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

Good afternoon, and welcome to eMemory's Fourth Quarter 2022 Webcast Investor Conference. Present today, we have our Chairman, Dr. Charles Hsu; President, Mr. Michael Ho; Head of IR, Ms. Li-Jeng Chen; 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 Chairman, Dr. Charles Hsu, will give an opening remark. Afterwards, President, Mr. Michael Ho, will summarize our operations in the fourth quarter of 2022, followed by the outlook of our business. Next, Dr. Charles Hsu will talk about the evolution of PUF-based security subsystems. 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 Chairman, Dr. Charles Hsu.

Good morning, everyone, and thank you for attending our conference call today. The revenue of the fourth quarter and the full year of 2022 hit a record high, reflecting the results of our continuous invention of new technologies and the development of new application fields. And looking forward to 2023, although first half revenue will be impacted by the sharp decline, the decrease of the foundry overall utilization rate, our view on the -- our market year growth trend will remain intact. A substitutional increase in security-related license fees will drive this year's growth momentum. We have completed a series of PUF-based security IP and solutions, which I will discuss later. With the rapid increase in demand for security, our PUF-based business will be imperative for driving the future growth of our company. In terms of royalties, more than 600 new product designs have tape-out each year over the past 2 years. As these new products gradually enter mass production, we are confident that our royalties will continue to grow in the long run. First of all, our technology development has reached 4- and 5-nanometer and 3-nanometer verification is about to start. The customer adoption of 6- and the 7-nanometer is also accelerating, which will drive our future growth momentum. So next, I would like to invite our President, Michael Ho, to share our fourth quarter performance and the future outlook. Michael?

Thank you, Charles. Good afternoon, everyone. Now let's begin with our 2022 fourth quarter financial results. The fourth quarter revenue was TWD 903 million, up 14.2% sequentially and up 43% year-over-year. Operating expenses were TWD 368 million, up 6.6% sequentially and up 22.8% year-over-year, mainly attributable to the increase in salary and the other related human resource expenses such as the increase in bonuses and rewards. Operating income was TWD 535 million, with an increase of 20% sequentially and 61.2% year-over-year. The operating margin increased by 2.9 percentage points sequentially and increased by 6.7 percentage points year-over-year to 59.2%. EPS for the quarter was TWD 5.77 and ROE was 62.2%. Next, let's move on to revenue contribution by licensing and royalty. Licensing in the fourth quarter accounted for 22.7% of the total revenue, up 41.8% sequentially and 26.1% year-over-year. In U.S. dollars, the licensing increased 38.2% sequentially and 14% year-over-year. Royalties in the fourth quarter contributed 77.3% of the total revenue, increasing 8% sequentially and 48.8% year-over-year, or up 1.9% sequentially and 31.2% year-over-year in U.S. dollars.. For the full year of 2022, total revenue grew 36.1% compared to previous year. Licensing and royalty grew 5.6% and 49%, respectively. In terms of U.S. dollars, the total revenue increased 29% year-over-year, with licensing and royalty both increasing 0.6% and 41%, respectively. With that, I will comment on our revenue contribution by specific IPs. For NeoBit, it accounted for 17.7% of the total licensing revenue in the fourth quarter, decreasing 4% sequentially but increased 54.6% year-over-year. Its royalties accounted for 33.3% of total royalty, down 0.7% sequentially, but up 16.7% year-over-year. For NeoFuse, it accounts for 48.4% of total licensing revenue in the fourth quarter, up 47.6% sequentially but down 3.9% year-over-year. In terms of total royalty revenue, NeoFuse royalties increased 15.9% sequentially and 75.4% year-over-year, accounting for 64.6% of total royalties. For PUF-based security IPs, it contributed to 20.5% of licensing revenue, increasing 112.3% sequentially and increasing 122.1% year-over-year. Its royalties accounted for 0.6% of total royalties, which is up 88.4% compared to previous quarter and up 1,838.8% year -- compared to the previous year. For MTP technology, it accounted for 13.4% of the total licensing revenue, increasing 39.3% sequentially and 61.8% year-over-year. Royalty from MTP decreased 49% sequentially and 14.6% year-over-year. From the full year of 2022, the licensing and revenues are as below. NeoBit licensing revenue increased 9.8% year-over-year and royalty increased 17.5%, accounting for 33.2% of the total revenue. NeoFuse licensing revenue decreased 1.3%, but royalty increased 77% year-over-year, contributing to 58% of the total revenue. PUF-based security IP licensing revenue increased 294.9% year-over-year where royalty revenue increased 3,278.1%, accounting for 3.8% of the total revenue. MTP technology licensing revenue decreased 38.9% year-over-year, but royalty revenue increased 55.2%, accounting for 5% of the total revenue. Now let's look at the royalty for 8-inch and 12-inch wafers. For 8-inch wafers, which accounted for 47.4% of royalties, increasing 9.6% sequentially and 40.2% year-over-year. For 12-inch wafers, contributed to 52.6% of royalties, increasing 6.6% sequentially and 57.5% year-over-year. In total, 150 product tape-outs were completed in the fourth quarter. We will provide more information in the management report. In the next section, I will address our future outlook. We foresee revenue growth to decrease sequentially in the first quarter of 2023 due to the sharp decrease in foundry utilization rate, especially for the second and the third tier foundries. However, a strong new tape-out from the past 2 years are gradually moving to production. We expect our royalty momentum to pick up in the second half of the year. For licensing revenue, licensing will grow significantly this year due to the strong demand for our PUF-based security solutions. For the royalty revenues, the growth momentum of royalty will be driven by penetration rate increase from the 28-nanometer, 12- and 16-nanometer, 6- and 7-nanometer and the newly qualified 5-nanometer. We expect the first half royalty to be impacted by the overall low utilization rate in foundries customers, but will pick up momentum in the second half of the year. Moving on to new IP technology and business development. One, NeoFlash technology platforms are developed in several foundries, targeting the embedded fresh market; two, PUF-based IPs have completed N5 tape-out and is moving to N4 and N3, maintaining the leading position in technology. This concludes my comments. Next, I will pass the time to Charles. Thank you.

Okay. Next section, I would like to talk about the evolution of our PUF-based security subsystems. I think everybody knows that we have become the world leader in the OTP IP. And recently, we invent PUF technology from the OTP. And then we add a lot of digital design and also integrate our OTP and the PUF together to become the root of trust. So this section, I will talk about that to explain that how we did it from the OTP to the PUF-based security subsystems and then you can turn to Page 13 to see the figures, okay? So based on our OTP technology, we developed a PUF-based chip fingerprint IP, both OTP and the PUF, which stand for the physically [ comparable ] functions, are important IP for a security subsystem. Within the security system, the most important component is the root of trust, which including key storage and the key generation functions. So by integrating OTP, with PUF, we can create new IP solutions that include our IP, such as our PUFrt, and that is our root of trust IP. And our security subsystem SoC IP was created by integrating a crypto engine, which is a SoC IP with the law of trust IP, which is our [indiscernible] IP. So we create the [indiscernible] IP by integrating OTP with PUF, resulting in PUFrt, which is root of trust IP. And furthermore, we created a purely digital crypto engine from different cryptographic algorithms, and the digital circuit IPs to perform the cryptographic computation of encrypting and the [ description ] data for security operations. And to facilitate the security observations in SoC, we must protect the data at the [ rest ] and data intrinsic by using the operation of the security subsystem. We also developed firmware and the software and the various tools to perform security functions in the security subsystem IPs, such as the signing of the software and the over-the-air updates and the security [ boot ], et cetera. With the growing demand for security in different applications, we are seeing growth from our security products in current business opportunities. Therefore, we expect to dominate the security IP market with our ready-to-go root of trust technology. Our security IP have a comparative advantage because they are all proven in many different processes, just like our OTP technology and also developed in over 600 process platforms over the past 22 years. So we create the new business opportunities by expanding our technologies from OTP to PUF-based root of trust and security subsystem and also the security function software, which will preparing us beyond selling individual IP to selling security subsystem SoC IPs and related security software services. So as eMemory is an established IP company, they are different platforms that we can use to leverage our sales in security IPs and the subsystems. In [indiscernible] foundry performance in the past, foundry platforms were our main champions for our OTP technologies. Now we license our security technologies to major foundries such as TSMC, Intel, UMC and the GlobalFoundries, and are also jointly promoting with them to further the business effort. And the second platform is CPU partners. We recently announced our cooperation with the CPU partners, such as ARM and RISC-V by providing a security subsystem to integrate with the CPU IPs in many applications. SoC customers require CPU and the security subsystem IPs. And the third platform will be on the OEM and the design services. Many OEM companies have started to ask design services companies to customize their chips in system devices. Most of these system devices require strong security functions, which our security IP can provide. And in addition to the above platforms, I would like to also address the future technology, which is so-called the future of computing architecture. It's moving to a confidential computing. Confidential computing architecture protects the program codes in the virtual memory from being attacked by other users running the programs in the same virtual memories during execution. By assigning tech keys exclusively to different programs, we'll prevent information such as data and the code from being stolen or accessed by malicious hackers. We are now coworking with -- on their future confidential computing architecture by providing a PUF-based root of trust to protect the boot costs and the data in use by providing tech keys. We believe that the future computing architecture is confidential computing, which will become a major application of our PUF technology in high-performance computing. And this concludes my remarks. And next, we will enter the Q&A sections. [ Mini ], please?

Thank you, Charles. This concludes our prepared statement. We will now begin the Q&A session. [Operator Instructions]

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[Interpreted] So this question, usually, the third month, eMemory does not receive licensing revenue. So the question is asking, why did your revenue substantially increase in December 2022 compared to March, June and September? And why did the revenue of January this year decreased compared to last year and the year before, Michael?

December, we received a lot of PUF-based related licensing revenue. Due to fewer working days in January, part of licensing revenue will be recognized in February instead. In terms of royalties, it was affected by the sharp decline in the capacity utilization rate for mature process. Thank you.

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[Interpreted] So the second question is, China has successfully built legacy node manufacturing processes with its own technology in recent years, especially for SMIC and Huawei. What role does eMemory play in this situation? And how do you view future contributions of this for eMemory?

There are 2 situation with other foundries. This will help increase adoption of our OTP, MTP and PUF security solutions. Thank you.

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[Interpreted] So the third question is we know that eMemory's royalty is based on foundry shipments of the previous quarter. If the utilization rate of major foundries only improves in the second half of the year, do we have to wait until quarter 4 to see royalty growth?

Customers who made inventory adjustment earlier already started wafer production for new products at foundries. In addition, we have accumulated hundreds of new product tape-out designs in the past 2 years. Some of them will start production in Q2, ahead of a new product launch in the second half. Overall, we believe royalty will pick up momentum in the second half of the year. The revenue momentum for this year will be driven by PUF-related licensing. Thank you.

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[Interpreted] So the question was, January revenue has declined in comparison to quarter 4, and the decline is much more significant than overall foundries. What is the reason? Michael, please answer.

In addition to continuous growth below 28-nanometer, many customers of mature process applications have undergone drastic inventory adjustment. And some chip customers even stopped all wafer production. This already occurred in the royalty report last quarter, but is more evident as more customers cut wafer for existing products. However, some customers who were the first to adjust their inventories have already begun to place wafer orders for new products and foundries. In addition, many new product applications accumulated in the past 2 years will be mass produced one after another. So we think this is a short-term seasonal adjustment. Our growth momentum will restore in the second half. Thank you.

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[Interpreted] So this question was asked because we mentioned we have a lot of new products. So this person asked, [ on ] new applications in 28 nanometers, 12, 14 and 16 nanometers and 6 and 7 nanometers have been designed in, but not in mass production yet.

For the 28, 22-nanometer, we have the new [ NTO ] like WiFi, TWS, RFIC and high-speed interface IC. For the FinFET process in the 16, 14 and 12-nanometer, we have the PTV SSD controller surveillance and set-top box. In the 7- and 6-nanometer, we have like FPGA ADAS SSD controller and the DTV.

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[Interpreted] This question is about Cadence. So Cadence has changed its strategy and is looking to cooperate with Taiwanese IP manufacturers for outsourcing efforts. Does eMemory have any related projects? And we will invite Evans to answer this question.

Cooperating in Security Solutions. Thank you.

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[Interpreted] So the question is, there are many kinds of PUF in the market. What is the biggest difference between our PUF and other kinds of PUF? And is it necessary to use PUF for security? And lastly, is it possible to pass security standards without using PUF? And again, Evans will answer this question.

To answer the first part of the question, PUF needs to meet 3 conditions to provide the [ best ] root of trust. The first one is should be highly random; and then should be unique; and then should be reliable and also easy to create. So the biggest problem of PUF on the market is their lack of randomness and reliabilities. To second question, using PUF as a random security for the root of trust will quickly generate high-quality unique keys for security purposes. Doing so is much safer than other security measures. To the third question, without using PUF, high security standards cannot be met. The disadvantages of not using PUF include inability to generate high entropy in random numbers. Instead, a post-processing circuit will be required to accumulate or improve the quality of random numbers and provide a chance to attack because the root of trust will be stored in secure [indiscernible]. Thank you.

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[Interpreted] The next question is asked by a lot of people. So the question is basically, has a client ever redesigned a chip to remove your IP to save money or to use a competitor's IP? Michael will answer this question.

The stand-alone product with easy replacement characteristics, our embedded large MVM IPs are hard to be replaced directly. We only lost the one key customer in the past 22 years, which was [ HiSilicon ] due to the sanctions by the U.S. government, which hit our royalty in 2021 Q1. It's from the high single-digit percent of royalty to 0%. Besides, customers only adopt our IPs for more applications and will replace other solutions, including the 3 eFuse or other vendors step by step. As a semiconductor, innovation only move forward, not back forward. Thank you.

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[Interpreted] Related to our business model. So the investor asked if our business model will inevitably lead to an exponential growth of royalties. Michael, please answer.

I think no business model will guarantee growth. Our royalty model is the most difficult one to achieve in all IP fields, unless the technology is exclusive and must have. Typically, customers are unwilling to pay the royalties. Even with the royalty model, we still need to work hard to gain new customers and get into new applications to ensure our growth sustainable to the long-term. In addition, continuing innovation for new technology to maintain a leading position in our industry are all important to ensuring a cooperative relationship with most of the leading customers. Thank you.

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[Interpreted] So all questions are asked about AI these days, and this one is a question about AI, too. So the investor asked, is eMemory's IP being used for AI-related applications? And why does AI need to use eMemory IPs? Michael will answer.

We have customers in AI applications. Our PUFrt, the root of trust IP can be used as the root of trust for AI chips, while PUF CC, that is the crypto coprocessor IP, can generate unique keys to encrypt AI models and application code. Thank you.