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

[Audio Gap] Phison's 2021 Fourth Quarter Earnings Call. This is [ Jack Chen ] from Citi semiconductor team serving as host today. Today, we feel honored to invite Phison's CEO, Khein-Seng Pua, to join the meeting. For today's agenda, we will first begin with the fourth quarter 2021 results update and business outlook and then enter Q&A session. As a reminder, this meeting will end in 4:30. Right now, I would like to turn the call to CEO, Pua. Mr. Pua, Please go ahead.

Thanks to [ Jack Chen ] from Citi. Yes, we have Phison's 2021 fourth quarter's financial report update. I think we all agree 5G is going to trigger more NAND application, and we can see a lot of new storage keep asking for higher capacity. So this is -- I believe, Phison, we are in a very good position because we almost cover every kind of application, provide the controller, IP, the full system and the full turnkey. And so many years, a lot of investors keep saying Phison is a consumer-related company. But I like to use this chart, Phison's 21 years history to explain to you. At least, at this moment, Phison, we are far away -- we are still away from the consumer business. The first 10 years, Phison, we developed the first USB SoC for the -- we name this a pen drive. This is a totally new market, and Phison, we are one of the key players. So from nothing to USD 1 billion, we made it within 10 years. First, start migrate to the embedded system triggered by April by 2007. Phison would try to get this business, but unfortunately, we are not able to make it because we don't have a good relationship. We don't have any good channel to talk to those key players. So in 2010 and 2015, in these 6 years, we are stuck in the consumer business. So during that time, you're saying Phison is a consumer-related company, we agree. But during that period, Phison would start to have a heavy investment into the R&D activity, we built a lot of fundamental IP and a lot of system integration. By 2018, the opportunity we worked with AMD, we are successful to bring up their PCIe Gen4 SSD within 9 months, which was launched by 2019 July 7. With that product's launch, we successfully attract a lot of Tier 1 system makers who recognized Phison are capable in this high-end controller system development. We achieved a lot of new programs from either semiconductor company, NAND manufacturers, system builders, asking Phison to cooperate, develop the new products to them. So we can see Phison with a big growth after 2019. The reason is everything coming from heavy R&D investment. So Phison today, we cover most likely every application, the segment, which need a lot of NAND Flash storage. So this is a breakdown about our last year 4 quarters' revenue. You can see there our controller portion by dollar amount, by percentage is all-time high. We grew a lot in controller business just because of we gained many controller projects from the semicon. I still believe by 2022, Phison will still able to grow rapidly in the controller business with dollar amount and also the percentage, I believe we're able to increase. And you can see the consumer business is down to almost 20%. This is fully follow our expectations. And the one so-called embedded ODM, we started to enable this business from the 2021. Now, growth rapidly, and I believe this will be our major cash cow and also generate a lot of relationship with the system makers. And these embedded ODM modules, which cover the mobile phone, PC, server, automotive. And we believe Phison, with our consistent heavy R&D investment, we're able to gain more business. And I wish the shareholder, the fund manager, investor, you can recognize, Phison, we are not as a consumer-related company anymore. We are the so-called technology company. So the revenue by fourth quarter last year is $16.8 billion announced already, and the gross profit is $4.7 billion, okay? And the gross profit grow by 61% Y-o-Y and the record high in the same period in CQ4. And last whole year, Phison achieved a whole -- we hit the revenue in all-time high, which is $62.5 billion. And some highlights here, controller is record high with the dollar amount and also the portion, 25%. And the PCIe controller, every quarter, we keep rapidly growing because we are pioneer and also we gained a few more semicon projects. And we also designed with a lot of our modules into customization and embedded ODM to the system makers. So we expect by this year, controller is going to grow in our revenue. The PCIe controller, we're also able to gain market share. By modules, I need to highlight about the so-called BGA SSD. This was triggered by Intel many years ago, but it looks like the market didn't take it. Last year, we made it this into the smartphone, Chromebook, automotive and some industrial motherboard. And also, we put this to the Mars. If you read the news that NASA have 1 investigator in their Mars, which is using Phison BGA SSD. Next year, Phison, we also work with our system partners, we are going to ramp-up a lot on the BGA SSD into the computing business. So we are expecting 2023, this will become one of our major business. And embedded ODM is really almost a 2x growth versus Y-o-Y. And by 2022, this will become our biggest business. So the overall revenue is at $62.5 billion. And the gross margin, CQ4 is at 28.4%. And shareholders may ask what happened? Remember, last year, Q3 end of the same or the memory business going to the winter demand is that [indiscernible] but anyway, we not agree. And last year's CQ4, Phison's, we are strategically to increase our inventory. The reason is we got so many design wins and forecasts from the embedded ODM customers, which we need to start to ship by CQ1, CQ2 next year. And personally, I believe every time go to the CQ2, NAND manufacturer, they will prioritize their NAND supply to the main system makers such as phone makers, PC makers, server makers. And at that time, Phison, we will be in the lower priority to gain the NAND supply. So when market going slow down, that is our best timing to increase our inventory. So we make it happen. But follow the so-called financial rule, there are so-called LCM, definition of LCM is here. We have to write-off some inventory -- actually this is not a loss, okay? This is just a move to prepare for next. But you can see by CQ1 next year, actually, the market price has bounced back. So those write-offs already is moving back to our financial report by this CQ1. So, I don't much worry about this. And in the future, Phison is going to grow more business. And definitely, we are going to increase inventory, especially in the slow season. And this kind of story may happen again. But I think this is our strategy to big inventory, then to grow ourselves. So I don't have any concern on this, and I wish you also agree to my point. The earning per share is -- EPS is $9.19. And also, this is our all-time high in CQ4, okay? So versus -- I believe this is one of our good performance compared with last year. You can see, last year, we had the disposal of our Hefei entity. We again extract $12 EPS back. This year, this is everything coming from our business. So income statement, you may have more concern in our EPS, but I need to highlight again, look to our operating expense. Even though the gross margin is -- gross profit coming down, but we still insist to increase R&D expense. Especially last year, Phison, we increased more than 700 new headcount in engineering. So our cost actually is increasing, okay? But I think this is a trend Phison have to keep investing into the R&D. And the total ROE, I think you may care about more in the ROE. So overall, Phison, we are -- I believe by CQ4, we are doing good. And earnings per share, I think we're also happy. The whole year is $41 EPS. And balance sheet, in this, you may have concern about the inventory. By CQ4 2020 is $10 billion by inventory. But since last CQ3, we have structured it to increase our inventory because we gained so many design win programs. So by end of last year, it's close to $20 billion in the inventory. But by February, we go to almost $22 billion. The reason is, after Yokkaichi contamination, we already been warned by our customers that we have to make sure we're able to fulfill their requirement by CQ2 and CQ3. So we have to try to build out more inventory to fulfill their inquiry, okay? So the overall Phison ROE is still we keep over 20%. I think overall, we made a good performance to our shareholders. And we also like to announce our February revenue. To be honest, this $5.3 billion revenue is totally out from my expectation and be surprised. February, the working day is only like 60% of January because of Chinese Lunar New Year. But we almost Y-o-Y growth, 45%. The m-o-m, we only declined single-digit. So just 2 months we hit the $10 billion. Phison's all-time high revenue is close to $17 billion. But in this CQ1 slow season, we already made it, okay? So you may ask, is it because of Yokkaichi contamination reflected revenue? The answer is no. It's negative. Actually, by January, February, Phison, we got a lot of demand in the embedded ODM and also controllers. This revenue, to be honest, February is out of my expectation, but overall, it's very healthy. And I believe Yokkaichi contamination impact to the price in the market will happen only in May, later I will explain to you. Storage Newsletter website, they have awarded Phison again 2022, the Best in the SSD controller. So we are in 2 years to get this award. And I still believe by '23, Phison, with our heavy R&D investment, we will get the award again. And Phison, we hit very good products in the, especially, PCIe Gen4 high-performance, our customer. They also gained the award by the best products by hardware and the PC gamers. So we are happy to see this happen. By the way, by CQ4, some business highlights here. In the retail business, talking about the Gen4 SSD. You take out the NAND manufacturer brand, almost 85%, 90% are coming from Phison, means Phison regained the 85%, 90% share in the retail, excluding the NAND manufacturers. So this is why we are good and we feel happy about this performance. And talking about the OEM, we gained 3 NAND makers to adopt Phison eMMC and UFS controller, and we start to ship by this CQ1. eMMC is growing rapidly and UFS also growing very rapidly. But unfortunately, the supply from our factory is still further enough. So we're still trying to convince our suppliers to give more wafer allocation to Phison. And this award is by the OPPO China. This is the first time we got award from the mobile phone manufacturers. This special appreciation to Phison in the last 4 years, we support them a lot in their NAND storage development, supply and their kind of cooperation. So with the award from the phone makers, we're able to have more visibility, better positioned, and we believe we are able to gain more market share from this industry. And we can see that more and more middle- and low-end phones start to adopt the UFS, and Phison, we invited by Qualcomm and MediaTek to be their AVR partner. So we are now supporting these 2 chip makers to -- with our UFS to their phone customers. And in Chromebook, Phison will get a very big market share, and we keep adopting and also design the BGA SSD into the Chromebook. And we can see the big growth by 2023. We have a big program to work with the system makers and the CPU makers. In gaming-wise, unfortunately, because of material shortage, the game console not able to increase supply in the market, but we can see, even though unit not growing, but the capacity is up. Now, the majority is going to the 2-terabyte, which also helping us a lot in the ASP. In the server application, Phison were also awarded by the gaming server, we supply the 2-terabyte SSD for their gaming server, mainly is the cloud gaming. So this is also a good achievement. And Phison, by second -- actually by next month, we are going to have -- organize a Technology Day. We are going to announce our enterprise SSD storage strategy with our partners. So at that time, we are going to tell you what is our policy, what is our strategy and what is our marketing position. Industrial is slowly moving. We are one of the key players. We keep developing a lot of customization products into the industrial applications. Recently, there is a new gaming -- handheld gaming machine, which Phison is a key supplier. And enterprise, by April, we are going to announce more to share more of our strategy to you. PCIe Gen5 Phison will get award by this CES as the best SSD controller in Gen5 and it's going to empty by this CQ3. And we're also working with their semicon, with a few semicon and also a few game console makers. Okay. About semiconductor industry outlook. Yokkaichi contamination, later I will have a chart to explain more to you. And Ukrainian and the Russian war impact to Phison is very minor. Phison only like 20%, 21.5% of revenue coming from that area. So we are basically okay. The most urgent and important to us is about the fab capacity supply, especially we are gaining more inquiry in the 28- and 12-nanometer. At this moment, we're still not able to get 100% supply from the customers. But on the other hand, our demand is keep increasing. So this is a happy trouble. Okay. I need to highlight here, you can see our R&D headcount, we increased almost 700 headcount in 1 year. And I can see by end of 2022, we are going to hit 3,000 R&Ds in worldwide, okay? So we still invest, you can see rapidly heavy in the R&D investments. So last year, we hit almost $200 million in R&D expense. So this is helping Phison to gain more trust, confidence from our semiconductor partners. We keep heavy investing, they award us more controller projects. So this chart is very important. Phison, we cover almost every storage application systems, which I can name is gaming, it's a big market; embedded ODM, a big business; enterprise, automotive, industrial. And Phison is a very unique company. We cover everything from in-house IP, controllers, system integration, software development and the full turnkey products. And Phison is the only unit company in the world, we are able of doing everything in-house and cover every kind of inquiry from the storage demand. We are the only one. So I believe, if you agree, then you can value the Phison potential. Okay. So this is a brief update about CQ4. Then we also cover some questions. Let me finish this question, then we can go to online. Our cash dividend, this morning, we had a Board members meeting. We approved the other TWD 13. So first half January, we already had a TWD 10 dividend to shareholders. So all is at TWD 23, same as last year. Okay. So I think audience, a lot of experts. So I just use a simple chart to answer you about the Yokkaichi contamination and what happened. As a normal operation, when the wafer in day 1, wafer process may go 2 to 3 months, after they go into testing, packaging, then go into system, EMS, doing SMT to the phone, to the server, to the SSD. What we get from the public, again, we are getting public information, based on public information, we made a simulation here. Looks like contamination happened by middle of January. And yesterday, we got the announcement from KIOXIA, they have started to full recovery production by yesterday, means they may lose 5 to 6 weeks production capacity. So this production capacity, the wafer output will happen by April to May. Then go into the packaging and the SMT. Actually, the market, the biggest shortage happened by end of May to June, which this season is EMS most busy season to get material, doing SMT, assembly and the ship to the market. So, the real shortage to the factory, to the assembly house will happen by June. And unfortunately, this is the biggest season who are asking more than supply. So, we have to try to get more our inventory to fulfill at this period when the customer looking for more support, we're able to make the fulfillment. And shareholder asking, investors asking, "Hey, is the Phison lucky"? Last year, built inventory, then Xi'an shutdown, lockdown, then Yokkaichi contamination. I don't know what's next. I hope -- hopefully not happen anymore. But last year, Phison increased buildup inventory is our strategy. The reason is, you look to January, February Phison revenue, big growth. Last year, we again, we got so many design win business. But when the market going to the hot season, we are not able to get full enough supply of NAND. So what we can build inventory is, when EMS, they are going to slow down, semicon asking our help, that is the best timing Phison to build inventory. So by end CQ4, early CQ1 is the season that Phison to build our inventory. Then we consumed by CQ2 and CQ3. So this is not lucky. This is just because Phison, we gained a lot of design win program, we need to pick up the inventory to support fulfillment to the customers. And a lot of shareholders, investors are concerned about our gross margin. So as I mentioned in the first page, by 2010 to '15, we are [ safer ], we are in the consumer business. So you can see the gross margin a little bit, what I can say, [ ugly ] because of the consumer business. But we have slowly migrated to the embedded after 2016. 2019 with the AMD opportunity we built the drive controller system within 9 months, we get a lot of recognition from the Tier 1 partners. They start to award Phison many projects. So you can see our gross margin has improved very rapidly. So we give the kind of guidance to our shareholders. We hope our average of gross margin, 27% plus, minus 3%, which we raised 2%. I believe with our heavy R&D investing and also the more project award from the semicon and we are going to build more high-value products, we can gradually improve our gross margin. But on the other hand, we also wish, in our supply chain, our suppliers, our customers also able to enjoy the profit together. My goal -- Phison's goal, at this moment, we are going to increase to focus into our revenue growth. The reason is, this market is so big and growing so fast. And Phison looks like we have a really good opportunity to cover every segment. So we need to improve, increase our revenue. At the end, we're able to increase our net profit. So gross profit -- gross margin rate itself, I believe, gradually, we are able to improve, but most likely, I rather prefer to increase revenue and the net profit. This chart is very interesting, okay? This period, I keep talking to the investors, in our business, they have a unit business and also a capacity business. Unit means every phone, every PC, they need one storage, means one controller. But look to the smartphone, worldwide consumption is 1.3 billion, 1.4 billion. This is not going to 2 billion, not -- impossible going to 2 billion. PC, 400 million, not going to 500 million, means controller itself, the growth in the unit is very, very minor. Phison controller business growing a lot just because we take market share, not means that industrial increased the demand, okay? But fortunately, Phison will not only cover the unit business, but we also cover capacity business. You can see the capacity is going up rapidly. Many years ago, Phison, we are in the USB business, it's a 2-gigabyte, 4-gigabyte, 16-gigabyte. But now we go to the PC cloud business, it's a 1-terabyte, gaming console is a 2-, 4-terabyte, enterprise is a 16-terabyte. So we also gained the capacity business, which improved our ASP. And at the end, improved our net profit. So again, if Phison only in the unit business, what I can tell you, the momentum to growth is very, very minor. But with the capacity business, I think in coming few years, we can grow -- 2021, I think Y-o-Y growth is at 29%. By January, February, we grew close to the 30-plus-percent. So this means, Phison, we're on the right strategy and the best approach in this NAND industry. Okay. The Ukrainian, Russian war is -- last year, it's less than 0.5%. So I think we are okay. Investors may also concern about the so-called ESG. DJSI, by 2020, 41 points, we grow to 63. MSCI from CCC upward to BB. By OTC, 2019, we moved to the first ranking, okay? So we are keep improving our ESG, okay? So this is my report and my questions, so we can go online.

[Operator Instructions] Our first question comes from Donnie Teng from Nomura.

Okay. So just 2 quick questions. The first one is, it looks like NAND supply is not an issue this year. So just curious, how do you look at the demand side by different applications like server, PC, smartphone, gaming, et cetera, especially that I think you have increasing your sales contribution from gaming quite significant in the past few years. However, you know that the markets are concerned on the demand sustainability after the COVID normalized. So wondering if you could give us some outlook from NAND demand perspective? And second question is related to the first one. So, considering the demand uncertainties, how should we look at Phison's inventory procurement or the bidding strategy maybe into the second half?

Okay. I think this year is not a good year anyway, Xi'an, Samsung lockdown for 2, 3 weeks. Then looks like Yokkaichi lost 5 to 6 weeks production. So overall, the gap, the supply gap already happened. So everybody clear about the -- and I don't believe this gap able to fulfill because equipment is all done. I mean, even though with the full speed production, the loss is a loss, okay? But talking about the demand side, I agree that smartphone, PC, by unit, I don't see able to grow, maybe potentially may go down, I mean, may decline. But on the other hand, last year, the PC BGA SSD is mainly 256 gigabyte, this year where they move to the 512 gigabyte. And smartphone, smartphone low end was 32, 64, now start moving to 64, 128. So even though the unit itself is not improving, but the capacity is increasing. So this is also fully follow our strategy, not just only gain in the unit, but also gain in the capacity. And on the other hand, when look to Phison Controller portion, actually, by dollar amount, we are increasing every quarter. Thanks to the settlement between Micron, UMC, Phison able to gather more wafer supplied by this year. This is helping us a lot in our controllers. And also, Phison made a lot of design win with our semicon partners to the PCIe Gen 4 SSD controller business. This is so helping us. So by unit, we grow, not because industry grow, just because we get market share. And in the capacity side, we gained this business because where market slow down, we build inventory and market will go to -- turn to a strong, we have an inventory to back up. This is helping us to gain our ASP and also gain our net profit. And talking about inventory. Since CQ4 last year, we have started to build up our inventory. This is our strategy. And my most concern, my most worry is actually the gap will only happen by end of May and June, July, follow this chart, okay? This is the most busy season for the EMS, but the component supply in this period may be in the big cut. So Phison has to make sure we are able to have a good inventory to fulfill our customers' need at the period. So at this moment, any good offer from the semicon in NAND flash, we are going to buy it. And we're also asking the more visibility from our customers. Then we're able to build not only NAND flash for them, but also controllers and also the PMIC IC. So far, PMIC IC is still very tight. But Phison, we are good because we are using our in-house design, and we have a capacity support from UMC. So inventory-wise, our strategy is, keep build up inventory to support our customers' get in the June, July time frame.

Our next question comes from Brian from Credit Suisse.

Can you hear me?

Yes.

A very good result. My question was on the Q4. You mentioned there's the write-offs, which affected your gross margin. Can you just -- how much gross margin has been if you did not do the write-off? And the second question is, it does seem the NAND tightness, the pricing of NAND may trend upwards going into this year, is that your sentiment you're getting and should we see a similar trend this year in terms of gross margin where you tend to trend up alongside the NAND prices?

I don't have a number, how many percent runoff in CQ4, but I believe it's between 1% to 2%, okay? And we can see the supplier increase the price by February, the price increase between 15% to 20%. So definitely, we are going to move back those one-off into our financial position. Missed CQ1, we came back, okay? This is a ride-off. So we'll reflect on our CQ1 financial report, means margin will be turned to good in the CQ1. Okay?

Okay. And should we expect a similar trend this year for margins alongside NAND pricing as shown in the chart that if net pricing continues to increase, we will see a good margin imbalance as well?

If no more accident, no more earthquake, no more this, no more war, no more on this, I believe 2022, the shift will kind of a similar like 2021.

Got it. And maybe could you just share what's happening on the wafer supply side and on pricing. What are you seeing right now? And are we getting sufficient supply for this year? Or is there a concern to be continuous tightness? And what's the fulfillment rate at this point?

Controller itself, we are tight, 100% tight, okay? We fulfillment only like 60%, 65%. Last CQ3, we thought this year we can fulfill 100%. But unfortunately, our customer increased their demand. So controller is a 60%, 65%. We hope we're able to get more supply. But talking about NAND flash, right now, we are using every NAND manufacturers' NAND, every. In this world, they have 7 manufacturers, okay? We buy them -- first from these 7 manufacturers. But Yokkaichi site in CQ2, we are going to suffer some gap because they are not able to fulfill what we need. So now engineers need to immediately taking other flash to our customers to make the approval to fulfill the shipment by CQ2. So we may have a few weeks not able to fulfill the customers' demand by May because Yokkaichi not able to fulfill what we need. But after June, we're able to recover back because we're able to take the flash from Korea, from Singapore, from China to fulfill [indiscernible]. So strategy is very simple, okay? We enable every flash. We enable every type of applications, and we try to gain every kind of business to make sure we grow in revenue and grow in net profit. Yes. By the way, on the other hand, talking about the gross margin, I think you may agree, Phison able to get a more wafer supply from foundry, which controller business is a much higher gross margin, okay, which is between 50 plus minus gross margin. So that's also helping us to improve our 2022 gross margin.

Our next question comes from Simon Woo.

Can you hear me?

Yes.

Okay, great. Very quickly, yes, looking at the February monthly revenue, very strong, 45% up year-on-year. Any rough idea, how you achieve such strong year-on-year growth, sorry, 45% growth year-on-year. So half is more a price increase or almost based on the price increase treatment?

No actually, if you may agree since last CQ3 analyst saying the memory going to the winter, February, actually, the price is not reflect immediately after Yokkaichi news, this crossed. We believe the price will slightly reflect by April and May, not now. So this YoY growth, just because last year we announced, we are gaining a lot of design wins in the systems with names and the ODM, which cover PC computing, mobile, a lot of communication equipment, which we made a lot of design wins. So the price -- you're talking about the Yokkaichi contamination, still not any influence to my February business. That will start to reflect by April. So this is everything coming from our design win project. And we already know we're able to get a good CQ1 this year, but it will be a surprise to me because February working days is less only like 60% of January, but anyway, this is good sign. So we believe when time going to the April, May and June, when markets start feel they have a gap in supply, then the price up may also helping us to gain our revenue and net profit.

That means maybe a second quarter sequential revenue profit improvement will be strong, I believe?

I believe so. I believe so.

Yes. Okay. And then, sorry for the little bit confusion is that, overall, last night, Western Digital confirmed the normalized flash operation. That means about only the 1 month long destruction. So any rough ideas, sir, what's the over the global impact, the Western Digital future together is around maybe what percentage of impact 3%, 5% for the entire year, any rough idea. They mentioned about initially 6.5 EV, but they raised a little bit to 7. So the overall global impact, including the KIOXIA maybe around 14, 15 zettabyte, but any rough idea the global impact based on their public announcement?

Again, I'm not analyst, right? I'm just running the business, just making money for company, okay? So I use this just simply to answer you. Actually I don't care about impact whole year. We care about the gap is happening by this period. I think you agree, right? The supply -- the gap in supply will happen by the end of May and June, maybe early July. The gap will be here. So if they have 15 ZB or 18 or 20, I don't know, the supply gap in this period, the market may go to crazy. Yes. So I don't care about a whole year. I don't care about this month.

Yes. Yes. However, you have inventory and you have sourcing from the U.S. to make Korea and Jamaica. So if the June, July, industry shows meaningful shortage, the revision can easily say that your industry and also you can redistribute to the NAND product based on the Korean or U.S. NAND. There's no issue there for you?

I think the answer is, yes, but probably the answer is no. When this period, the market is a real big gap there, right? We believe a lot of system makers may come to us to call help. So I believe even though I have today's inventory, still may not enough at the period. So I am still accumulating my inventory at this moment.

Yes. Yes. Yes. Okay. Very clear, sir. And then lastly -- sorry, I missed your slide. Could you recap your revenue mix for maybe 2021 or fourth quarter, I missed over the...

Yes.

So this is -- seems to be pretty much in line with the recent trend. So any particular change in the mix, controller always look to be 20%. So industry a little bit off, so any particular -- sorry, for maybe I missed your...

Actually controller was around 20% in the last few years, but now we migrate to the 25%. And potentially, I believe, by CQ1, we may able to go to 27%, 28%. 2 reasons. We get a more wafer supply. Second, we get a more project from the semicon by 2020 and 2021 start to ramping up. Yes.

You don't worry about the UMC's full utilization ratio. And also, they may raise the price again your foundry sourcing cost for them making to the -- your margin or leading to the growth?

Okay. Now the market has 2 ways. The one way saying, they are -- they're still tight of raising price. But the other side says, oh, it's going to empty, okay? So I don't know who's right, who's wrong. But even I worry here is not able to help me solve problems. So if they raise price, okay, give me more allocation. The reason is my customers still asking the more supply, so I have no choice. Yes.

[Operator Instructions] There are 2 questions from me. First one is for the foundry supply just want to have a longer-term sense. Will the supply issue be more resolved in the next year given more foundry going online? Or you still think that was still a bit tight and there will still be a gap for the next year?

Okay. Actually, we've been informed from both TSMC, UMC next year still tight. Next year still under allocation. I hope this is not true, I hope. The reason is, you can see at Phison we invest so many R&D in the new project design. So when controller is ready, we wish we are able to ramping up the quantity, right? But we invest in the early stage, but eventually not able to get good enough wafer, we are not able to get our ROI. So in my mind, my best wish is foundry going to release, I hope so. But unfortunately, until today, they keep saying, 2023 still under a big allocation. So I don't know who's right, who's wrong. But I, Phison, actually we are in a very good position in the storage industry. And both TSMC, UMC agreed Phison, we are very delicate position. So they are trying to help, but I wish they're able to help and give us more supply.

Okay. That's very clear. My second question is about -- it seems that Phison is having more design win recently. Just wondering if it's because those leading NAND maker is increasing their outsourcing ratio? And do you expect this kind of outsourcing trend to continue? Or is there any other reason to trigger this multi side way?

Okay. I believe a NAND manufacturer now their most focus is into the data center enterprise SSD, which able to help them to consume more petabyte and to gain more profit. So they need their internal controller team to develop solution for enterprise data center, not client SSD. Phison, we're able to offer very good in cost performance, plus R&D fee, which attract them. They outsource project to us, actually, they gain extra return, instead of the used internal team. So they can focus more in the data center. We are trying helping them in the client. So it's a win-win to the both parties. So overall, I believe that outsource is keep happening. And Phison's, after we get the outsourced project from them, we're able to gain the so-called the unit business, as I show you here, okay? We gain the unit business. It's good to us, but the -- where's the chart. Let me show you the -- Okay. We get the unit business here. It's good to our gross margin rate. But on the other hand, when we design the controller for them means our module is done, okay? The design of module is done. So on the other hand, we buy back the flash from them with slow season, we're helping them. We build the modules, we gain the SSD. So this is one of the so-called win-win model between Phison and the NAND manufacturer. So I expect and I can foresee that Phison able to get more projects in the coming futures.

Okay. Understood. That's very clear. Our next question came from Britney Lam.

I want to follow up a little bit on the, I guess, 1Q and 2Q because you mentioned earlier that not only would the revenue be higher from the SSD controller, but it's also a higher GP mix -- higher GP product itself. So in that sense, would both the revenue and GP margin be higher, I guess, heading into the rest of the year?

Yes. Good questions. Okay. Revenue-wise, to be honest, when we look to our -- this January, February, right, Phison's all-time high is, I think, is $17 billion in the last year CQ3. But these 2 months, we already hit the $10 billion. So to break the record, it looks like not so difficult, to be honest, but CQ1 again, is a slow season in this industry, right? The most big growth may happen by CQ2 and CQ3. By CQ2, because they have a get supply by the end of May and June. So this is how Phison we're able to use our strategy, our strength to get inventory and to gain more business and to help the fulfillment to our customers. So CQ1, I believe we are good, CQ2 will be better. CQ3, I believe, will be the best.

Wow, that sounds like you'll be breaking records every quarter this year.

I hope so. I hope so. But I wish no more accident, okay, no more earthquake, no more war, no more power outage. Yes.

Understood. Last one is because you -- one of your slides was your strategy to focus on revenue growth instead of just GP margin hitting target, right. In that case, given the still the backdrop of better product mix and all the disruptions causing that prices higher. I guess I'm trying to understand what's your strategy then? Would it be lowering prices to gain scale? Or what is it actually?

First half this year, I think not any necessary to lower the price, no matter in the controllers or in the modules. Okay, NAND is tight. The foundry is tight, okay? But when look to this, right, controller is helping me to gain our gross margin rate, GM rate by percentage, we are good. And I believe by dollar amount in controllers, in CQ1, CQ2 definitely, we are growing because the more project ongoing, ramping up and more wafer supply. And talking about revenue wise, I believe embedded ODM and gaming were helping us a lot in revenue. And second half this year, Phison will start to launch our enterprise products, okay? We are hopefully one of a key partner. And I hope we're able to announce it by end of March. Then by mid of April, Phison will host a so-called technology day to disclose as planned what's our strategy enterprise. If that happened on time, enterprise SSD and the solution is able to help Phison to gain more in revenue, okay? And also making Phison in the better position in the net industry. So I don't see this is a must to lower the price in the first half of this year. Yes.

Actually I'm curious, this enterprise SSD, what kind of ISP margin would it be?

Good question, okay? If talking about the drive itself, to be honest, will be like between 10% to 20%. The reason is a terabit, second terabit, the NAND cost in the [ foot drive ] is 98%, 99% but this is our first product going to the market. I care is a recognition approval by the customers. The second step, Phison is going to make a design service and replace to the customers, then they're able to helping growing our gross margin rate because now it's 100% gross margin.

And when could that usually, you expect it to come at the design service?

I believe by CQ4, CQ1 -- CQ4 this year, CQ1 next year, we are able to engage for design service opportunity. But first of all, we need to show we are capable to make the products to the market.

Our next question comes from Simon Woo.

Yes. Number one, in the PCIe maybe fifth generation, when do you expect a meaningful production for client SSD and then maybe your long-term target for enterprise solution set?

Again, to be very honest, yes. Okay. Personally, I don't believe PCIe Gen 5 is going to popular incline by 2022 or '23. The reason is the power consumption and also the thermal still is a big edge to the system makers. So we believe that PCIe Gen 5 first going to popular is in the new high-end data center. And Gen 5 penetration to the client, I believe will happen by 2024, '25, okay?

So 2024, 2025?

2024, 2025, yes.

How about the 2022 and 2023 you were saying?

Gen 4 -- will be the Gen 4 -- majority will be Gen 4.

Yes, Gen 4, however, your enterprise solution exposure is just minimum, right?

Yes. So that's why we are targeting the Gen 5 into the data center enterprise.

Yes. For 2024 and 2025?

Yes.

Yes. And then basically, sir, for 2021, how many times you accepted the foundry price increase from...

3,4, I believe they are 4x.

4x, that means almost every quarter you paid a high price?

Yes.

That means maybe for 2022, every quarter, you have some shape in foundry resourcing.

2022, we still don't know how their strategy yet, but I believe if a foundry increased price, Phison may have a better treatment from them. The reason is that Phison also made a lot of contributions to them into 2021.

Yes. Yes. Your new customer YMTC, are they actively using the Europe controller? Or you just get the mandates from YMTC and then you make your own SSD product, putting the YMTC NAND or your own controller, could you read that #1 YMTC NAND chip volume is a bit large and then how are you doing the business with the YMTC, sir?

Personally, I believe Phison is their biggest customer in the NAND processing. And I also believe in YMTC controllers, Phison is a bigger supplier.

So then new Phison supplies pure NAND controller chip to YMTC that is a one-way transaction?

Yes.

In that case, here the high chart, 25% of your revenue in Q4 is controller?

Yes, only controllers.

This is -- however, this 25% mostly the -- Phison's own product rather than...

No, no, no, Phison controller only a few percent here.

Oh, I see. So more than 90% of -- 25% pure controller sales.

Yes.

Yes, for the export model.

85% -- 85% to 90% are pure controller sales.

I see that as a silicon merchandise.

Yes.

I see. Yes, very, very clear.

Okay. We got one question from the chatroom? It's also about the Gen 5 and the investor wants to know about the Gen 5 progress for the redriver and SSD controller and retirement. And also the investor wants to know about that in terms of the Gen 5 redriver, is the company already competing with other peers like us media?

I think PCIe Gen 5 driver, Phison is quite in the leading position in this industry. And what I read for my people, we are competing with the TI. I didn't see a local Taiwan design house that have a PCIe Gen 5 redriver yet. But we already start emptying these products to the server and the motherboard business. Good business, but revenue is relatively small, much smaller. But I don't see this as a kind of my cash cow, but I think this is a strategic business. The reason is by second half this year, we are going to penetrate to the data center SSD business. And if data center motherboard using our redriver, this also will improve Phison influence power inside the industry. So I don't see we are competing with any other else because we have not any intention to compete. This is just our business strategy.

Okay. Thank you. And that's very clear. I think that due to time constraint, it's not allowed to take another question. So we have to close the meeting right here. And thanks, Mr. Pua for his effort and thank you all for your participation. If you have any further questions, please feel free to contact Phison's IR team directly. This concludes the meeting today. Have a nice weekend. Thank you all.

Thank you.