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

Good afternoon, and welcome to eMemory's Third Quarter 2022 Webcast Investor Conference. Present today, we have our President, Mr. Michael Ho; Head of IR, Ms. Li-Jeng Chen; and the Director of the Finance Department, Ms. Teresa Kuo; and Process Securities Vice President, Dr. Evans Yang. The format of today's event will be as follows: First, eMemory's President, Mr. Michael Ho, will provide a summary of our operations in the third quarter of 2022, followed by the outlook of our business. 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 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 President, Mr. Michael Ho.

Good afternoon, everyone. Now let's begin with our 2022 third quarter financial results. The third quarter revenue was TWD 791 million, down 0.7% sequentially but up 33% year-over-year. Operating expenses were TWD 345 million, up 2.7% sequentially and up 24.3% year-over-year, mainly attributable to the increase in salary and other related human resources expenses such as the increase in bonuses and rewards. Operating income was TWD 445 million, with a decrease of 3.2% sequentially but an increase of 40.7% year-over-year. The operating margin decreased by 1.5 percentage points sequentially, but increased by 3.0 percentage points year-over-year to 56.3%. EPS for the quarter was TWD 5.45 and ROE was 63.7%. Next, let's move on to revenue contribution by licensing and royalty. Licensing in the third quarter accounted for 18.3% of the total revenue, down 27.9% sequentially and down 23.3% year-over-year. In U.S. dollars, the licensing decreased 29.8% sequentially and decreased 28.8% year-over-year. Royalties in the third quarter contribute to 81.7% of the total revenue, increasing 8.5% sequentially and increasing 59.3% year-over-year or up 5.8% sequentially and up 48.2% year-over-year in U.S. dollars. Total revenue in the third quarter of 2022 grew 33% as compared to previous year. In terms of U.S. dollars, the total revenue increased 23.8% compared to previous year. With that, I will comment on our revenue contributions by specific IPs. NeoBit accounted for 26.2% of total licensing revenue in the third quarter, decreasing 14.5% sequentially and decreasing 2.9% year-over-year. Its royalty accounted for 36.2% of total royalty, down 2% sequentially but up 21.9% year-over-year. NeoFuse accounted for 46.5% of total licensing revenue in the third quarter, down 28.6% sequentially and down 28.1% year-over-year. The main reason is that because many of our NeoFuse customers have adopt PUF-based security solutions such as root of trust to upgrade their security functions. Since royalties for PUF-based solutions consists of both PUF-based and existing NeoFuse royalties, it will drive the growth of future royalties. In terms of total royalty revenue, NeoFuse royalty increased 15.8% sequentially and 92.6% year-over-year, accounting for 60.2% of total royalties. PUF-based security IPs contribute to 13.7% of licensing revenue, decreasing 57.8% sequentially but increasing 611.7% year-over-year. Its royalty accounted for 0.3% of total royalties, which is up 209.5% compared to the previous quarter and up 23,456% compared to the previous year as PUF-based solutions are adopted in IoT, industrial IoT, WiFi, DPU, video ISP, set-top box, SSD controller and automotive fields. For MTP technology, accounted for 13.6% of total licensing revenue, increasing 28.1% sequentially but decreasing 63.1% year-over-year. Royalty from MTP increased 3.3% sequentially and 78% year-over-year. From the first 3 quarter of 2022, the licensing and revenue are as follows: NeoBit licensing revenue increased 0.7% year-over-year and the royalty increased 17.7%, accounting for 34.5% of total revenue; NeoFuse's licensing revenue decreased 0.3% but royalty increased 77.8% year-over-year, contributing to 56.9% of the total revenue; PUF-based security IP licensing revenue increased 610.4% year-over-year while royalty revenue increased 36,222% year-over-year, accounting for 3.3% of the total revenue; MTP technology licensing revenue decreased 52.3% year-over-year but royalty revenue increased 80.7%, accounting for 5.3% of total revenue. Now let's look at the royalties for 8-inch and 12-inch wafers. For 12 -- for 8-inch wafers, which accounted for 46.7% of royalties, decreased 0.8% sequentially but increased 42.3% year-over-year. 12-inch wafers contributed to 53.3% of royalties, increasing 18.1% sequentially and 77.9% year-over-year. In total, 149 product tape-outs were completed in the third quarter. Within that, tape-out from 6- and 7-nanometer continue to contribute to revenue. We will provide more information in the main report later. In the next session, I will address our future outlook. We expect the growth of revenue to continue in the fourth quarter. For licensing revenues, declined licensing this year was due to waiving technology license fees but increasing production royalties for several foundries to accelerate the development of licensed technology platforms, especially for MTP-related technologies. We expect license fees to grow significantly next year, driven by PUF-based related solutions. For royalty revenues, the growth momentum of royalty will be driven by penetration rate increase from 28-nanometer, 12-, 16-nanometer and 6- and 7-nanometer. Moving on to new IP technology and business development. One, new fresh technology platforms are developed in several foundries, targeting the embedded fresh market. Two, our PUF-based security crypto coprocessor IP PUF CC is PSA certified Level 2 ready, which will accelerate the adoption on ARM's platform. Three, PUF-based IPs have completed M5 tape-out and is moving to M4 and M3. This concludes my comments. Next, we will enter the Q&A section. Thank you.

[Operator Instructions]

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For this first question, it was asked a lot by our investors, so we consolidated everything into one. So the most commonly asked question we hear about these days is, what is the impact of the latest U.S. sanctions on the company? And Michael will answer this question.

This sanction mainly targeted HPC-related products for AI applications. We currently have no Chinese customers in this area, as mostly our leading-edge customers are U.S. and Japan based. Also, since we developed our intellectual property rather than licensing U.S. technology, we are not directly affected by the sanctions. Thank you.

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Since eMemory's royalty is based on a percentage of foundry price, there's a lot of noise regarding this. And we actually answered this last quarter, but we'll give our thoughts on the current trends of foundry pricing again. And we'd like to note that this is purely our thoughts, but Michael will answer what we think about the current trends of foundry pricing.

Currently, only some small foundry customers over discount price. The major foundries, however, will still maintain their existing pricing strategy into next year. We remain confident in our ASP growth trend due to the licensing contribution from more leading-edge technologies and higher royalty rates from the PUF-based and MTP-related technologies. Thank you.

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So this next question has to do with the economic situation of the semiconductor industry. And the question is, TSMC believes that the impact of the inventory correction will continue into the first half of next year. What will be the impact on eMemory? And this is not just for TSMC, I think, foundry in general has this kind of view. So Michael will answer this question.

Royalties are recognized in the quarter after foundry shipment. So our October royalty already reflect the lower utilization rate in some small foundries. However, since our 12-inch penetration rate has just started to take off, the overall royalty growth and the penetration rate will be continue -- will be contributed from major foundries. The decline in utilization from major foundries was mainly in 6- and 7-nanometer. However, this is a very small percentage for us as customers are just starting production. We expect this will still grow next year. In addition, licensing from PUF-based will grow significantly next year. So we remain confident in our long-term growth trend. Thank you.

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The question that was asked is, why didn't eMemory benefit from the devaluation of the Taiwan dollar? And Michael will answer this question.

When we receive the revenue in U.S. dollars, we immediately convert it into Taiwan dollar to convert the expenses here in Taiwan. Recently, due to establishing our U.S. and the Japanese subsidiaries and the spread of high interest rates between the NT dollar and the U.S. dollar, we will be more flexible in keeping some U.S. dollars in our accounts in the future. Thank you.

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Okay. So the question is, can we predict future royalties based on tape-out numbers or license fees? And Michael will answer this question.

Very significantly in terms of customer size, production application -- product application and the mix production scale. So it is not easy to use them directly to predict the future revenue. However, with the increasing number of processed payphones and technologies, there is a clear long-term growth trend for tape-outs and the licensing revenue. Thank you.

We figure that there's another licensing question later, which we will ask especially regarding why licensing decreased in the third quarter. But we'll move on to our next question first.

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The next question is asked by a lot of people as well. So it has to do with licensing. Does this year's licensing decrease mean future licensing will also decline? Michael, please answer this question.

Here, we waived the technology license fee to foundries, especially for MTP-related technology, but increased production royalty rate. This will accelerate foundry's progress of building platforms for our technologies, which we expect to bring higher royalty contribution in the future. We also expect increased growth in licensing revenue next year, driven by PUF-based solutions. Thank you.

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So this question is, compared to the second quarter, our PUF-based revenue declined in the third quarter. With the impact on the economy, will it continue to grow next year? Michael, please answer this question.

This is still early stage. There is a big correlation between the PUF license fee and the tape-out time of the customer. At present, there are many customers in the pipeline, and most of them are the first-time users of security IP. So it takes more time for customers to learn how to use it. We expect with incorporating our solution into ARM and other platforms, we'll accelerate the adoption rate and lead to more significant contribution in revenue. Thank you.

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So this next question is, who are the competitors of PUF? And since Synopsys is our OTP competitor, do they also have PUF technology? And does security have to use PUF?

All have PUF technology. Intrinsic ID has SRAM PUF on the market, but as SRAM PUF is unstable due to the following reasons: one, the values will change after power on; two, variations in operation voltage or temperature will also change the value of SRAM storage; three, noise will also cause the value of SRAM to change; four, long-term use of SRAM is unreliable. All the issues mentioned above cause problems for chips when using SRAM PUF. Therefore, after introduction of our PUF, we have become very popular because our PUF have excellent stability and reliability. In the future, the requirement for system security will become more stringent to meet the zero trust spec, which means never trust, always verify. PUF is the chip fingerprint, which is the best and the necessary solution for unique ID because it is generated by taking advantage of small differences in each chip process. No two chips will have the same ID. Thank you.

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So this question is also regarding a competitor but also our partner and client. So the company in question is called Rambus, and it also has a security solution. So the investor is asking, what is the difference between Rambus' and eMemory solution?

We have algorithm-related solutions. If customers adopt Rambus solution, they will still lack of a secure OTP or PUFrt to serve as the chief root of trust. Thank you.

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So this question is submitted by a concerned person. eMemory experienced a small downturn in 2019. What are the reasons? And why is the company still confident that it will not be affected by the economic downturn, which is even worse than the one in 2019?

It was the main royalty revenue in 2019, and then NeoFuse only reached 1 million wafer production that year. Now our main royalty contribution is from NeoFuse. The penetration rate in 12-inch is still low, plus the trend for hardware security has just started, accelerating the contribution of PUF-based related solution. The later tool receive much higher license and royalty fees compared to NeoBit. Therefore, this is a structurally different situation in 2019. Thank you.

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So this question is also about TSMC. So TSMC said that 6- and 7-nanometer demand will be corrected significantly in the next 2 quarters. What is the impact on eMemory? And we already kind of answered this question before, but I will invite Michael to elaborate further.

7-nanometer tape-out at TSMC has only just started small volume production and accounts for a very small percentage of the company. Because of the low utilization rate, foundry customers are encouraging from the 12, 16 chip customers to migrate forward. As evidenced by the rapid increase in the number of 6- and 7-nanometer tape-outs in the past few quarters, which are all migrated from the 12- and the 16-nanometer in their previous generation, we expect the trend will be more obvious next year and drive our royalty growth further once 6- and 7-nanometer customers move into production. Thank you.

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So this question is regarding ARM. So the person asked, what is the business model for working with ARM? Do we need to share royalties or licensing fees with other parties? Michael, please answer.

As license fee and royalties, the joint activity is mainly for promotion. We don't need to pay the other party any fees or profit shares. Thank you.

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So the question she is asking, are there any customer requests to decentralize our R&D resources? And does this have any impact on eMemory?

In licensing our IPs to foundries all over the world, the advantage of using our IP is that our customers can go to different locations for production. There is no such request from customers to decentralize our R&D outside of Taiwan. We did set up Japanese R&D team for the reason to recruit the talents from Japan region. Thank you.

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And also has to do with the American sanctions. The person asked, do Chinese companies have to obtain permission from the U.S. government to license with a company or eMemory?

These are IP technologies, our own invention. We don't need any U.S. or government approval, so we can license it directly to anyone. Thank you.

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Okay. So that question is more serious, and Li-Jeng says she gets asked this question a lot. But basically, it concerns potential war between Taiwan and China. So does the company have a backup plan if there is a war between the 2 sides of the Taiwan strait? And are customers worried about the risk and has this led to customers avoiding the company's technology? Michael, please answer.

Our main R&D is in Taiwan. Our IP data is stored in the cloud server. Our patents are registered in all major regions of the world and protected by international regulations. As long as the company's technology is used, regardless of the chip company or foundry, they must pay the license fee and royalty, which is the greatest protection for the company's shareholders. Currently, no customers have avoided our IPs due to the concerns about the war. Thank you.

So basically, Li-Jeng followed up with this with a comment, and my rough translation is she's telling everybody to hire a lawyer if there is a war because all the pricing abroad will go off the charts. So you better go hire a lawyer and collect your money. Our foundries and chip design companies do get pumped.

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This question is also on the U.S. government, and it's a little bit long. But basically the question asked, can the U.S. government restrict our security-related IPs from being licensed to Chinese companies? Okay, we answered this before, but there's a follow-up. What is the company's patent protection policy? In addition, patent protection typically last 20 years. Can you continue to receive royalties since its technology is 20 years old? And can other companies use NeoBit's technology without the company's authorization because the patent rights have expired?

Technology is the genetic invention, and there are no government restrictions. The technology patent is for 20 years. We improve the version periodically to extend the patent period. For example, NeoBit's patent was extended to 2034 in 2014. In addition, the complete IP including the circuit design have 50 years of copyright protection, and the royalty payment contracts we license to foundries have no termination date. Thank you.

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So this next question is regarding DDI and PMIC. So we want to clarify that we're not a DDI or PMIC company, but we're required for DDI and PMIC. So the question asked, why has eMemory's technology become a standard for DDI and PMIC, but not for other applications? And the follow-up is what is the alternative for other applications?

DDI and PMIC are analog circuit designs because there are variations in their production process of fab. To control the output signal accuracy and meet the spec, they need our OTP or MTP IP to perform output tuning, function setting, post-testing parameter storage and the co-update. These are the already standard in DDI and PMIC designs. We expect more analog and mixed signal application to follow. Thank you.

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The question was, is the patent right held by the inventor or the company, eMemory? And can the patent inventor user invention if they leave eMemory?

Held by the company, and the inventor cannot use the patent if they leave. Thank you.

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This question is actually really important, and it has to do with accounts receivable. So the person asked, does the company have any issues with accounts receivable? And are Chinese customers not receiving their money? Michael?

We have no account receivable problems. Since the company was established, we have only had 1 small collection problem in the early days. And for most of our Chinese customers, we take the prepayment. Thank you.

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So it's regarding eFuse. I think the person is asking this because our OTP is a competitor of eFuse. So the question is, although advanced process eFuse has the drawback of burn-in error, foundry can still provide hundreds of thousands of reliability tests. If customers do not need to test to that number, how can we convince customers to use our NeoPUF?

It is not the only consideration. UID and the key ensure the trip identity cannot be tempered with, copied or stolen. And the process of generating, it needs to be strictly controlled. To use eFuse to -- for key storage or UID, you must first write in the date, the key or obtain a random number from outside. The eFuse of each chip is empty at the beginning and the data is written externally, which give attacker opportunity to manipulate information. Using NeoPUF to generate key or UID is from the chip on PUF and cannot be written externally. The security of these 2 methods are different. In addition to generating the UID and the key, which cannot be interfered with externally, our PUF IP and secure OTP both contain physical and electrical anti-tempering design, certified by Rescue, which can further prevent attacks. Thank you.

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There is another question regarding the U.S. restrictions. And it's asking, NeoPUF has many applications in AI SoC, FPGA, DPU and HPC-related CPUs. How do you deal with the U.S. restrictions? And how does KYC deal with it? So KYC stands for know your customers.

Acted by the U.S. requirements and don't need to provide KYC information. Our customers are mainly from the Europe, U.S. and Japan. Thank you.

In the interest of time, we will now begin the closing -- we'll now enter the last question.

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So the last question, is the decline in 8-inch capacity utilization a result of Chinese foundries using 12-inch to produce 8-inch products? And what is the impact on eMemory?

She mainly refers to the use of 12-inch fabs to produce 8-inch process like a 0.18 and 0.11 micron process. This has been happening for quite a long time, especially in new fab build in China. This has no impact to us. We are promoting our NeoFresh technology to the foundries because NeoFresh does not require additional equipment compared to the traditional embedded fresh, which will require purchasing additional equipment. Our strategy of waiving technology license and raising the production royalty is very attractive to fab customers as they can add value and increase wafer price by adopting our technology. Thank you.

It looks like our time is up. So now we will begin the closing comment. Michael, please proceed.

Information about PUF-based security IPs, we encourage you to visit our PUF security website at www.pufsecurity.com and check out our article and other materials. Thank you once again for your patience and the support for eMemory. We will continue to work hard on IP innovation and security solution for our customers and bring higher returns for our shareholders. Thank you.

Thank you, ladies and gentlemen. Before we conclude today's conference, please be advised that the recording of the conference will be accessible within the next 3 hours. Thank you, everyone, for joining us today. We hope you will join us again next quarter. You may now disconnect. Goodbye, and have a good day.