Phison Electronics Corp. (8299.TWO) Earnings Call Transcript & Summary

Okay. Hello, everyone. This is Jason Tsang from CLSA. Welcome to Phison Second Quarter's Earnings Call. Today, we are happy to have KS here to share with the updates of Phison and end markets. And after that, we will open the floor to a Q&A session. So yes, let me turn this call to KS.

Good afternoon. Good morning. Ladies and gentlemen, thank you for joining Phison Q2 2025 Earnings Call. With this we start. Today, a lot of content here, so I may need to move a little bit faster. And Phison now we have the CB racing. So we are in quite not able to have so too many perspective in this call, okay? So please understand. Okay. The distribution of our CQ2 revenue, we can see strong, very strong in the embedded ODM, especially we gained share in the PC OEM and the mobile module business. And in controller-wise, the revenue itself increased a lot, but the percentage is [indiscernible] because of the revenue itself also growing. Enterprise-wise, we are stable growing, okay? And we still try to make more design win into the U.S. and also the China storage system customers. Okay. CQ2 revenue close to TWD 70.8 billion, which is our record high in the single quarter. Even though, CQ2 we are suffering the foreign currency due to the strong NT, we dropped -- we lost revenue in NT, but we still hit a record high. And gross margin-wise, by Q-o-Q, we improved 21.5%. Actually, the gross profit also suffered due to the strong NT. So the revenue-wise is all-time high. And we also have -- we believe this year, we have a big growth in our revenue. In the gross margins, Phison's inventory was built since this year January. That time, the NT is still around 32, 33, then CQ2, NT moved to below 30, the cost itself actually from NT to U.S. is increasing. So -- but we are good because the market also comp -- we don't have any something unexpectation. And the investment loss is around 0.5 due to our subsidiary, they are adjusting their -- what they're so-called the [indiscernible] IPO, but this is happening. [Foreign Language] So back to summarize here. Revenue in NT Q-o-Q is 29%, but in dollars, it's 37% means we suffer around 8% in the foreign investment -- the foreign currency, which is -- if you like to say this is the impact to the gross margin. The 8% is the net gross margin impact to our business. Again, it is why we do our best. Gross margin-wise is 29% as explained. The OpEx-wise is lower, because of due to loss in the foreign currency. So the employee compensation, we are getting conservative then this OpEx-wise is lowest in the -- compared with the last few quarters. Okay. [Foreign Language] So back to the operating margin, 13% gross margin, 29%. So operating margin actually is highest in the last 13 quarters. So I think our business itself turned to a much healthy. Okay. In the -- our balance sheet, the inventory, we built inventory since January -- actually since April, May, June, we keep building inventory, because we foresee the demand and the supply will be unbalanced. So we also need to prepare more enough inventory for our customers. Okay. Move to the TIF and non-TIF, actually, it's not much different, because we don't have [ assess ] any compensation for the employee. So it's life-threat. [Foreign Language] Okay. Back to the business highlights. In the client SSD controller, you can see Phison, we have controller shipment growth Q-o-Q 90% Y-o-Y 49%. Control revenue increased 87% versus Y-o-Y 50%. We also got 3 NAND makers design win in the PCIe Gen 5. We believe we are able to gain more design win since we are leading in our Gen 5 DRAM solutions. And the controller supply chain is still tight. We are facing the shortage due to the wafer constraint and also the substrate constraint. We still been pushing by our NAND customers to pull in and increase more controller shipment. So now we do our best. And thanks to the TSMC and our OSAT, scale ASE doing all their best to support us. So overall, Phison, we gained the controller share in the client SSDs and actually, we gained quite a lot. And in module-wise, you can see our growth is significantly Q-o-Q 57%, Y-o-Y 153% because Phison, we got the TLC -- Gen4 TLC, QLC, design win and shipment to all the Tier 1, Tier 2, Tier 3 PC OEMs. So Phison now already become the key supplier in the PC client SSD OEM and ODM, and Gen5, Phison also shipping to our Tier 2 and Tier 3 PC OEMs. So Tier 1 will happen by CQ4 this year. So we can see Phison in the PCIe Gen5. We have really become the key players. In the mobile-wise, Phison control shipment grew 74% Q-o-Q, 76% Y-o-Y. We also gained a very big share. Revenue-wise, controller also bit increase. Modules also incredible. It's 2x Q-o-Q and 1.6x of Y-o-Y. Revenue-wise, it's 2x. And by the way, we gained the share. Overall, this year, 2025, Phison will become the biggest mobile storage controller in the world. Okay, we gained the biggest share in the world, okay? And talking about the Chromebook, we also gain more design win, actually almost every Chromebook, the Tier 1, Tier 2, Tier 3. We're not only in controllers, but also we are in the modules. So this chart to show you, talking about smartphone other than one Apple, one Samsung, the rest are all in China. So Phison, this is only in the mobile controllers, not including IoT. So in this, you can see we have become a very key player in the eMMC UFS for the mobiles. So we believe with our heavy investing into the R&D and also we have a strategic partner in China. We think we are able to gain more share in this field. Enterprise SSD is stable growth. Even though right now in China, the suppliers is cutting price to gain share, but we have other markets like U.S., Southeast Asia. So overall, the shipment, the revenue, the petabyte, we are increasing. We also in the design win more storage system customers. And our PCIe Gen3 controllers is PCIe Gen6 enterprise controllers will be ready -- the silicon will be ready by end of this year. So we are moving to leading in the market. And next year, we are going to CQ2 to start to ship Gen6 enterprise SSD to our storage customers. This is what we are working with current storage systems. We are shipping the samples under 120 terabyte modules. We also developed shipping this [indiscernible] to very key storage system maker for the AI systems. We shipped a few thousand sets already. Now we are dealing in this market. In the overall business highlight in the IoT industrial, the industrial market was really slow in the last year second half and CQ1, but looks like gradually, the market is bouncing back. And Phison, we cover full range of IoT industrial modules. So not only EMC, but also other SSDs. So in the eMMC, now we gain -- we become the major supplier in the worldwide biggest [ TV ] OEM, OEM, the brand, okay? And we also win several U.S. and China, the robotic, the system makers. We are also doing customization for them. okay? And this is -- Phison, we are focusing in the industrial business. So this also become very stable and a better gross margin business to us. In automotive-wise, you may know the low-density flash is going to be EOL. Luckily, Phison since 2022, we've been asked by the NAND makers to help them to hold inventory. This inventory turned to a very profitable business. And not only profitable, we are also has a big leverage to support our customers to make sure they are not going to face any shortage. So in automotive, in IoT, Phison now become very, very key players. And UFS 4.1, we also gained many design win in this automotive industry. So this chart is to show you in the last 2, 3 years, Phison's team visit worldwide. We work with the worldwide automotive ecosystem partners. You can see Phison solution now we are almost covered any brand, the major brand you know, okay? So this is all our design win and this is our shipment. We are not just only talking, but we are shipping. [Foreign Language] Okay. Portable SSD, Phison is the first USB 4.0 controllers in the world. We win the 3 NAND vendors business, and one of them already have a shipment in the market. And also, we are -- we gained almost a top 5 of top 10 brands in the market. So this is unique, and we are in the leading position. And the SD MicroSD for the Nintendo Micro Express. We also start to ship to the market. Back to our Retimer driver business. We announced the world UFS 4.0 driver, now already testing, doing the ABL with the CPU makers. This product is going to ship to the market by second half next year, and we are now is a unique supplier. Gen6 driver, we also already got samples testing with the CPU makers. And we also try to build the driver not only in the PCB motherboard, but also bring into the automotive, robotic and also to the cable. And the sales itself, we have a growth, revenue 4x Y-o-Y. So we are taking share in this new business. And [indiscernible], we keep investing for 2 years, promote 2 years. Recently, we got many, many disruptive innovations. Also, we work with the CPU makers, GPU makers. So more and more POC that is happening, the shipment itself, we can see gradually improving. We believe the Edge AI, the era almost coming, almost coming. So we have a lot of activity. Hopefully, due to the -- we are in the quiet period. I'm not able to make more comment. But one commitment is this is coming. So we are heavy cooperate with NVIDIA. Now we are one of their partner, not only in storage, but also in the AI. Phison also have lots of POC system, as you can see here, which cover the bank, security, the hospital, telecom, industrial, information IT, almost in the academic. So this is already spent over 1.5 years. We can see the concept go to the POC, then go to the revenue and business. [Foreign Language] I want to share with you Huawei just announced the so-called AI SSD. What I can say is almost a similar concept from Phison. So they developed the AI SSD. We are happy to see this happen, because we believe they agree our approach is in the right trend. [Foreign Language] We also build a lot of software. Actually, we need millions and millions developers to develop applications on the Edge AI. We also need a lot of software system SI companies. So we are building ecosystem in Taiwan, in China and U.S. and also in Malaysia, India. So this is to show you in Taiwan, we start to build several SI and software company to provide a service to our customers. This at times not easier, but good time definitely will come. [Foreign Language] Monday and Tuesday, just 2, 3 days ago, there was ASEAN AI Malaysia Summit. I was one of the speakers. We are launching using single CPU without GPU. Let me repeat again, single CPU without GPU. We enable the CPU internal GPU with Phison aiDAPTIV+. Immediately, the PC laptop convert to AI PC without any extra GPU and MPU, without any extra cost. So imagine many years ago, every PC you want to go to Internet, you need to use a modem and WiFi router, WiFi standard. But Intel promote Centrino, if you know about Centrino. Today, every PC system, they're building WiFi. Today, with our new technology engaged with Intel, POC done at before July 15, we have a workshop with Intel July 29 and also PC OEM ODM worldwide. We already proved a single PC notebook without extra GPU, MPU plus Phison aiDAPTIV solutions immediately convert to AI PC like Centrino era. So next year, every PC shipping from a factory just plug in Phison aiDAPTIV+, then this is AI PC. So every user still are able to enjoy the AI PCs without extra expensive expense. [Foreign Language] We're also facing that we need a lot of engineers. We hope ecosystem, they have good skill AI engineers. But unfortunately, the university is not able to train the good skill engineers due to they don't have enough budget to buy expensive GPU. But with the Phison aiDAPTIV+, any single GPU card can convert to AI training PC. So we also built the cost to have support, educate, train the trainers. So after the few months, we have already trained over the 200-plus our trainers, which is from hospital, from professors, from Audi, from automotion, from the SI system integrators, everything. So now we also have license our trending costs to university, to third party and to other carrier training systems in Taiwan, in Malaysia and India. So we believe this can help us to train more good skill and AI engineers to use our aiDAPTIV+. COMPUTEX in May, we have -- we won the award, the Golden Award -- among this awards in AI, Phison and NVIDIA is in the AI area. So we are happy to put our [ E20 ], add the new invention on the aiDAPTIV. And also this is a support we are fund by the Taiwan government. So this is something we have activities with the Taiwan Telecoms. Okay. First half, this year, the OpEx is reducing due to the profit is shrinking by the first half, CQ1 was -- market was slow. CQ2 market was -- business was good, but we suffer EPS around close to 6 by the foreign currency, okay? So -- but I believe coming months, the business, especially you can show from our operating profit, we are turning good. [Foreign Language] So let me make some summary. Market supply basically is constrained. C23 every NAND vendors insist to raise a single digit of the price okay, in the NAND. So we need to be very careful to selling our products, not to sell too low in the market. And also, we recently have more inquiry from worldwide. We believe China competitors, they've been -- actually been suffer. They buy high, they sell low to get revenue, but now they are also turning to very conservative. And the shortage of substrate is happening. We have a new upside on our SSD, mobile storage and the controllers, but we cannot fulfill. That's why I said that we have a fundamental forecast, which is good, but all the upside are very challenging, okay? And NAND controller, this year, we gained big share in the client SSD and also mobile storage, but we hope we are able to solve the substrate issue to fulfill what the customers ask. In the mobile, we gain share, and this is turned to where we are already key players. PCIe enterprise SSD is getting stable, slowly grow. And we also got some several design wins in the U.S. market and China market. Hopefully, this will turn to strong revenue growth in the coming quarters. Automotive, Phison is really key player. And I think no need to keep any explanation. You see just our design win customer list. So we are the key in this industry, aiDAPTIV+ turned to very good, especially with the IGPU, cobalt, with Intel. This will help us business growth. [Foreign Language] Let me -- we have some Q&A. After Q&A, we go to the live. Why issue the convertible bond, we can see next year, our business, again, we are quite, but we can see the big growth. We believe we are going to -- we need to buy more [indiscernible] to have fulfillment to our customers. So we hope we can have a much cash flow to help us to run the business and to build the inventory, okay? This CB is to help us to grow in the coming years. Dividends. This morning, Board members approved dividend TWD 6.5 NT, which is approximately around 71%. In the past, we keep 55%, but this time, Board members agree, we don't have a big EPS due to the suffered by the foreign exchange, but they approved 71% of the share dividend. [Foreign Language] The impact on USD, every 1% NT growth will impact our 3% revenue. In CQ2 revenue from the NT to dollar is 8%. I can really clearly to tell you this is all our gross margin. But again, it's why it no way to complain. But when the currency go to the stable, we are happy to see to grow our business. [Foreign Language] Will be shortage. I'm hard to comment due to quiet period, but we take the open market report. Next year, the big growth is around 10% to 15%. But according to the last 10 years, the demand growth is 30-plus percent. So due to this, we believe next year, the [ press ] will be tight. And why the growth only the big supply growth down to 10% to 20% because of CapEx. You can read from the public. The 3 HBM supplier, they prefer to put CapEx in HBM. U.S. and Japanese, they'd like to improve their CapEx, but due to their financial constraint, they are not able to get aggressive. So overall, the big growth in supply is very limited next year. [Foreign Language] My conscious is saying that they are going to walk away from the mobile business and also lay off [indiscernible] entering China. So the impact of Phison is -- Phison already become the very key player in the China mobile storage, controllers and also modules. And we have very our strong subsidiary, they are doing the service to the China mobile customers. So I believe this will -- China mobile makers, they may decide prefer to come to Phison and [indiscernible] because we have proved we have a good technology quality and supply. So we believe other NAND vendor may also like to talk to Phison how to enlarge their business opportunity in China. [Foreign Language] The whole inventory, we still focus in the controller and enterprise due to embedded ODM, the PC OEM modules and the mobile modules increasing a lot. So we are trying to build a much higher inventory for our future fulfillment. We worry next year, supply balance is imbalanced -- supply-demand imbalance. So we need to build our inventory to make sure next year, we have a better fulfillment to the customers. Okay. So we can go to the online Q&A.

[Operator Instructions] And my first question is in terms of the impact from FX. KS you mentioned that the impact is around 8% on the top line. And you also believe that 8% will directly impact the gross margin as well. So I think -- so your gross margins will be around 37% based on U.S. dollar. Is that...

I think this is a simple mathematics. Of course, gross margin has many impact factor, right? But just saying simple, my inventory, that inventory buying at TWD 33 cost $1.33. But when we ship out go to TWD 29, we lost TWD 4. So TWD 4 equivalent to 100%. So this loss actually is a gross margin, right?

Okay. Got it. Got it. So I wonder if you can provide your gross margin based on U.S. dollar in Q2. Can you provide that kind of details?

I don't think we have that. Because this also complicate the indirect labor cost also come in, okay? So just give a simple, okay, the key component controllers, flash, we are buying in the dollars, we shipping dollars, right? So let's say, in the whole material cost, we have 50% is a controller plus flash, okay? From TWD 30 to TWD 33 down to TWD 29, every dollar, we lost TWD 4, TWD 3.

Understood. And my second question is in terms of your headcount expansion. You mentioned that it seems like you suffered some shortage in terms of the human resources or engineers. Do you expand -- do you plan to expand more headcount or in coming quarters or in next years?

Okay. Actually, since last 2, 3 quarters, I was saying that Phison has no intention to increase the many headcount due to our headcount increase from 2019 to 2023, they are good in [ well ] training, they start to exercise all good. And from 2024, we start to push using aiDAPTIV+ in-house AI solution to help them in design. So we don't have a plan to increase big deal headcount in coming quarters until aiDAPTIV+ turn to big revenue profit, then we have to ask more headcount to develop the future software. So means before aiDAPTIV+ turn to the good profit revenue, we have no intention to increase headcount.

Understood. Understood. My third question is in terms of the growth momentum in Q2 and Q3. I think like some of the demand in Q2 is coming from some of tariff concern leading to pull in shipments in Q2. So how do we expect that this kind of growth momentum probably will slow down or impact revenue in Q3? So I mean in Q3, what kind of growth momentum do we expect to sustain the growth drivers in Q2 or in second half this year?

Okay. First of all, no matter how many percent tariff American ask, the products from Phison shipping to U.S. still no tariff storage, no tariff. So in CQ2, I don't see seriously, I don't see customers in U.S. willing to pull in the many inventory. Only a few, but not that many because they can see storage is no tariff. And talking about the coming months demands based on what the order we collect in May, June, July, actually is growing. It's growing, okay? And we are now -- has already painful because we have inventory. Suppliers keep increasing too much price on that. We need to carefully use our inventory to make the design in design win fulfillment. So we are not able to take other upside opportunistic business. Means we are controlled to take order, we are control of our shipment. So I don't see their demand is a slowdown basically. By the way, from just the previous -- my report is we are gaining share in the client controller, client modules, mobile controller, mobile modules. So demand to me, make it short, I think still healthy and strong.

Got it. So the real demand is pretty good, and you can further gain some market share to fuel the growth momentum in coming quarters. Got it. Got it. And we got some questions. The first one is, can company talk about the enterprise SSD market share gain? And where are the big opportunity for Phison in the next couple of years?

Enterprise SSD market share, we are still slightly way, way small, because we are not the NAND manufacturers. But we gained a few projects actually turn to dollars is quite big. It's a customer design and also doing the [ DIY ] SSD for the system -- system makers. So I don't expect Phison can tell everyone our share in the enterprise SSD, but we can see the growth happening. Next year, 2026, definitely, our share is going to happen on the analyst report, okay? So enterprise SSD, we still investing our PCIe Gen4 behind the leader 2.5 years, Gen5 behind 9 months. Gen6, our silicon coming back by October. Our working sample will deliver to customer by next year, April. So we are almost able to deliver Gen6 with the big players. So after that, then it's meaningful that we are going to talk about market share.

Got it. And we have a question from Donnie from Nomura.

So I think the first question is regarding to the competition landscape of the NAND controller market. So I think your competitor also mentioned about it like they gained lots of market share into the second half this year. And it seems like you have very strong shipment as well. So I'm just curious, how would you compare your products with competitors? And if both of you are gaining market share, who do you think is like losing market share among the controller market? So that's the first question.

So Donnie, actually, I also keep making the study research and ask my guy to see what happened in the market. But this is a democracy, -- everyone can say what they want to say. But at the end, the number will show if they are bluffing or not. In controller wise, to be honest, my competitors, what they are saying, I found no much evidence to prove that. But -- so anyway, coming quarters, we can see who made the right comment on that. But on controller client, definitely, we can see the number, right? We are gaining a lot. And my supplier also come to me [ foundry ] saying, hey, Phison is doing good job because that's increasing. So I'm hard to comment, but I found no any solid answer to tell you because I also don't know how my competitors doing.

Understood. And another question is you have mentioned about Micron's absent in the mobile NAND market, which may create some market share gain opportunities for your business. I'm just curious, I mean, if you look at the mobile NAND market, Micron previously developing their own UFS controllers and now they are retiring from the market. But YMTC is an emerging player among the NAND sector. So after Micron's absent in the market, how do you think about the mobile NAND business model will be changed in China or whether the module makers in China, they will have better position or YMTC will continuously growing faster than all NAND makers. And are there any like domestic UFS or eMMC controller vendors can compete with you or Silicon motion?

Definitely, YMTC is the biggest beneficial, because they are local suppliers. But if you stand in their customer side, the phone makers, they need second, third, the suppliers. Of course, the Korean suppliers still try to make the fulfillment, but we believe the margin, if Micron decides to walk away from this business means the margin is bloody. So as Korean, they may face the same challenge. But the market is there, right? Users don't want to see single supplier. Phison proves we have now become the biggest controller maker supplier in this field. And we are good to have technology deliver supply quality and service and reputation. So we believe we are going to gain share no matter the phone makers come to us or the NAND manufacturer come to us. So I'm not able to comment the Silicon Motion and the China module house. But again, I have to repeat, the design technology, the quality, the service and the reputation.

Understood. And my last question is your comment on the shortage in terms of substrate and package. So do you think that will further drive the NAND module price to beyond what you said about like 3% to 5% quarter-on-quarter growth in the third quarter?

I think if in the BC period, every customer the system maker need to pull in, in that period, maybe 2 to 4 weeks, yes, potentially, yes. But again, personally, I don't like to see this happening, because if price keep pushing high, the same story will happen by either early 2024, okay? When price keep -- the first price keep high, system maker may decide to cut up the capacity. So I don't like to see that happen.

Thank you, Donnie. We also got some questions. The first one is the impact from tariff. The U.S. export tariff is currently set to around 20% for Taiwan. What's the impact for Phison? And what's the actions accordingly?

So far, we're still not facing the tariff, but we already have a plan to produce our modules in the U.S. Mainland. So this is what we can do, okay? So I don't have much things to tell you about this, because this is not only my only issue, this is everyone's issue. So let's see.

Got it. Got it. And another one is from the -- is regarding to NVIDIA's GB10 AI PC platform. Will Phison's aiDAPTIV solution will be integrated into this kind of platform, yes.

I cannot make comment due to [ NDA ]. So my answer is, let's see, okay? But one thing I'm for sure, we are using Intel CPU immediately convert the PC to AI PC. This is to show how powerful aiDAPTIV+. So let's see.

Okay. And I have another question in terms of the embedded ODM business. It seems like this kind of business had a very strong growth momentum in Q2. So is that due to the higher market share gains? Or we also see others new growth momentum?

In mobile wise, we have market share gain. In the PC OEM, actually Phison is doing a lot of customization in the past, okay? So we have a gain because of its unique of products. And also, we gained our reputation in the PC OEM. For the last 5 years, Phison is working very hard to make our controller good quality, [indiscernible] free, no compared to my competitors, sorry, they always have a [indiscernible] that;s why they lost the customer, the PC OEM, Tier 1, Tier 2, they lost confidence to my competitors. So I can say, yes, we gain the share and also we gain the respect from our customers.

Understood. Understood. So can you provide the growth momentum for each of the applications in Q3 and Q4, I mean, including consumer, industrial, gaming and enterprise?

Retail is still very slow. Retail very slow due to the -- and then now it's the summer season and the U.S. [ infection ]. So gaming is other than Nintendo, the rest is very, very slow. Nintendo, the Micro Express were in shortage, okay, due to the substrate not enough. We have many orders on hand, but we just only partial shipment. Go to the embedded ODM in the mobile and the PC OEM, yes, very strong. Our PC OEM inquiry from customers next year is almost 2x growth almost. So this, I think we're doing good. Enterprise-wise slightly growing, and we have many ongoing design-in projects. [ Almost, one person ] design win can turn to a big amount of U.S. dollars, because of high value of the products. Automotive, we have a significant growth, because after design in 2 years, the business is coming. The last is aiDAPTIV+. We are now shipping around 10 servers per month. The last few quarters, it's like 1, 2, 3 server per month now up to 10. AI training PC, we shipped like 50 to 100. And we made the design win into many OEMs in AI CPU project and also a lot of POC ongoing. So aiDAPTIV+, we are waiting the time when the market start to take it, then immediately this can turn to the revenue.

And we have a question from Simon.

Yes. Overall, today, takeaways sounds positive broadly. But one quick question is convertible bond. Meanwhile, you are still paying the dividends. You already mentioned that you need some extra capital for the next year NAND sourcing. But would you recap the overall the CV impact for the number of shares, et cetera, dilution?