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

Thanks, everyone, to joining today's Phison's 1Q 2021 Earnings Conference. And today, we're happy to have KS, Chairman of the company, and he will begin with introduction. And after that, we will start the Q&A session. [Operator Instructions] So now without further ado, KS, please begin.

Yes. Thanks Brian. Good afternoon, ladies and gentlemen, this is KS. So I have prepared our Q1 result and some other Q&A collect from other investors. I will go through one by one. Because we just have only 1 hour, so I need to go a little bit quickly and share more time for the Q&A. Okay. This is our statement anyway, please read. So first page, we'd like again to reemphasize that Phison, we made a lot of -- a big transformation from the consumer business, to the technology-leading business. In our -- these 5 years, we had lots of activities. There was new profit coming from nonconsumer business. So this is just to -- I have to keep repeating about this to brainwash your image about Phison. This chart will show you our Q1 revenue is still 30% -- around 30% in consumer. Controllers still maintained like 20%. Something we have -- some big growth is embedded. Actually, when I read my report internally, gradually, by every quarter, we increased the number and also increased the share. The other one is about the gaming modules. At Phison, we've been invest 3 years into the gaming business. We got some very good market share right now. But in second half of this year, we are keep working with the other 2 big guy. By CQ3, we are going to launch the other gaming applications. So please keep in mind. In Industrial module, we have a very strong growth in the CQ1 this year. Because last CQ2, lots of developed countries such as Western Europe, U.S. lockdown, a lots of deployment of equipment are postponing. Since the last CQ4 and coming -- and the last CQ1, we got a lots of rush order. Unfortunately, we are not able to fulfill 100% what they need, but we're still trying and the demand on industrial is still very strong. So revenue, I think you know about our revenue. It's close to TWD 12.9 billion and our gross profit by Q-o-Q, we grew by 28%. So this is some business performance summarize. Controller keep maintained 20%. SSD controller including SATA PCIe Y-o-Y growth is 17%. One thing is our expectation, our PCIe controller Y-o-Y we grew 96%. And we have many design win with the semicon on the Gen4 controllers, which start to have a shipment and went up by CQ3 and CQ4. So we still can expect a very strong growth in the PCIe controller in Gen3 and Gen4. Yes. Modules, we have 74% are coming from modules. And one thing I need to highlight about this much, they have a China gaming phone makers Black Shark, they announced they are very high-end smart gaming phone, which using Phison BGA SSD. At Phison, we are the sole supplier. And we are -- Phison is the first one to bring in their NVMe controller and modules into the Android phone. So because of that, recently, all the Android phones except Samsung, now all working with Phison for the embedded BGA SSD into their gaming phone. So we can expect by 2022, they have a very big growth on this business. They already have 2 smartphone makers that team members already stay in the Phison office to develop -- to have our core development on the new BGA SSD into their systems. Industrial module, you can see gradually, we are growing. And it looks like coming years -- coming few quarters, the demand is still strong, but we are not able to fulfill what they need. And in Gaming SSD is a big growth, 39% and embedded order is 32%. We're also able to see the embedded business is going to grow in the coming quarters. And overall, the revenue, last year, CQ1, we are doing good because at that time, the demand is strong, but unfortunately, the CQ2 loss of lockdown, our revenue and margin dropping, okay? And it looks like this CQ1 it will start to recover. Actually, since the last CQ4, we started to recover our revenue. And Q1, we have a lot of bad luck, we are not able to ship on time just because our supply chain is so tight. But CQ2, I think we have some breakthrough and revenue already differ on April, our announcement. Gross margin, our peak was last CQ1. Then after lockdown, we suffer of market, start to lower the demand and -- but it looks like this Q1, we already recovered. Actually, the margin recovery happened by March. By January and February shipment, a lot of order coming from last CQ4. So overall, the margin because of CQ3 doing good, so we have a kind of a significant pickup in the Q1 overall result. I believe by our CQ2, the gross margin is still able to differ in the high level. And we've made also some breakdown about our profit comparison between the last CQ1 and this CQ1, what is different? Basically, last CQ1 overall EPS is TWD 9.6, but we have TWD 1.6 coming from the exercise of our investment. So basically, this year, CQ1, the business in the operation is much better than the last CQ1. So if we compare at the coming 5, 6 quarters, 7 quarters, our operating profit is record high, so means we are getting the more good opportunity to make more profit to the company. This is some highlights here. Revenue is almost flat Q-o-Q and Y-o-Y. And inventory, you can see the inventory here -- not yet. We have a good inventory management. So the gross margin overall CQ1, we have a big pickup compared to the last quarter CQ4. And again, in our OpEx, we still have a high percentage into the R&D activity. So we keep our commitment then keep investing more into the R&D. Okay. So the gross margin, 29.5% is a high ranking in the record, not top ranking, but I believe potentially CQ2, we may hit the top ranking in the -- autumn high in the gross margin. So this is answer. I think you are more concerned about inventory. Since the last CQ1, market was good. Inventory is in a high level. It's 12b. But after lockdown, we start to manage the inventory, we lowered to the 10b at the end of last year, but now we're back to the 13b. And by end of April, is go to the 14b. The reason is we are not in intention to increase our inventory, but we got so many orders. So we need to keep buying whatever the material, the power IC, the controllers, the wafer. So by the way, the supply chains wait -- at Phison, we are not able to ship everything on time, means by April revenue is lower than expectation just because we are not able to ship because of logistics is -- supply chain is so tight. But in coming few months, demand is still strong. I think we're able to maintain our high-level revenue. So about CQ1's business highlight, we awarded by the PC gamer about the best SSD for gaming in 2021. In March, we also awarded by the Storage Newsletter, the best SSD controller in 2021. Now we got the other award. This is just to prove Phison, we invest huge R&D activities, now we got a very good response. This also surprised Phison actually. Last Sunday, Intel announced about the platform now is working on the Mars. And on the picture, you can see Phison SSDs there. This is just a proof, is a big evidence Phison, we are doing good in engineering and doing good in the quality. And this also helping Phison to make our good image to the worldwide Tier 1 player. Since then, we got so many good response, and we also got some other new project approach from the key industrial supplier. So this is a surprise, but this is also -- is an honor to our R&D engineers. They did a good job. About Q1, our business highlight. Retail, actually, we have our first -- worldwide first USB SSD control, the single chip solution, and we help our semicon customers to build 4 terabyte external SSD now already in the market, is the highest density in the world. And we also announced our SD 7.0 SD express card, now start to doing design in with the notebook makers. PC OEM, because of a supply shortage in Phison, we got good enough of controllers. We got many design win projects with the notebook makers. And also, we are working for 3 semicon with our PCIe Gen4 controllers start to went up. So we can see more revenue coming from Gen 4 controllers in the second half. And also, because of a controller in EMC shortage, we also got a few big Android phone makers and 2 semicon start to use Phison UFS controllers into the smartphone to replace EMC. We have no intention to design the high-end UFS controller because high-end UFS is only in the UMC phone. And this dominant by 3 semicon who are able to produce the DRAM and 2 Korean all 100% in-house. American DRAM makers, they use external controller house. But internal, they already have 2 controllers ready, start to deliver sample. So means for high-end model eventually, these 3 DRAM makers, they are only using their in-house controllers. But Phison, what we did is we directly go to the smartphone makers. We proposed the total solution to them with the middle, low-end UFS discrete solution, and we got a very good response. And right now, we have to ramp up our UFS controllers mainly for middle, low-end discrete UFS demand. So we have 2 semicon working on this, and we have our China investor partner. And also, we start to work with every smartphone makers. Also, we engage with the smartphone AP supplier. We build the ecosystem together with them. So for sure in coming years, in UFS, middle, low end, Phison will play the position that today the eMMC And Phison able to provide the controllers and also the modules. And our Gen4 new controllers, 12-nanometer start to have assembling to the customers, and this will be our next growth in the Gen4 business. In gaming, we have launched the first BGA SSD into the gaming phone. And second half, we believe we got the other 2 big approach design win is going to announce. So that's it. And we also just announced that we have a PC gamer, the award, the best controllers. So Phison, by the way, in the coming summer season, we believe it's a traditional, the big demand in the gaming business. So we are preparing a material for that. And for server application, we also got a few design in, in the China and U.S. market. And our new controller 12-nanometer is coming back by March, then we're able to deliver the high-end data center SSD by end of this year to the Tier 1 for testing. And in Industrial, because Industrial now is so strong, and we are on the Mars, recently, we got, again, so many inquiries. So automotive also is our Phison next, our approach. So Industrial will maintain -- is a strong demand in Phison business. This Q2, our outlook, we start to ship our Gen4 value line SSD in the retail, not only Phison, but also with our partners, brand partner and the semicon partners. So this will help Phison to get more market share and revenue. And PC OEM, Phison Gen4 working with 3 semicon already in all the Tier 1 PC OEM under design in. So we also start to shift the controllers to them and ramp-up will happen by Q3 and Q4. In gaming, we are working for the other 2 system makers. So hopefully, by CQ3, we are going to launch the first -- the other one, system makers ecosystems. And server is ongoing. Industrial, we are mainly focused to some of their security. We are shipping some very high-end security SSD to the U.S. dedicated agency. So this is helping Phison to get more market share and also making the much better profit margin. So the order of semicon, Phison, our controller mainly in the 28, 40 and 55 are not -- and also Phison, we are different with other semi -- other controller house. We also design our own SSD PMIC where Phison is selling controllers or module all with the Phison in-house PMIC. The 8-inch is super tight. So we don't see any release in coming 2 years. So Phison, we need to keep really strong relationship with our foundry, TSMC and UMC. We're also working very close with the packaging house to make sure when we -- our controller flash is ready, we're able to direct all to the packaging and testing. And talking about the NAND flash, basically, since February, I believe the component shortage may cause the system makers start to reduce -- to downsize the focus. And it looks like this happens, smartphones start to downsize and mobile start to downsize their focus, right? But by February, personally, I think the flash may go into soft by CQ3. But just months ago, the Chia coin, the cryptocurrency user storage start to getting crazy. Now I believe CQ3, the flash will get tight again. And from the informal notification from the semicon, they are going to raise the NAND flash price around 10% by CQ3. This is unofficially. So we are waiting and monitoring. So Phison, we keep investing very strong activity to R&D. So enterprise and security and recently Chia, we are not like to focus to Chia, but Phison at least, we need to figure out what kind of SSD algorithm is the best for Chia. Last Friday, we found some good algorithm. So we are going to have some white paper to our customers. And with this kind of algorithm, we're able to create a much better profit on the SSD to Phison. So Phison in the -- our Q1, we still maintain with a strong investment in R&D. This is our commitment to measure every quarter Phison able to deliver the new products to the market and to the customers. So our head count, you can see by end 2020, we have 1,500, now we're already going to 1,600. So by end of this quarter, we are going to 1,700 or 1,800. We still need a lot of engineers because of so many projects accruing there. Okay. Phison's strategy will define as so-called 5 plus 5. The left 5 is the present business model. We have IT, controllers, modules, business service and full turnkey. This is our business model, which is able to create much better gross profit and net profit to the Phison. And the business section, we have these 5 gaming enterprise, automotive, industrial embedded, every one of this business can become an independent company, means this is a big enough in the revenue. But Phison, we wouldn't speak off anything. We just use our business model to create more revenue and profit to the company. So this is our goal and our strategy. So recall, there's some Q&A, which I'd like to make a brief report here. The Chia cryptocurrency, actually making a lot of maybe you can say the noise or demand in the market. And we get a strong demand, but we are not going to fulfill what they need. We need to use our resources to fulfill first to our designing projects such as smartphone, TV, notebook, auto. On the other hand, Phison needs still to study what kind of algorithm is good to the Chia cryptocurrency. So now we found something good, and we are going to announce to work with somebody. At least this is helping Phison to sell more SSD and create a much better gross margin. Looks like controller supply is there, but our demand is getting too strong. So yes, if you ask me, our supply demand is getting worse because getting so many projects. But I visited to UMC and TSMC recently, we tried to ask some more upsize support by CQ3 and CQ4. So if there was some downsize in the forecast, in the phone or notebook or other applications, this definitely will help Phison to get more resources in the foundry. By the way, if Phison, we are only in the controller business. If you can know how many wafers are able to get, then you can know my revenue is there. But at Phison, we get certain of controller wafer. We're able to allocate the wafer go to controller business or go to the modules. If go to the modules, for example, 2 terabyte SSD was at $200 FOB from our company. Because of Chia, we're making some new algorithm, we're able to sell the drive up to $300, with the same materials, different technology, different applications. But if I'm only selling controller, I can raise controller from $5 to $10, but just only $5 extra income, we build the modules. We gain extra $100 revenue with $100 gross profit. So again, this is our business model, and we're able to create the net profit to the company. So controller shortage actually is good to our module business. So this is asking revenue is the same why EPS is same as last year. But I need to highlight, look to the last CQ1 versus CQ1, the revenue is almost flat. Actually, the last CQ1, the flash was in shortage. But unfortunately, because of CQ2 lockdown by COVID-19. So revenue dropping gradually. But when you look to the margin, last CQ1 was at 30, and this CQ1 almost close to the 30 means it's flat. The difference is CQ2 versus last CQ2, personally, I believe there was big growth in the revenue and big growth in the gross margin and also in the gross profit, okay? So I believe that CQ2 and CQ3, we still stand in a very strong demand. And with our business model, we're able to adjust our portfolio to make more profit to the company, then invest to the R&D and also share to the return to the shareholders. Wafer is tight. We keep very good relationship. We create value to both TSMC and UMC. They recognize Phison, we have a very unique position in the market, then they are more willing to support to Phison. About testing, packaging, we already we -- since the last November, we asked the packaging house to increase the price. We talked to the substrates. We're able to make the prepayment. We're able to give them some price increase. So in packaging and testing, I think now we are doing good. Only problem is wafer still not enough. Even though we got the upside, we are still not enough. Phison, our business, we already diversified a lot of business to the different portfolios such as auto, gaming, embedded, industrial. So basically, I don't worry if the cycle goes to the downtrend, I believe if IT market go to downtrend, everybody suffered, of course, Phison suffered, but I think we just only minor suffered because of different portfolio and we're able to manage. So I don't much worry, and I wish the downtrend come as soon as possible because during downtrend, Phison, we have with our business model, our strong finance, we are able to react to the market. For example, last year, even downtrend happened by Q2, Q3, we're still able to grow the revenue and making much better profit. So I don't mind the downtrend coming because we're able to manage with our business model. Okay. So how will we -- I think this is our portfolio. We have so many different portfolios, so many different business model. So I don't mind and I don't worry about it. Supply-demand basically fresh CQ3 originally, I thought will be go soft, but because of cryptocurrency Chia, I believe Q3 the NIM were back to strong and already 3 semicon announced they are going to raise a price on the NIM. So we guess we wait. Phison have our strategy in China. Last year, we put our subsidiary merged with our JV company. The reason is we need to use a China activity to get the China business. And this is doing good. And I can see they are spending and getting more market share in China. And Phison is one of major shareholders who are able to gain not just only from business, but also from capital gain in the future. Colorado is mainly for the enterprise SSD controllers. So we keep investing and return will happen only after 2 years because this is a long-term investment. So what is the Phison vision? Again, this is our 5 plus 5. Left is a business model, right is the target market. Each market actually can be independent company and can be big growth. Phison will cover everything inside the Phison, and we are not going to make a spin-off. But within 5 years, I believe every segment we're able to grow to help Phison get the more revenue market share and also profit. So this is about the ESG's ranking. To be honest, in the past Phison, we are not focused on the ESG. We now have a dedicate department. But since last year, we start to invest, organize a good team. Now in Taiwan, OTC ranking, Phison now already in the top 6% to 20%, also highlighted by OTC, we have a big improvement. MSCI ranking was CCC because we did nothing. But just last year, we start to getting aggressive, prepare the document. Now we're already in the BB, I can see very soon, we will be upgrade again. Okay. So this is others, all the accumulated question. Any we can go to the line.

[Operator Instructions] If not, maybe I'll start a few. First of all, thanks KS. Maybe could you provide some updates on the flash and controller price trend for coming quarters? And after the strong margin performance in first quarter, what do you expect for the coming quarters?

Actually, Phison shipment January, February, which we shipped the order from last CQ4 with the reductive low profit margin. The reflect on the margin was start from March. So we also have a lot of backlog. We are not able to ship on time by March and April. I can see in CQ2, we are going to be strong in the revenue and also the gross profit. Talking about CQ3, I believe even though they have some adjustment in the system house because of material shortage. But, Phison, again, we have so many portfolios in the business and also the crypto, Chia, is helping us to gain there some other new business. So I believe CQ2 is strong. And no doubt, in revenue, we are able to hit the record high, the all-time high in CQ2. And profit -- gross profit potentially also may able to hit the all-time high. CQ3, I still believe the demand is still strong. So coming few months, I think we need to work very hard to get more supply from TSMC and UMC.

Yes. And we have a few questions from the [ Xiogrin ]. First thing is Kingston stake has normal ratios in 2020 annual report. And Simon is asking why is that? And the second question is the impact of Intel's new 10-nanometer CPU to support the PCIe Gen4. And also what's the implication from Silicon Motion's bullish guidance?

Okay. Phison already sold back the [Technical Difficulty] Hello, Simon, you may have to -- you have echo again. Okay. Let me answer one by one, okay. Last CQ3, Phison already sold back the KSI share back to Kingston, so I think you've got this kind of data right. So why -- then by law, we are not able to show any report. So Phison has nothing to do with the Kingston. They are just our customers' partnership. We work very close together core development, but we are not in JV anymore. Second question about the Intel CPU. Basically, I don't much worry because Phison, our allocation in the wafer for Gen4 swapped, this year swapped. So we are trying to add more supply from TSMC. If I'm able to get the more supply, then I may have a concern of Intel, but at this moment, swapped. So I think I don't have any concern on it. And about the SIMO's bullish guidance, actually, you may need to ask, they are customers -- the share of their customers. If they have customers from, let's say, 10% up to 50%, then you have to ask why and what's going to happen. I am not going to say -- Simon please, Simon please. Okay. You may need to ask, my understanding there is a UFS controller ramping up because of the ecosystem. But Micron also has internal controllers already. So if a customer occupies like 40%, 30%, 50% of this, they have a new share reasonably, then you would ask how about next year. okay? So this is my comment. And I have no any interesting to answer where is the position. But I'm only looking to Phison's, our business, how we're able to make more money.

Thanks, KS. Simon, do you have a follow up?

Yes. Can you hear me?

Yes.

All right. So you have a background, that is Chinese language. So not easy to find how to raise the hands or raise the questions, sorry. Maybe next time, you guys can convert Chinese background, although where there seems to have maybe English, if you don't mind. But anyway thank you very much. So very quickly, you know when we look at the NAND flash industry, the industry consensus indicates about 35% big growth and then the maybe Phison recovery. So how do you clear the NAND industry cycle and then the implication for Phison? I mean the simple question is, how do you assess over Phison's top line growth for second quarter of 2021? And then the -- yes, you said gross margin not really improving year-on-year, but any color for the gross margin for second quarter and 2021?

Okay. Let's go this way. Phison, we are not a NAND manufacturer, we just are NAND users. So we don't mind the NAND manufacturer to keep investing more, making more NAND, making NAND more cheaper. So again, go to Phison, our business segment, we are going to use more NAND flash in the coming future. So we wish the supply getting more, the price getting better. Hello. Simon you have to mute. Okay. So I have no any comment on how the supplier to increase their output, but we are happy to see they have a more output because look at here, Phison, we have over 74% business coming from module. So if the NAND player supplies more than enough, price is much better or lower, we are more happy. Then we're able to create more systems in storage to support to our customers. Phison, we have 2 main business, controllers and modules, right? Controller is good, it's important, but I'm still always a question how controller company able to make more profit from controllers, since you have a big investment there. And for the mainstream controllers, semicon, most likely they want to use that. For example, the uMCP are dominated by 3 DRAM makers, 2 Korean, 1 American. And 2 Korean is 100% in-house controllers UFS. And American, they also have 2 controllers UFS ready. So if we delay on that, I think I'll be [indiscernible] in the next few years. But good thing is Phison, we have so many self-control, I define so-called self-control module business. We made the customization. We made a lot of new different applications, create the value that able to help Phison gain them more profit. And I want to share with you, recently, we just -- in the last year, we started to codevelop with the U.S. agency. We created the cybersecurity SSD, same material, 2 terabyte in market $200, but with support of the cybersecurity, there can be $350, same material but different price model. So anyway, this is the things at Phison we are going to build our own ecosystem, our self-control business that we're happy to see the NAND supply bit increase every year.

And also another question from Xiogrin -- from Jeff. How much and how many times was your controller price raised this year?

Okay. Phison, we decide every controllers. And you may not know Phison also develop the power IC PMIC for our controllers. So let's talk about PMIC 8-inch. We have been raised 3x from the supplier in the wafer -- 8-inch wafer, 3x. So we also deflect our PMIC price 3x to the customers. And the price already over 100% because of PMIC it's so tight, okay? And talking about the controllers, like USB, memory card in the past couple, the price is too low. Those price also already deflate 60% to 80% in the market and we raised 2, 3x. And the most tight in controller is the EMMC -- EMC. We're not able to raise so many times, but we also increased the price around 40% to 60% to deflect the type in supply. SSD, we also raised 2x because, again, demand too strong. We're not able to get good enough supply. So overall, we don't like to raise the pricing controller, but we have to because the wafer price, packaging price, testing price was increased from our suppliers.

Maybe 1 question from me. So for the coming quarters, as you mentioned, second quarter is likely to be a record quarter. So probably by [indiscernible], what do you expect to deliver a much stronger growth in coming quarters and which segments could be below your average?

Actually, this and next quarter, industrial was strong, embedded is super strong. Gaming -- not yet, gaming is still flat, but I believe next quarter, CQ2 gaming [indiscernible] very strong. And controllers is always strong, but we are not able to fulfill the demand because of type. We still need to keep some controlled inventory for our in-house applications. So -- and the next is about the crypto Chia. This is strong, but we still need to think how to react on this extra demand.

Okay. Thank you.

I saw Simon has a question, but I'm not able to read here.

Okay. He has a follow-up on the previous question on ASP. He's confused with the 1Q ASP high for controller and noncontroller products. So could you probably recap the 1Q price trend in terms of Q-o-Q?

Okay. Q1 controller price in the USB, memory card, almost 80%. PMIC almost was 100%. SSD controllers about 10%, 20%, 30%. Yes, they also happened. But the problem is a controller -- there is a controller, a SATA controller was $2. We raised to the $2.50, means raised 25%, it's good. We got extra 50% margin. But on the other hand, packaging cost is increasing. But we use the controllers to build a module, for example, 240 gigabytes SSD was $22, $23. Because of controller shortage, we're able to put the drag to the $28. So Phison, I can either sell a controller, get extra 50% of margin or I decided build the modules to get extra $6 of margin. So I'm smart, right? So I think Q1, we are trying to take the more controllers to the -- into the module business to help customer to get the more modules. But on the other hand, for designing controllers such as our partner, Kioxia, Kingston, Micron, WD, YMTC, we keep supply the controller to them. Even though the price increased just better, we have to lower it to our commitment. So Phison able to met the more margin from the module business. The margin improved so little, to be honest, Phison, generally shipment which follow CQ4 price. February shipment followed the December price. March shipment followed the January price actually, from order to shipment, we need to have a 30 to 60 days. So March, we have a much better margin. So on the same time by April, May, June, I think we are in the high level gross margin. PCIe is -- we have 12 and 28 mainly in the TSMC.

Okay. Maybe 1 follow-up from me as well. So as you improve your gross margin this much, you also have aggressive R&D investment plan in coming quarters. In your slide, we saw that your R&D headcount serves quite a bit in first quarter. So maybe you could just share your target for the year? And also if there's any change to your R&D headcount target by 2025, as you mentioned in prior quarters?

Basically, R&D headcount to me, no seating until 2023, no seating because we still have so many projects queued in. We've just been requested by the 1 of Korea semicon to ask develop controllers. We also asked by the U.S. company to do the other controllers. Japanese also asked, but mostly we don't have resources. So many projects we have to keep on hand and trying to find a resource. So my goal is I hope if I'm able to get enough engineers by end of this year, we need to hit 2,000 in engineers. By 2023, we wish to have 2,500 to 3,000 of engineers. So this is a heavy expense. But Phison business model, we're able to create more than enough profit to subsidize this R&D activity.

Okay. And 1 follow-up. Given that R&D headcount plan, how does that imply to your R&D budget in terms of either absolute terms or a percentage of revenue?

Basically, now we still keep like 12% to 14% of total R&D activity. We are going to keep this -- this kind of a number. Of course, when our profit getting better, we are going to enter more. Okay. So I think 12 plus/minus of our total expense is our target. Simon has some in the writing. So let me check. Auto NAND spec and also auto NAND controller, please. Today's auto -- the NAND in the automotive is relatively small because it's only like 16, 32, 64 gigabyte. Imagine your USB reached already 128. So a car using less storage than your mobile storage. So this business is good, but too small in the ASP. Phison, we have high-level enterprise level SSD controlling and modules for the auto, okay, for the auto [indiscernible] application. But this only will happen in the '22 or '23. So we are investing, developing right now, but we are in no rush. So when times happen, we will be there, we will stand by.

Okay. Just 1 more question from Simon. Also asking YMTC China NAND flash sourcing.

YMTC still is a Phison main supplier. We are working very hard for the 128-layer and start to ramping up from coming zone. So they are our very important supplier. Phison controller YMTC China meaningful? Yes, why not. China keep looking for their own products, their own design. And looks like YMTC flash is a proven in technology, also proven in quality. So it's meaningful. And Phison, we have JV in China that is going to support more into YMTC business. So by the way, I think no doubt China is the biggest NAND consumption in the world. So we have to do something to make sure we are getting more share in China. CQ2, yes, sales definitely in the all-time high. Gross margin, I believe, also in the all-time high. If COVID-19, no more impact to the market, okay? If, COVID is not we can control, but now look to the May, June still very strong. Phison, we don't provide the guidance because our history and, Phison, our business model. But I think April, we are in the TWD 5 billion in revenue. Overall, we believe we're able to keep flat or grow it a bit. But this depends on the supply chain. We're still tight in some flash memory. Otherwise, we will...

[Technical Difficulty]

Simon, can you hear me? You may try to unmute to see if you still have echo.

How about now sir?

Now it is good.

So yes, we really appreciate your great presentation and all answers to the questions. But maybe almost the last question is, your foundry [indiscernible] UMC is a great in the company, which will make continuously your controller. And the meanwhile, your competitors will use continuously the TSMC. So the question is, TSMC is a very big foundry company versus the UMC relatively much more similar than TSMC, that really means some twist of the benefit of item that occurs on new capacity. So the question is to promote PCIe fourth generation controller or more advanced, do you need [indiscernible]? In other words, are you still okay with the 28 node, and once the UMC capacity still picking up for your double-digit strong growth?

Simon, I think you didn't...

[Technical Difficulty]

Okay. Simon, I think you didn't make a close follow-up about Phison's, our portfolio. Phison's, our 8-inch, 55 nano, 12-inch 40, 12-inch are in the UMC. Our NVMe 100% in the TSMC 28 and the top. And since last year, we already have more than 20 -- this year, we have more than 20,000 pieces of wafer support from TSMC. If talking about the 28, TSMC is our biggest supplier. So hopefully, by next year, 2022, we're able to grow to 40,000 to 50,000 piece per year. So we cover both UMC and TSMC.

Maybe 1 follow-up from me. So regarding your foundry capacity, when comparing to 2021 versus last year, how much do you increase your foundry capacity support?

Basically, we give our forecast to the foundry, both UMC TSMC, but unfortunately, they're still not able to fulfill what we need. But again, now it's just May in '21. Still too early to talk about '22 whole year supply. I deliver with important message to both TSMC, UMC [indiscernible] Phison, we are doing a lot of activity in the design win. They're able to risk all our achievement every month. So they can make related adjustment anytime. So I'm still quite optimistic. We are going to double our wafer supply next year. Although we are not -- at this moment, we not get 100% commitment. But when time flying, we get the more design win, we get a more award and also from -- the approval from our customers, Tier 1. I believe we are able to get more wafer supply. So this all depends on Phison's R&D activity and also our position in the market. So if they agree, we have a position, I don't much worry about our supply next year.

Yes. So probably it's still too early to tell the 2022 number, but how about this year versus last year? For the past being committed already by foundry partners.

Basically right now, the foundry, what they do is the next year is flat as this year. This is a principle. But depends on each different company, right? So I think we're able to get some more because of different our position. And we're also making a lot of ecosystem partners with a Tier 1 chip makers. And they also need Phison, so they were total foundry to support us. So I don't worry too much about it.

Okay. And also 1 question on the overall smartphone market from Randy. Randy is asking, the Android market seems to have more news on softness, some supply related, but also demand seems mixed. So are you seeing any softness in this mainstream controller for that factor?

Actually, since last year, when Huawei start to quit the smartphone market. Those few big China phone makers already give a forecast in this year, which is 2 to 3x of Huawei's total demand. So last CQ3, CQ4, we already know they are going to make adjustments, and this happened, right? So I'm not much worried about that because our controller is still not able to fulfill. Even though they adjust, we're still not able to fulfill what they need.

Randy, do you have a follow-up? Then maybe one for me. So still in the smartphone-related market, so you already have project wins and shipment to Xiaomi on your BGA SSD. Could you update us with some of your other projects regarding the BGA SSD in coming quarters?

All the Android phone maker, except the Korean phone makers are already approached Phison. We have 2 customers now start working in Phison office to co-develop the driver of the Android phone BGA drive. We believe next year, Phison will cover most of the high-end Android phone -- gaming phone market and looks like we are the key supplier there.

Then if we compare the BGA SSD solution, what's the, say, pricing or margin difference versus other product lines?

This is a proprietary customization products where the margin is compare -- is better than the module business. Did that -- I mean, the better than any other module business because these are customized products.

I see. And is there any estimate or expectation on the smartphone SSD contribution revenue probably this year or next year in terms of percentage?

Okay. We got the focus from the 5 phone makers who is now doing the designing for next year. Overall, again, this is so-called forecast, okay, is 8 million to 9 million pieces. 8 million to 9 million piece in a phone is small, but 8 million to 9 million piece SSD to us is big enough. So I don't know if that's true or not, but at least Phison is a sole major supplier, I think we're able to get the most of the market.

Okay. And we have a few questions from [ Xiogrin ], also from Simon. First is on the dividend policy and the CapEx trend this year and next year.

Dividend policy as past, we keep 55% of net our earnings per share, 55% to 60%, okay? But again, Phison, we are going to keep hiring more engineers. We are going to build more building to that engineer working. So we are still growing. And right now, our revenue is close to the TWD 2 billion. My goal is to go to TWD 3.5 billion within 2 to 3 years. So we are going to increase the inventory. We are going to increase the business. We are going to increase headcount. So companies need to keep the cash. And for many years, Phison didn't raise capital from the market. So if need, Phison may go to get the money from market. But if through the earnings, we prefer to keep 40% to 50% on hand, at least 40% on hand, to grow our business. And the effective tax rate, the CapEx, basically at Phison, we don't have [indiscernible], so we don't define the CapEx, there's OpEx. The only thing is a new building. Every 2, 3 years, we are going to build a new building is not that much enough -- not that much number still affordable. So we don't have a CapEx. So we only got OpEx. And effective tax rate, Taiwan tax, I think now is at 20%. We still have some incentive. I think overall, we are in the 15%, 1-5.

Okay. And also 1 more question asking, is there any negative impact from OEMs production come back, meaning probably component shortages that needs to [indiscernible] by OEMs?

Again, since February, I already talked to my people, they have adjustment in inventory from system makers. So now it looks like happening, right? But we already prepared for that. So if even though they made adjustment, we're still not enough to supply. So I don't worry on that.

[Operator Instructions] If not, I think KS, we can wrap up the call.

Yes. Thank you. So overall, I think our CQ1 result. To be honest, the profit is over my personal expectation. Because January, February, we are shipping more goods followed by last CQ4 orders. So this is our expectation, means we got some outperformed performance, they outperform the profit, so we decided to increase the R&D expense. CQ2 I believe we are in a very good shape in the revenue and profit overall and also some market share. So now what we have to do is working hard to ask both TSMC, UMC to give us more supply wafer in Q3, Q4 helping us to fulfill the demand from our customers. And every quarter, Phison will give a new surprise to the investor. CQ1, we have BGA into the phone. Now we have on the Mars. CQ3, definitely, we are going to have some good news on the gaming business. So please keep waiting. We have a commitment here. We are keeping investing more in technology and at all the return to shareholders is a much better profit. Okay. Thank you for your time today.

Thanks, KS. And also thank you for your participation on today's call and here. Have a good day.

Thank you. Thank you. Bye-Bye.