provide security function for network applications. Now I will pass the time to Charles.

Okay. Please turn to Page 15. I will start to explain why DPU is booming now and also why our DPU require more security solutions. As everybody knows that NVIDIA is a big company on GPU. And why GPU becomes important is because a lot of new applications, particularly AI applications, require a lot of pattern recognition or graphic recognitions. So the DPU become the very good accelerator to compute the graphic data. So in general, CPU can take care of every -- many -- because CPU is very general for the computation and also for -- can be used for the computation, also the data storage, also other network functions. It's very general functionality. But however, as the application increases such as the AI application, and now there are a lot of IoT applications. So since the year before last year, NVIDIA start to promote their DPU. And also from the last year, we start to promote our PUFsecurity solution in North America market. We also get inquiry from quite a few of DPU companies. So I would like to take this chance to give everybody a very short brief about what DPU can do to assist the CPU. So as you can see from the Page 15, we have the simple diagram to compare the conventional data center and also the DPU-powered data center. A DPU process unit is a processor which can offload the CPU burden by assuming the responsibility of managing the data processing in network server and the data center, such as storage and data classification and also the security. And this will -- expanded data processing capability will be -- improve the system performance in a similar way as what the graphic processing units, GPU, does to improve the graphic processing performance. So as the IoT is booming, a lot of data will be collected from the edge device. So the data-centric-driven processor are becoming very important to manage big data. So therefore, in addition to CPU and the GPU, DPU is required for improving network server and the data center performance. So that's why in the Page 15, you can see that for the new architecture, CPU will taking care of -- be taking care of the application management, while DPU will assist CPU for the network management, storage management and also security management because those are very related to the data processing. So for the -- as I said, so the conventional CPU, after detecting, you offload the CPU so CPU can perform the application management very well. And also the -- when the security -- in the past, the CPU needs to also take some of the security, but because the security function is also occupied -- can occupy a lot of CPU computation time. But if the DPU can take care of the securities, then the CPU can take care of the application management very efficiently. So the inclusion of DPU can offload the networking processing and also the -- particularly for the networking processing because in the 5G, actually, they are so-called virtual define the network and which can slice -- which need to slice the network server for the 3 different applications. One is for the many connectivity, and one is for the high bandwidth and then another is for the very ultra-low latency applications. So if the network server has a DPU, DPU can take care of that. Also because of the network now is so-called virtual network, so the security will become very important because for the storage and also network processing, and they are all sharing the same memory and also same tasks. So that's why the security becomes very important to take care of the -- each branch of the servers. So by doing this, so CPU can focus on its processing for the edge application instead and the overall performance of the server, including the network server and the data center, can be -- have a lot of improvement. And so in such case that the DPU needs to have a more security function into the CPU, so the embedded security function is not only enhanced the overall level of defense, but also can prevent CPU operation from being interfered with the -- by the hacker and then preventing massive security breakdown, such as, for example, now there are a lot of on-net attacks and also those -- the attack from -- we call it phishing mail or other different kind of attacks, which will influence the CPU's operation. But if DPU pick up that, then the CPU can still continue to do the application processing without being interfered by the attacks. So in terms of both the amount of sensitivity of data surges, when the IoT application becomes booming, the DPU need to be equipped with more solid security functions so that the data is will be well-protected during the transmission of the processing. And that is why security solutions are essential to DPU. And so most of our potential customer in North America, when they inquire us about our PUF-based hardware security solution, I think that are very interested, and they think that this could be embedded into their DPU to provide a very strong security functions. And the reason why the PUF-based power security solution can enhance DPU securities is because in order to attain the fast and very reliable security operations, each system needs its own unique identifier at the hardware level. And then this unique identifier is basically similar to the fingerprint to the human being. And that is the fingerprint of the chips. So the security can use that -- we call it one-of-a-kind PUF values to generate, because this unique identifier is created by PUF and the DPU can use this unique identifier to generate keys and also to encrypt data and to ensure integrity and also authenticate between sensors and the receivers. So we find that embedding the PUF into -- and also PUF-based solution into CPU chips can enable very high security and very high performance for the chip solution and also the entire systems. So I think that is what I want to share about why DPU become the, I think, the new architecture and also new elements in the new systems, such as the virtual network processor and also the data centers. Thank you.

Ladies and gentlemen, this concludes our prepared statement. We now begin the Q&A session. [Operator Instructions]

Thank you, everyone. We already have many question. So I will invite Rick to answer one by one. The first question is regarding our general revenue, which is a record-high TWD 420 million. And the guest wants to ask, is the IP license in the service revenue, which is also record high, is it onetime recognition? And then is the contribution from NeoPUF or NeoFuse? In the last 3 months, eMemory IP license and service revenue are more than TWD 50 million. Will this be the norm in the future? So Rick, please.

Okay. Thank you for your attention on eMemory's revenue achievement. So here, I would like to answer that. The upfront fee, like the [indiscernible] license fee is recognized by milestone. So that is not just onetime and without seasonality. So we can expect good growth from the licensing this year, as I mentioned, as strong demand from NeoFuse, NeoPUF and also MTP technologies.

And another question. According to the annual report, eMemory royalty revenue accounted for 70% of the total revenue, which is higher than the world's largest IP company, Arm. This percentage is also significantly better than the domestic Andes Technology's 20% and the M31 Technology's 9%. Why is the proportion of eMemory royalty revenue so high?

Okay. This is a very interesting question. And let's begin. Some investors also asked the same question before. So our business model, eMemory's business model, is aimed for the royalty and we charged much less upfront license fee. Our current royalty reflects our accumulated effort from the past. The reason we can have the highest percentage of revenue from royalty because, first, our persistence and stickiness with our business model. Second, the technology we invented is the most fundamental part of a semiconductor structure. So whenever a customer move into production, eMemory will be rewarded by the production rolling. So this is a win-win-win situation for parties, including foundry partners, IP users and eMemory. So with that, eMemory is able to enjoy the growing rolling contribution when customers succeed.

Another question from [ Mr. Chen, single PUF ]. Last week, PUFsecurity news. PUFsecurity's crypto coprocessor, PUFiot, passed CAVP certification. I would like to ask, by passing this certification, certified security algorithm, okay, including AES, CAA -- CMAC, DRBG, key packaging, does it mean that NeoPUF has made a great progress? And will it be adopted into IoT-related security applications?

Okay. Well, first thing, I would like to thank you, [ Mr. Chen ], for his attention on the -- on our progress, especially in the technical portion. So yes, the demand of our PUF-related IP is very strong. And we already have tape-out, as you know. And we mentioned several in the past on conference call that we already have several tape-outs for the IoT chips and the other applications, which are embedded with PUF IPs.

The question from [ Ms. Lee ]. Based on Q4 licensing revenue analysis, profit base has declined since Q3, even lower than Q2. Although the amount decline is not large, but there seems to be a contradiction in the trend, please explain.

Well, the revenue recognition is based on what we sign when we sign the contract and that which cannot be judged only by one quarter. So customers' request for PUF, as I mentioned, are very strong and that we expect more licensing to come this year.

And it is mentioned in the previous earnings call, royalty from NeoPUF will be seen as early as the second half of the year. Does the schedule still remain?

Yes, we expect the customers will move into production stage in the second half of this year. So everything runs smoothly.

Apple does not use our NeoPUF, Samsung use its own SRAM PUF. What are the other areas that NeoPUF could provide opportunity to help the company create high revenue growth?

Well, currently, their hardware security is using stand-alone security element chip we call that as SE chips. Our security solution by leveraging our NeoPUF's natural randomness function can be the security element as a full IP block directly embedded into chip itself. So the NeoPUF now is just at the very beginning stage. So we expect this will be the future trend for the hardware security.

What are the NeoPUF cases we have received or are negotiating?

Well, the demand for our PUF-related solution is very strong, as I mentioned. So there are many, many projects ongoing, including data center processors that is introduced by Charles just minutes ago. And also FPGA and ADAS for automotive and AI, industrial automation and the IoT. All those requirements are from the customers in U.S., Europe, Taiwan and also China.

In the current situation of capacity tightness of the foundry, does it impact the progress of our new product development and verification? If so, how does the company cope with it?

Okay. I think that most -- a lot of our investors and shareholders are concerned about this current situation. But our answer is we don't see this an issue. So we have a record-higher number in tape-out in this quarter -- in the quarter and -- for the year and then for the quarter and for the month of January this year. So on the other hand, for the long-term business development and growth, foundries still allocate certain resources for the new platform development and the new product deployment. So at this circumstance, eMemory's technology and the technical excellence are quite essential to support foundries and fabless companies to -- for the product development. So we are now still busy in development projects.