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

Good afternoon, and welcome to eMemory's Second Quarter 2021 Webcast Investor Conference. Present today, we have Chairman and President, Dr. Charles Hsu; Senior Vice President of Business Development and Spokesman, Mr. Michael Ho; Director, Ms. Lin Ching-Yuan; and Director of Finance Department, Ms. Teresa Kuo. The format for today's event will be as follows. First, eMemory's Chairman and President, Dr. Charles will give an opening remark. Afterwards, Senior Vice President, Mr. Michael Ho, will summarize our operations in the second quarter of 2021, followed by the outlook of our business. Next, Dr. Charles will share with us on the news on hardware security in DARPA. 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 3 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 IC 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.

Good afternoon, everyone. Thank you for attending our conference call today. It is with profound ones we announced the sudden passing of our former President, Dr. Rick Shen, from Tech last month. As the company has always established a strong reputation system, we are confident his vision for the company's future will continue to be fully realized. All regular operation will proceed as normal during this interim period with myself temporarily assuming the President's responsibilities. As mentioned previously, we have entered a multiyear growth cycle following the applications of 28-nanometer process nodes the applications of 16-nanometer and beyond entering into production, which will contribute to our royalties in the future. Our penetration rate is still low, but considering the larger application market for 12-inch in comparison to 8-inch, there will be a considerable potential for future growth. As for our new technology, we are confident with the development and adoption across various markets. I will elaborate more on our partnership with U.S. DARPA Toolbox Initiative later. Next, I will invite our Senior Vice President of Business Development, Michael, to report our second quarter operating results and the outlook of our businesses. Thank you. Michael?

Good afternoon, everyone. I will first begin with our second quarter results. Second quarter revenue was TWD 541 million, down 9.3% sequentially but up 27.9% year-over-year or down 8.6% sequentially, but up 35.9% year-over-year in U.S. dollars. The operating expense were TWD 259 million, down 0.1% sequentially, but up 13.8% year-over-year, mainly attributable to expenditure increases such as human resource expenses, rewards, bonuses and the compensation of employees and directors. This brings us to the operating income of TWD 283 million, with a decrease of 15.3% sequentially, but an increase of 44.3% year-over-year. Therefore, the operating margin decreased by 4.4% sequentially, but increased 5.9 percent points year-over-year to 52.2%. Overall, our second quarter EPS was TWD 3.27 and ROE was 50.2%. For the first half of 2021, the revenue was TWD 1,138 million, up 5.7% year-over-year. The operating expense increased 15.4%, and the operating margin was 54.5%, and with an increase of 8% points, EPS, up 54.5% to TWD 7.2 and ROE ended 12% points to 55.3%. Now let's move on to revenue contributions by licensing and the royalties. Licensing in the second quarter accounted for 32.2% of the revenue, down 1.4% sequentially, but up 47.9% year-over-year or down 0.4% sequentially but up 57.3% year-over-year in U.S. dollars. Royalties in the second quarter contribute 67.8% of the total revenue, decreasing 12.6% sequentially, but increasing 20.2% year-over-year or down 12% sequentially, but up 27.6% year-over-year in U.S. dollars. In the first half of 2021, the total revenue grew 35.7% as compared to previous year. Licensing and royalty have a growth of 56.6% and 28.1%, respectively. In terms of U.S. dollars, the total revenue increased 43.6% year-over-year with licensing and royalty both increasing 66.2% and 35.4%, respectively. In terms of revenue contribution by specific IPs, the results are as follows: new bids accounted for 28.6% of total licensing revenue in the first -- in the second quarter, increasing 82.9% sequentially and 145.7% year-over-year. These royalties accounted for 47% of total royalty, down 19.1% sequentially and 13.9% year-over-year, mainly due to seasonality of smartphone customers and some products like PMIC and TDDI moving into 12-inch for production and adopting NeoFuse IP instead. Other products such as legacy PMIC, automotive IoT-related will contribute to new bid royalty in the future. NeoFuse accounted for 58.6% of total licensing revenue in the second quarter, up 12.7% sequentially and 22.1% year-over-year. Its royalty decreased 7.1% sequentially due to the seasonality of smartphone customers, increased 89.6% year-over-year due to the continued strength of new application production. This brings the royalty of NeoFuse to 49.6% of total royalties. Our PUF-based security IPs contributed to 1.2% of applied licensing revenue in the second quarter. Even though engagement with industry leaders will take a longer time as it involves security architecture, it is still actively ongoing. Thus, we expect more significant contributions from PUF later this year. As to MTP technology, licensing revenue decreased 62.2% sequentially, but increased 82% year-over-year to accounted for 11.6% of licensing revenue in the second quarter. Royalty from MTP increased 17.5% sequentially and 38.7% year-over-year to contribute 3.4% of total royalties. Currently, our MTP team is working with partners on developing MRAM, ReRAM and the AI memory. We have just gained ReRAM qualification in 40-nanometer process and are in discussions with our customers for design-in. In the first half of 2021, for NeoBit, the licensing revenue increased 74% year-over-year, but royalty decreased 3.4%, accounting for 40.7% of total revenue. For NeoFuse, the licensing and the royalty revenue grew 21.8% and 94.5% year-over-year, contributing to 50.1% of the total revenue. For PUF-based security IP, licensing revenue increased 122.4% year-over-year, about 0.7% of total revenue. For MTP technology, the licensing and royalty revenue increased 304.4% and 12.3% year-over-year, accounting for 8.5% of the total revenue. Now looking at the royalties for 8-inch and 12-inch wafers. 8-inch wafers, which accounted for 51.8% of royalties decreased 16.7% sequentially but increased 3.3% year-over-year due to the seasonality of smartphone customers. Other products such as legacy PMIC sensors and automotive-related will contribute to 8-inch wafer royalty in the future. 12-inch wafers contributed to 48.2% of royalties, decreased 6.3% sequentially, but increased 71.1% year-over-year due to the continued strength of new application productions. There are 154 product tape-outs completed in the second quarter, which remains at a record high level, reflecting persistent demand for design activities with our IPs. We will provide more information in the management report. In the next section, I will address our future outlook. We expect the growth of revenue to continue in the second half of 2021 and beyond. For licensing revenue, there is a continuing strong demand from NeoFuse, PUF-based solutions and MTP. We expect licensing revenue to continue its growth this year. For royalty revenues, 8-inch and 12-inch royalties will continue their growth momentum. 8-inch royalties will grow due to the demand and the content increases, for PMIC, MCU, Fingerprint and the sensor-related in the 5G, automotive and IoT-related applications. 12-inch roles will have strong growth as customers' productions are licensing for TDDI, OLED, ISP, DTV, set-top box, WiFi 6, Bluetooth, Ethernet, switch, TWS, DRAM and others. In addition, we also expect to see more royalty contributions from the FinFET process in the second half of this year. Recently, several major foundries have actively expanded their 28 and 22 production capacity. We have accumulated more than 140 new tables at this process now, which will drive momentum to the growth of royalties in the future. Now looking at the new business development. Our new applications are centered on the business development of hardware security. NeoFuse, in advanced processes, is being adopted for security key storage and is seeking to replace the conventional eFuse. We expect this will be a trend for hardware security as productions are moving to more advanced processes. Our effort in the past is also gradually being seen with higher adoption and penetration rate. Business activity of PUF-based security solutions are in progress in applications of IoT, industrial IoT, AI, blockchain, FPGA, data processor unit that is DPU, mobile storage, UFS and automotive. In addition, our PUFrt and PUFiot have been adopted by several customers across various applications. As for the cooperation with ARM, since customer adoption cases have been very successful, we intend to expand the cooperation to CPU security architecture in the future. eMemory and PUF security has also joined DARPA Toolbox in an initiative to provide IP solutions for accelerated technology innovation. For new IP technology development, 6-nanometer OTP has passed the qualification test and already has customers adopt in. As to 5-nanometer plus N5P, it has complete derivation worth and will move forward for further qualification tests. In Q2, we have announced the cooperation of PUF security and this to integrate crypto co-processor PUFiot into the RISC-V AIoT security platform. We also continue to develop our PUF-based solution to implement HSM, that is hardware security module, which can be embedded into the chip to provide a security function for network applications. Next, I will pass the time to Charles. Thank you.

So as we have announced in June, we are working with DARPA for advanced on-chip security mechanism, utilizing our OTP, memories and PUF to establish a unique identity for every chip as well as a foundational building block for mitigating the supply chain vulnerabilities. Our solutions come with embedded NeoFuse and the NeoPUF to make up the secure storage and chip fingerprint, providing an isolated secure boundary for the system, as shown in the PowerPoint; along with an anti-tampering shell to protect the secure boundaries. And there are 4 programs running by the DARPA, which can be implementing our PUF-based root of trust and the security solutions. And by doing that, which can facilitate the development of chip providers for government and defense devices. These 4 programs, one is system security integration through hardware and firmware, which abbreviation is SSITH. It aims to develop hardware security architectures, and associated design tool to protect the electronic system from remote attack on locations, such as software or firmware. And another program is supply chain hardware integrity for electronic defense. It is called SHIELD. It aims to prevent counterfeit or an authorized IC to enter the module supply chain with hardware root of trust. And the third program is automatic implementation of secure silicons. It's called AISS. It aims to automate the process of incorporating scalable hardware security into chip design. And the fourth program is called asset management infrastructure, AMI. It aims to protect chip throughout their life cycle by using hardware security and the blockchain to manage keys, authentication and the certification during field usage. And these 4 programs, our [ OMM ] to provide the hardware security to secure the systems, no matter use in the government or defense device and also in the future consumer products. The ultimate goal is to have the -- for us, the ultimate goal is to have the PUF-based security architectures in every single chip and the supply chain going from chips to finished modules need to be secured with minimal costs. So when the device goes into the field use, it will remain under life cycle security management until end of life to secure the commission cost and they never make their way back to another device. So that has our defense contractors who work on this 4 program can easily adopt our solution into their products. The U.S. has also prioritized the supply chain security such that they require the chips used by government and the defense to be ideally produced inside the U.S. So foundries like GF, Intel, SkyWater and our own semi operating in U.S. to manufacture the defense or the product required by governments. So we are working with the related party to build a platform for different products. But we expect this platform to extend to commercial product as the U.S. government is pushing for a current network and the supply chain management of national or national securities.

[Operator Instructions]

We have many questions. So the first question comes from David [ Takeo ]. Okay, David, which is our shareholder too. Okay. I know a lot of questions are centered on our drive royalty only grew 5%. Do we have any reason for that? Michael, please?

Question. Let me explain in more details about that. Our royalty grew 12% in terms of U.S. dollars. Royalty from the majority of our foundry partners grew 20% or above, except for a significant drop from the Chinese foundry due to the season of production by one Chinese customers. We expect the royalties from the Chinese foundry to pick up when other customers ran up production. Our August royalties will grow much higher with a correlating rise in the total Q3 growth.

Are there any limitation for your IPs as you move forward into the new technology platform? Can you work for say, like 2-nanometer GAA structure.

It's a good question. Actually, there is no limitation, and we are confident it will work for the GAA structure. It's just like previously, we have moved from the plane-type to the FinFET process. Since the transistor is always MOS metal oxide semiconductor structure, which is the basis for our OTP technology. Our process remains robust and able to scale. Thank you.

Another question. global semiconductor foundry are expanding their capital expenditure, especially for the 28-nanometer process. How will this impact the company?

So thank you for the question. Well, as mentioned previously, we have accumulated more than 140 NTO at 28 and 22 process nodes with our IP widely used in various products. Currently, major foundries are actively expanding the 28 production capacity. This will help us during wafer production volume in the future. In addition, the ASP of 28-nanometer wafer is several times higher than the ASP of the wafers on mature process. As our royalty rate is fixed. This will also benefit us in terms of the royalty income. Thank you.

Meaningful contribution from PUF securities IPs, just, we...

The business model we prefer is royalty stream business model. So to maximize the future continuous royalty stream, we are building the platform business model for PUF securities IP. We are building platform in foundries, CPU IP companies. For example, recently, there are quite a few CPU IP companies come to us to invite us to cooperate with them to produce -- secure CPU. And also, we also build the platform on the design service companies. As all of these platforms start to roll out, we will see a meaningful return from security IPs. In addition to these platforms, we also already have quite a few customers using PUF-based security solutions. They will start to have products by the end of this year or early next year. Our branding on security has also grown quite a bit, which we have observed from the inquiry numbers through our promotion program.

TSMC has announced 28-nanometer production expansion. How will these 28-nanometer product affect eMemory's royalty in 2 to 3 years. Michael, please?

Okay. So far, we have accumulated more than 60 new tables at the TSMC 28 and 22 nodes across several different application fields. We are confident that the new tables will continue to be becoming green significant rise in royalty income for us in the next 2 to 3 years.

And this question is also related to TSMC. TSMC has been emphasizing that high-performance computing drives semiconductor demand in the past earnings call, what contribution does this have to the company? Michael?

Yes. I think the application of the HPC is mainly concentrated in the advanced process. As you can see, we have made good progress in advanced process and have received some customer requests in applications such as like FPGA, AI and the DPU. The licensing per cash and the royalty per wafer are much higher than the mature process which is also a considerable driver to our future revenue contribution.

The mature process wafer fab have an expanding annual revenue growth rate trend and the wafer price are also accelerating. However, the company's annual revenue growth rate does not reflect it. What is the reason. Michael?

That is a good question. Our royalties in the first half of the year were 35.4% year-over-year growth in terms of U.S. dollars. Our largest foundry customer didn't increase wafer prices in line with the other foundries. This caused only a slight rise to our wafer price ASP overall.

Another question. If Intel wants to enter the foundry industry, it can open its IP for customers to use or it could accept the IPs that most foundries are already using, which kind of development does the company think is more likely to happen? And how is its impact on the company. Michael?

[ Thank you for the ] question, I think, the foundry and IDMs are customers that we value very much. The largest foundry in the world have proven that our products can help their customers bring in good production experience and records. In addition, our IPs offer the best convenience for end customers to freely move from different foundries compared to the used foundry's internal solution. So our IP can bring great benefits to any fab that intends to get into foundry business, especially since many of the major fabless customers, they value our existing customers.

The other question. You hope that in future, PUF will be used in every chip. Why will every chip a PUF solution, Charles?

Okay. As I mentioned that since quite a few companies who provide the CPU come to us to invite us to cooperate with them to incorporate our security, PUF-based security solution with their CPU. So for the -- in the future, what I mean every chip is every the chip needs security will have the PUF solution. That's our goal. And I think it will be, as the security requirement becomes higher, this will be the -- in the future, this will be every chip needs to have the PUF-based securities.

PUF security is the first to propose a product of, PUFiot. That means the FIDO, F-I-D-O, standard, using PUF as device identification can help IoT device development and the manufacturer, like OEM or ODM to create IoT product solution. That means the FIDO standard. Does this mean in-memory secure IP will become a security standard for IoT.

Yes. Because the FIDO device on board already -- they already defined the IoT device authentication standard for connecting online. So that is basically for every IoT device, if they follow FIDO device onboard span, then they have to borrow these standards. And our PUFiot security functions, we already, in our announcement, press release, we already announced that our PUFiot security function satisfied that defined standard on device onboard in the FIDO's.

And the first-tier companies such as Microsoft, are promoting no password verification. What is the impact on eMemory OTP or P-U-F, PUF?

Okay. Yes. This question is very good. It's actually related to FIDO's vital standard. Because FIDO also promoted the no-password verification. So Microsoft promoting the no-password verifications, which requires an authentication process. And in any authentication process, the device needs to have the unique ID. And PUF can generate a unique ID very easily and by the chip itself, which is essential for a system with our possible verifications.

In the previous earnings call, the company mentioned that if a customer use NeoPUF, they will also use NeoFuse. Were the licensing fee and the royalties be charged double? Is the price of NeoPUF silent NeoFuse? Michael, please.

As we mentioned in our previous earnings call, our NeoFuse provide a secure storage function and the NeoPUF provides a secure key generation. Both are essential for security applications. We can provide an integrated IP that will have a comprehensive solution with a one-stop shop. Such integrated IP will have higher upfront fees and royalty than the single one.