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

Good afternoon, everyone, and welcome to Phison Third Quarter 2022 Earnings Call. And today, we are pleased to invite K.S. Pua, CEO from Phison to summarize the company's operation in third quarter 2022. [Operator Instructions] And now I would like to turn the call over to K.S.

Thanks to Amy. Good afternoon, good morning to all the attending for today's, our CQ3 quarter ends earnings call. So this we move direct to today's presentation. Again, we keep repeating about our industrial that the NAND application is still expanding. And we already seeing a lot of new applications coming which is triggered by the 5G applications. In Phison, we already covered the NAND application in the mature and also legacy note, which have a PC, mobile, camera, medical, souvenir industry. I think we are covered -- we have a full range of to cover this industrial. On the same time, we also keep investing into a lot of [ mass leading ] technologies such as for data center and automotive, which is -- will help us to gain our market share and also to increase our revenue in the coming few years. We are -- again, we are keep insisting to invest into the R&D activity. Since 2 years ago, we have increased close to 2,000 engineers and we are trying to keep this momentum in the coming few quarters. This is our breakdown of our Q3 revenue. From this chart, you can found the controller is 34% of our total revenue. And you can read our history data, the controllers actually is increasing. Starting from 2020, after we engagement with AMD, we gained a lot of PC design win opportunity. And engaged also with the NAND semiconductor customers, we get a lot of embedded mobile auto business in controller side. So controller is getting very -- one of our major revenue and also profit cash crop. And go to the -- we call embedded ODM, especially in this Q3, we are dropping a lot, which also fully under our expectations. China started lockdown by Q2, March and April. So this already impact the mobile and the PC demand. So Q3, we are suffering the inventory adjustment from our customer, which in the mobile and also the computing-related business. In the gaming, gaming is a much high related to the consumer business. And I think everybody aware what happened to today's economy status. So gaming is weak, but it looks like slightly we did the big impact the business because CQ4 is a season for the consumer season and we won some game console in the handheld game machines business, which we did a big increase in this portion. Industrial-wise, was flat actually starting the China total. But now we also started getting back. And consumer-wise, it keep like low 20% since many quarters ago. So this, to me, is a healthy breakdown. We keep insisting to invest with controllers. And we again -- by the way, we also gain some other new models from the NAND manufacturers such as PC -- CC controller and also the embedded for mobile. And for the data center business, now we have a very good progress later I can share with you. So with this, our breakdown, I think we are trying to diversify our business into the every kind of NAND applications. So since a few quarters ago, we start to explain to our partner, our shareholder. Phison, our last month in the NAND storage business is a data center and enterprise controllers, which we already have a very good progress. And the other new growth in the future is automotive, mainly is EV application. Phison, we have a very good potential position. We are working with 3 of a semicon company to develop our EVs controller for their storage systems. So we believe with this heavy investment and our insist in this activity, these 2 application enterprise automotive by 2025 will become our main strength to generate the revenue and also the profit. This Q3, at Flash Memory Summit, our partners, we have a call announced about the PCIe Gen4 high-end enterprise SSD with our partner, Cigent. And these products, we have started preparing material for next ramp-up for mass production. And we also work very close with Cigent to put this drive into the Tier 1 OEM, Tier 2 OEM, some hyperscale and also some system integrator. It looks like -- we also delivered this sample to our semicon partner, the NAND makers. They test it. They just give a report to us and they show a big surprise. They don't believe, Phison, we are capable to make a drive ready, mature and with a very high good performance. And most important to this design is our power efficiency, is the lowest among these all the enterprise supplier, no matter from Samsung, from Hynix, from Solidigm, from Japan Kioxia, our power performance is the best. So this also referred to the, today everybody cares about the ESG, okay, try to put embedded data center, consume less power with a much higher computing power. So this drives now we believe is the lowest power efficiency may also help Phison to gain the business opportunity. And this is a press together with the Seagate and we are happy also aside that, work with Seagate to bring this into the hyperscale and also to the OEM business. Okay. By this CQ3, the revenue, I think we already got our -- 2 hours ago, we have a press release, so the number you already get. So gross margin-wise, is TWD 3.5 billion, I think it's lower than our expectation. But later, I'd like to explain why this is happening. So some highlights, basically it's 34% of total revenue. And the controller growth Y-o-Y, 7%. PCI controller growth 11%. This also the starting from CQ3, the PC market start of adjustment. The increased Y-o-Y is declining, customers now start to adjust in the inventory. And the model-wise, we are putting a lot of effort into the BGA SSD. This will become -- again, this will become one of our major business in next year. And in gaming module, CQ2 was terrible because of lockdown and the war causing the user don't like to spend money. But now back to the CQ4 season, we got a little bit improved in these gaming margins. And the overall revenue by Q3 is a second higher at the same period, but this also referred to the whole markets economy. So we like to keep how to help Phison to get the next growth, I think only one solution is investment, invest in the new technology, new products, new applications. Okay. Back to the gross margin. In this CQ3 gross margin was 24.4%. We go to the study of the total gross margin without the write-off in the LCM inventory the real margin was 29%, but followed by the IFRS definition, we have to write off close to 5% of inventory. But this 5% of total amount were back to the finance book after we sell out this number and this inventory. So without the inventory loss, the real gross margin is at 29%, okay, also follow what our expectations. But inventory, I think, already become effect. So I think no argument and no excuse, but we are trying to make ourselves much healthy in inventory and also try to reduce the average cost in the inventory to -- with our next pickup in the business. So the earnings per share is TWD 6.13, I think it's also lowest because we had to cover the extra 5% of the -- by this CQ3, we write off close to TWD 780 million inventory loss. So TWD 780 million convert to the earnings per share is close to TWD 4, but anyway, this is why this happened. But we are trying to adjust the inventory, try to make the inventory much healthy. Back to the balance sheet. The cash flow, our cash flow, we still maintain is around close to $450 million net cash, which is in the coming 1 or 2 quarters, if economy turn to bad, we still have a good enough cash to cover our operations and trying to use our cash to buy the much cheaper component, no matter the NAND flash or the wafer from foundry. So with the net cash flow, I think we are still healthy and we are trying to be aggressive when our vendors approach us to co-help. Back to the inventory. Inventory, we are actually declining close to like 10%. And by this October, the inventory become much lower. And not talking about the amount of dollars lower, the average cost per gigabyte in the NAND wafer also declining. So this inventory, of course, we like to try to consume more inventory, lower the amount of dollars. But on the other hand, by this CQ4 and CQ1, look to the NAND supplier. I think CQ3 a lot of report already disclosed why we had the Korean manufacturer, the NAND profit dropping more than 2-digit percent. U.S. player also announced they are potentially -- CQ4 they may go to obtain loss in the business. So this is telling us that they mainly help, when they co-help to Phison. And from our study by end of September, the flash price the NAND manufacturer offer to the market or to us already close to their cost. And CQ4 price keeps dropping. The price may touch the cash cost, which already they have a few vendors announced cut production. This happened. So I don't much worry about the write-off in our inventory by Q4. I think Q4, we still have to write-off, but the number will be much smaller than the CQ3 because we don't believe the NAND manufacturer willing to cut the other 30% in the selling price. From Q2 to Q3, the price almost dropped close to 30%, which is all their margin. So from Q3 to Q4, they don't have a big much room to cut. So to us, if our inventory close to their cost, cash cost, we are much safe and healthy. And this will help us to able to lower the total cost to gain more business from the market. So by cash flow itself, we are healthy. But inventory, yes, we are managing right now, but the write-off ratio were much smaller than the Q3. So by Q1, if the cut productions, the market realize the cut production, the wafer output decreasing, when market turned to optimistic price starting stable or bounce back, then we can return. I mean we can take out our write-off number back to our books. So it means next year, we have a high possibility to gain the extra profit through our inventory. Okay. So this is all the index about the balance sheet. So most concerned, cash flow, with good inventory, now we are well managed. So I don't feel much worry about coming quarters in the inventory. We go to the income statement. By the gross profit was, just now I explained 5% cut down because of the inventory write-off. And talking about our non-operating cash. We have investment subsidiary in the China which also they are in the NAND industrial. Their suffer inventory also, they have to cut down their inventory. Phison had to recognize the loss and this become one of a big portion Phison need to recognize. I think Q3, we had to recognize, Q4, we may have to recognize it a bit. So basically, after by Q4, when Q1 the market turned to stable, the cost per gigabyte in the inventory getting lower, next Q1, everything will recover, will reset. So we can start to gain the return from inventory, not only Phison, but also our subsidiary in China. So the most difficult timing happened by -- last time I mentioned that either Q3, but Q3 looks like it's okay. Q4 potentially market still go to the end of season, the slow. But on the other hand, we don't think the NAND manufacturer willing to cut price aggressive, no more, okay, because they also got no room to cut. So in the income statement, overall, I think this earning EPS, of course may this quarter, but unfortunately, this is caused by the inventory cutting and also subsidiary losing we have to recognize. This is just a temporary. The regular business, we are still doing good as usual. Okay. We also have a supplemental information about the NAND TIF, which is similar as U.S. NAND gate. Phison, we have option, it's the option to our staff, which we had to recognize the monthly write-off. So back to the NAND TIF, our net income EPS actually back to the TWD 6.4, which is slightly higher than TWD 6.1. Okay? So this is -- the only factor here is the option to the employee. And October revenue, we are TWD 4.2 billion. The reason is I go to check the shipment, the shipment of a drive of the products of controllers. Actually, we are demanding the quantity, but unfortunately, there's a price dropping. Okay? Price, when we did a component cheaper than 30% than CQ2, this reflect to the products. So by unit shipment, we're still doing okay, doing good, but how to the dollar amount, they're declining. So it's TWD 4.2 billion in revenue. Some business highlights. Phison, since August, we announced our PCIe Gen5 SSD for the PC and gaming market. We engage with a key player in the gaming business, such as Gigabyte, Corsair [indiscernible], Nextorage and dS/CFT. They already carry our products. These products will go to the market by end of December. So Phison looks like today is the sole supplier in the PCIe Gen5 client and the gaming module business. Similar as 2019, which we enabled this together with AMD. So these products will help Phison to gain a much better gross margin from this as a new product and the gaming industry. The other good news is we are working with the NASA project to put our data center SSD on the moon. Our data center SSD already qualified by our partner. So by next year, our drive were on the moon for testing and deployment will happen by 2025. Means by 2025, they have a data center on the moon with a Phison SSD. So this is one of our good progress. Taiwan just opened the quarantine. So I made a few trips to U.S. in the few months and we have every day different group of visitors from worldwide. In these 2, 3 months, we've been asked by many partners to develop a lot of our customization products for them for coming years of application such as in the hyperscale cloud, we've been asked for PCIe Gen4 SSD customizations. We also have asked to have a good drive customization from the business. Okay? We also have Tier 1 asking Phison to develop a new controller, enterprise controller as a design service to support them. I believe years ago, I'm keep explaining Phison business model. We need to get proven in the data center storage by our technology control and drive. After that, we're capable to get the design service business from the key players. Now we have one project starting. It's a design service for high-end data center controllers, which is [indiscernible] based. And then we also have controller revenue and we are helping them to make a module. So we are also to get the modules business and revenue. In auto, Phison, we are working with 3 of NAND manufacturers to support them in their new generation PCIe Gen4 SSD controllers for the auto applications. And this revenue was starting by 2024. And this also need to occupy a lot of R&D resources. And we never slow down. Even though the economy today is low, we keep investing. PC makers also, few came to us to ask to customize storage into their laptop which you may also agree Apple now become the #4 market share in the PC which a lot of PC makers, they feel they've been threatened. They need to make something different on the products. So Phison now helping them to customize our controllers and modules. Smartphone, android phone other than Samsung, the rest, most likely from China. So we partner with most of the android phone maker in China. We're helping them to customize our U.S.-based controllers to make the differentiation of the phone compared with the others. So they're able to get some extra value on the phone. So this just to the point, we read in the western companies start to lay off 10%, 20%, 30%. In the NAND industry, we also keep hearing somebody going to cut the head count, cut budget, slow down the activity, they cut CapEx. But we believe, Phison, we have a very unique position. We cover full range of our business, every single NAND user they asked Phison to cut back for them. We need good enough of a talent. So I decide not to cut, I decide not to slow down, we keep our momentum in the development. So we believe in the next pickup, Phison, we are more ready to gain the business opportunity. So we keep investing for the coming 5 years, auto, data center enterprise, PC, smartphone. We keep investing the people, no layoff. We continue to expand our R&D head count. But of course, in Taiwan, we believe now we are much easier to get the talent. I believe many designers from Q3 and Q4 next Q1, I think they have to suffer the headwind. But Phison, we are healthy in the cash flow. We have many business portfolio. So we are going to pick up the most good talent to join Phison to developing our future products. Okay? So the NAND market, personally, I believe we're back to normal way and we have to make Phison ready before the market back to normal. So to share some of our CQ3's design win projects. In OEM, we put our solution into the FIPS application, which is for high end, for secure PC. Okay? Our Gen4 SSD also already design wins shipping to the -- all the Tier 1 PC makers. In gaming-wise, we also -- recently we get some casino gaming. After the COVID, everything back to normal, the casino business slightly coming back. So they start to invest in new equipment. Phison's products, we are success to design win into the many equipment there. And in the auto and the data center, we have a partner with Semicon and also with Seagate. We believe very soon with the hyperscale and the Tier 1 storage company we are able to deliver our products there. Okay. And we're also putting our high-end Gen4 into the CT scanner. Okay? Of course, this is a high-end market with a much good gross margin. So we keep developing and made a lot of design win into the systems to make sure in the next pickup Phison, we are good to growth. Okay. The NAND market, the price, the wafer price cutting crossed 30% from CQ2 to CQ3. Personally I believe by CQ4, we don't have a big room to cut. Few manufacturers start to announce their wafer cutting in production. So by CQ1 next year, we believe the wafer output was declining. It means the market will start to feel supply is not that much. In this case, the market will back to normal. Okay? So we believe the NAND in this price-wise is going to touch bottom. And in the demand side, we need to wait until -- and this is nothing we can control, lockdown China, the war in Europe, the inflation in the U.S. So we don't know what's going to happen. But overall, in the NAND application, we don't see big room to drop in this industry. So we keep increasing our head count in our development. So of course, the expense is huge, but we decide not to slow down. The reason not to slow down, we believe that NAND market will pick up very soon. So let's see what happens. Okay. And Phison today looks like we are the only one player which able to manage this service from the IPs, from aesthetic design, firmware design and the full turnkey design. We are the only one survivor in this market. So -- and the market in the NAND products, getting more systems players, they need to customize the product. So that's why either they go to the NAND manufacturer or they can only come to Phison. So we are potentially to get lots of opportunity. But in order to fulfill this opportunity, we need to have a big portion of a talent to meet the service. So that's why I keep saying we are not going to slow down our R&D investment. Okay. I'd like to make today's summary. The fact is the market, I think I don't need to spend time to tell you what happened in the market. You know what happened in the market. But in the supply side, the NAND makers announced the production cut. They slow down the wafer input. The cycle time of a 3D NAND is around 70 to 90 days. It means after 2 to 3 months, the wafer output were declining, okay, start to decline. And this last month, I visit to almost every NAND manufacturers. They are cutting their CapEx. They are slowed down to increase their capacity for the next generation flash, means the big growth in the coming years were declining. I read a number, user with a big growth in supply side is 35 plus minus percent, but they may go with the CapEx cutting next year, the big growth only like 10%. If demand big growth maintained to 20%, 30%, this will cause again supply and demand unbalanced. So we don't know when this happened. But the fact is wafer production cut, CapEx cut were -- made the big growth in the -- after 3 months and after 9 months declining. And back to the demand side, and no argument by 2023, every business, PC, auto, smartphone, IoT, if you count by unit definitely declining, okay, declining. Okay. But every system products, they need a NAND flash. And we believe with the NAND flash price so cheap today their new products, the flash which embedded into the system definitely will start from 2x versus this year. So smartphone which this year's model 128, next year definitely will go to 256 gigabyte. So this will create the demand in the NAND industry. So controllers-wise overall, declining by unit, but modules tick-up by increasing. Phison, in controllers, we gained a new opportunity from the NAND manufacturers. So potentially, our unit in controller may also increase. But on the other hand, the module's ASP also going to increase because of the demand in the content. Okay? Then I have to take a -- the study on the history. If you still remember, by 2008, before Lehman shock, the industry getting slow. But after Lehman shock, fresh market start pick up by 2009 CQ1. And the fund we picked up only like CQ3 2009. So NAND flash industrial is an early indicator. Okay? So you can study this by 2008 history and back to today. We believe potentially, NAND cutting in production cutting CapEx and NAND getting cheaper, the [indiscernible] system declining, the unit maker, they need to improve the revenue. The only way is increase the capacity of a NAND. So by this whole, the story, I personally believe the market in the NAND will get to stable by Q1 and then we see when the demand is back to normal. Then Phison, it is a time to take the portion increase in the market. So this is my summary to deliver today. So we have some Q&A we collected before. So I just finish this and we can go to online Q&A. We keep very good healthy in the cash flow. But we believe we still need investment and we need the cash to buy cheaper inventory. So we put our priority. Our priority mainly, our cash is going to the technology development, to talent, to our business, then shareholders. So we are taking our shareholders by when business turn to good. And investors also concerned about Phison, oh, this is the impact. Okay. Transparently, by Q3, our inventory write-off is close to TWD 800 million. But I think this is most write-off. In this Q4 and Q1, the number will become much smaller. Okay. And what we're trying to do, at this moment, if a flash price is under cash cost, we're better to buy as many as they want to sell, okay? In this case, after they're below cash costs, they are not willing to produce anymore. The market will turn to upside very, very soon. So this is our opportunity. And we keep diversifying our business into the different -- many different applications. Of course, controller is our mainstream. But when market turn to regular, embedded ODM will become our next growth and enterprise SSD by next year also will become our big growth in our revenue. Investors may also worry about Phison gross margin. We are 24% still follow 27% plus minus 3%. This was due to the 5% inventory write-off. By this Q4, we believe we're still able to follow within this window. Okay? Then we have to wait until Q1. Everything back to normal, then we can back to our user business. So I'm not much worry about gross margin. Okay. The reason that equity [ research saying ] Phison's, our next year profit potentially may go to 20% da, da, da. But Phison, we don't have the guidance in the finance. But that is simple, 2008 by September there was shock, the whole market turned to super weak in the Q4. But NAND markets start to bounce back by Q1. I'll give you a number, example to you. 2008 the whole year Phison, EPS is close to TWD 4, 2009 Q1 the EPS is TWD 3-point-something. Okay. So we believe when markets turn to regular with Phison, our business portfolio, our readiness in our products and with the low average cost in inventory, we believe we can get much better profit from the market. So I'm not that much pessimistic about 2023. Okay. At least just when I showed to you the NAND cut production, the demand may go to a double size in the systems. So overall, what we'd like to wish is the market back to normal. Okay. I don't know when, but we keep waiting. But during this period, we made ourselves ready in developing the new products and the engineering and also make ourselves healthy. And to be very honest, we got so many inquiries from the system makers. The only my pain point today is I don't have that many engineers. Every Monday, I thought to my executive, I need this, I need that, but they keep telling, not enough, not enough, not enough, engineers are shortage these day. So anyway, now every Monday, we have a priority to pick up, which is much potential business with a better profit to us. But overall, we don't worry the business. Only worry is that they got so many business, but we are not able to cover. Talking about the ESG which update. With this Sustainalytics, by '21 was 32.5%. This is a high risk than '22, we are medium risk. Okay. So we improved. MSCI from CCC, we upgrade to BB, we improved. The SCI last year's 62 point, now 74, we improved. By the Taiwan corporate governance, now we are in the top ranking 20% from 80.5 go to 88. So we're doing a lot of our internal government policy to make sure Phison is going healthy and going transparent. So this is today's, our presentations. Now we can open to online Q&A.

[Operator Instructions] And the first one to ask question is [ Taek Cheon ].

Just a very quick one because you mentioned that you wrote off most of your inventory in the third quarter and the fourth quarter, the price cut magnitude will be smaller. So does that mean your gross margin will likely increase a little bit in the fourth quarter?

Okay. The new IFRS guidance, if you buy cheapest component from supplier, your inventory have to adjust your cost. So this happened by Q3, big amount, close to TWD 800 million write-off. By Q4, potentially, we're still able to get from different number, which is cheaper. Of course, buying cheaper, we are more than happy. But buying cheaper, we also need to write-off the inventory. Okay. But the ratio, Q3 was a 5%, Q4, we believe, is much smaller, okay. But second, the cost of wafer price already declining in the market, especially like China module house, they have a big minus in the inventory, they had to cut. So the market, the product price is still getting weaker. Okay. I expect my margin can go better, but we need to see by November, December, the module house, they keep cutting. If they keep cutting, we need to keep the revenue, we have to follow. If follow, we have to suffer a little bit lower margin. But it is what it is until next Q1 when every system makers, the module house realize, oh, wafer output declining, okay. Next Q3, the new generation flash because of cutting CapEx, right, they push up the new generation flash output. Next year, the growth come to like 10% or single digit. The market turned to stable. That time, the gross margin will start to differ. So I don't expect Q4 margin -- definitely, I believe Q4 margin may be slightly better than Q3 because I don't need to cut it at 5%. But Q1 or Q2, we can turn to much better. Okay?

Okay. And my second question is regarding you expect the demand to eventually come back. So when do you think this will happen, maybe in next year second quarter or first quarter?

Okay. Definition, define demand. They have 2 kind of demand. That first define demand is the worldwide economy. Economy turned to good. Europe war stopped the winter pass, the gas price going down, the China dollar policy release, then the market demand was slightly back, okay? And second demand is imagine if you are the smartphone makers, okay? Next generally, you need to start to prepare your revenue budget for 2023. And no doubt, the unit is pessimistic, means by unit-wise, the market will turn down. The only way if you are the director of the smartphone makers, do you need to try to put your ASP higher, okay? How to make the phone ASP higher? The only choice is to put more NAND. So this will create the other demand. Okay, I'll give you an example. If smartphone next year, for example, okay, cutting 30% by unit means declining from 100 to 70. But if smartphone inside the memory 2x growth, the NAND demand is 140%. You know what I mean? 70x2, 140. So actually, the demand in the NAND is increasing. And every new model planning starting from the Q1, they start to go production Q2 and Q3. So I believe by Q1, when the market, most of all turn to the stable the buyer, they realized, oh, the NAND maker, they are not going to cut price anymore. They need to make a plan, then they will come at to talk about the demand. So this will happen by Q1.

Okay. Okay. Got it. It's just a small follow-up. You say that the price may be down 30%, but content doubled. So is it...

No, I'm talking about unit.

Unit. Is it the real number you shared?

No, no, no. I just -- so I keep saying example, for example, for example, okay?

I got a question in the chat room. The question is how much does the exchange rate affect the gross profit margin in Q3? And will Phison buy more NAND from Kioxia to help Kioxia kept its utility rate at healthy level that Samsung does not cut utility rate as other companies? Will NAND price fall more than expected?

Phison accumulated inventory since last year Q4. At that time, the NT rough is around TWD 27 to TWD 28, okay? And the time we went to the Q3, TWD went to 32 -- 31 close to 32, actually this is helping Phison gain a big gross margin from inventory, okay? So this is good. So overall, my cost in the TWD versus the dollar is cheaper because a lot of inventory collecting from last Q4 and Q1. Q2, we slowed down the inventory, okay? Q3 we also slowed down the inventory. So sorry, I don't have how many percent we are gaining from the currency. We don't make this study, but next time we will prepare, okay? But TWD getting weaker actually is helping us for exporting. This is no doubt, okay? And second question is about Kioxia. Yes, Kioxia is a Phison's partner since 20 years ago. We're helping each other for many, many years. Without Toshiba Memory by 2002, Phison already gone. Okay? So they're helping us in every cycle 2004, 2008, 2011, 2016, 2019, when NAND cycle turned to terrible, Phison always work closely with our partner, Kioxia, Toshiba. Then the answer is yes. Actually, by Q3, we are start helping them to take some portion of inventory. We believe by Q4, Q1, they may have a potential, a big portion, okay, we're to help. But this if Phison start to go to cover this inventory, the market may feel, oh, when Phison start to go to have a big buy means it's almost touch to the bottom. So this is a signal we are going to release to the market. And Kioxia already announced by early October, they are cutting the wafer output 30% by CQ1. And what I can share with you, this is the truth, okay? And saying Samsung doing cutting production, I can't comment because the transparency of Samsung is, I don't have to comment. But personally, I don't believe because with this inventory level, Samsung is the highest in the NAND industry. Okay? So if they keep producing, they're not able to sell, this will force the NAND price go below the cost, the cash cost, which is I don't believe Samsung also able to suffer for long term. By anyway, no comment, okay? We are working close with our plan. We are helping them and we try to take their flash to make them more design wins, which is similar by 2008. Then, we're able to enjoy 2009, the big growth in the profit. Yes. So this is the answer.

And there is another question on the investors. What's the impact for U.S. banned on sending chip tech to China for Phison? And what's the advantage and disadvantage? For how long it will impact the SSD business at China and around the world?

Phison, our products actually never touch to the so-called U.S. mentioned national security industry. We are not going to the military. We are not going to the high computing AI. We are not going to the [indiscernible] in China. So basically, Phison products in China market, we're still very, very safe, okay? And talking about current trade war, the sanction in the China, personally I think Phison potentially can take the much better positions in the market. The reason is I think no doubt, eventually, China will build their own systems. They will have their own ecosystems, which Phison still as defined is a Taiwanese company. I don't know how to define if he is local or foreign, I have no comment. But we have our subsidiary, our partner in the local China. They -- because of a reason that's war, they are successful to get almost every phone-makers 2023 major business, major business, okay? Today, you're talking about China industrial, phone is mainly dominated by the China. I don't think PC is dominated by China, PC is still dominated by U.S., data centers still by U.S. China is a kind of consumption. But if you're talking about the phone, actually is managed, dominated by China manufacturers in the phone makers. So our subsidiary, I'm proud, excited to read now they have become the key supplier to work together on phone. And phone is consumer products, nothing related to the national security issue. So basically, we think we are good at this moment.

And I see we have questions from Jason.

Can you give more color on your SSD controller business? Do we see any price pressure or achievements slow down in third quarter and in Q4 or coming quarters?

Yes. To that PC, which from every public information, big inventory. But those big inventory actually is a previous generation model, which is a Gen3. The material is Gen3. So in the market, there's a huge number of a Gen3 drive. Gen4 is a new model, still picking up. But due to the demand slowdown, so the Gen4 demand also slowed down in the PC industrial. So personally, I believe we talk to all the PC makers. We believe by Q1, they may start to talk about next year's business. But right now the customer itself for Gen3 is almost gone. But luckily, Phison, we are not in the Gen3 PC OEM, okay? We are not. We are starting from PCIe Gen4. So Gen4 wise, we are still doing okay. And we also gained some extra than the other NAND manufacture project for the PCIe Gen4. Now we are developing for them. And in Gen5, we also requested by the 2 PC makers to develop the Gen5 for 2024 second half of our business. So making short, PC market, Gen3, gone. But luckily, we are not the supplier there. But Gen4 still growing, but recently a little bit slow, but believe by next year, Gen4 will back to the momentum. Okay?

Yes. So do we have any plan to control our wafer input to reflect or to control our supply from our foundry suppliers?

Okay. This is really embracing question. Unfortunately, foundry saying they are going to raise a price, okay, by CQ1 again next year. But we, personally -- we are not able to be raise the price due to the weak demand. And as a business partner in the ecosystem, we need to help our customers. So if markets turn to slow, we need to keep the price flat or make some discounts to support them because the market is terrible. In this case, we are not able to place much wafer since the foundry is saying they are going to raise the price. But who knows next Q1. If markets still turn to bad, we don't know if foundry policy may change. So in wafer in controller supply chain, we have now become very conservative. But in the NAND supply chain, we are getting aggressive because the NAND price already touched -- almost touch their cash cost in production. Okay?

Yes. How about the wafer input? Do we plan to cut the...

Slow down. Slow down.

Slow down. So do we face any prepayment or penalty from our foundry partner?

No. No, because the facility is not ready yet. It's just starting by second half of '23.

Yes. Okay. So my last question is regarding your operating margin and operating expense. You mentioned that you will continue keeping, increasing your development on the new product lines and also increasing your [indiscernible] account. So do we face any pressures on operating margins if we see both top line and gross margin pressure due to the demand headwind?

Yes. That's why I was a struggle a few weeks ago, either we slow down or we keep our spending. The reason I decided to keep spending because when I do to this [indiscernible] industry, I personally believe by Q1, everything will go back to stable, then the demand will like slightly back. So I may only suffer 1 or 2 quarters. As you're saying that expanding gross margin, we are suffering, we probably -- best case, we suffered 1 quarter, worst case, no more than 2 quarters. So if I slow down or I decide to freeze, but we got so many projects request by our customers, our ecosystem suppliers. So if I slow down means I'm going to lose a 6-month window. So if net pick up the project for next year, Q3 NP, next Q4 NP, we may lose the opportunity. So based on today's my knowledge, my study, I think the best case is we keep our activity. We may suffer. Yes, you're right, I suffer, but 1 quarter. Just take it. Okay? And on the other hand, Phison, we have very healthy in the cash flow. We have many inquiry from the customers. If today, we lost the project, I mean customer cut project, then I have no choice. But unfortunately, we get so many inquiry. I can tell you every week new project coming in. Of course, with the new project, we start to ask NRE as a service cost. This also can help me to cover my initial investment, helping to improve the big gross margin. So yes, I think 1 month ago, I internal discussed what is struggle, which way is a better. But anyway, the decision that we keep continuing. So let's see if Q1, the market tend to stable, the market -- in the NAND --I'm talking about NAND, okay, no others, then the confidence level getting higher, then I don't feel any pressure after that.

We got 2 questions from Donnie at Nomura. The first one is only 10% to NAND company's cash cost. So does that mean only 10% downside to our NAND price? And what kind of ASP erosion will be in Q4 and Q1?

Yes. By Q3, we believe this is touching small gap versus the cash cost. But talking about the modules, I think I'm hard to answer this question because if there's a crazy [indiscernible] okay, from China module house, from the NAND manufacturer, they need to dump inventory. They can cut price 10%, 20%, 30%. So it's hard to make explanation. But Phison's products, we've got so many so-called design win project, which customers, they are not able to replace immediately. And they also agreed with these products, they have to pay some premium. So if Phison's products most likely is in the retail, I can tell you, we need to cut the other 20%, 30%. But most of products is go to the embedded system with the customization. We just adjust a few percent in the selling price, customers may feel good. Especially in the auto industrial, customer didn't ask. They don't need us stable supply and better service. So I'm hard to explain how much margin may impact, okay, in our products line. But by overall quarter end, when we release a report, I think we can be good. But again, I keep reminding, we have to watch next Q1, what is going to happen in supply side.

Our next question is, there we suffered from net profit loss in certain quarter during the financial crisis. But due to we have much better product portfolio and better sell scale, how does management think the downside GPM and EPS will be in this down cycle?

Of course, by Q3, we suffered 5% write-off. By 5% compared to the EPS is close to the TWD 4, okay? So we suffered TWD 4 in the earnings per share. By CQ4, I think we still need to write-off a bit. So maybe between TWD 1 to TWD 2 EPS, then the rest is gross margin suffered from the competitors, okay? I still hard to give you what kind of a guidance, but I have a confidence by Q4 the gross margin we're able to keep versus Q3 or maybe slightly better, okay, because our cost, our cost in the components decreased a lot, okay? Yes. So earnings per share, our fixed cost, fixed cost is there. Our operating expense is there. I'm not going to cut in head count. So yes, so the earning per share, we may have to face pressure. But on the other hand, potentially, potentially, we still have an investment. We can go into, as I said, our investment to take some profit back. But I'm not making a decision yet. So we'll have to wait until December to see what's going to happen. And on the other hand, the weak TWD also helping us in our gross margin.

And next question is, is demand elasticity to pricing stronger or weaker this time compared with previous down cycles when we have higher revenue mix from retail and consumers?

Well, can you repeat? Sorry, I didn't catch the question?

Yes. Is demand elasticity to pricing stronger or weaker this time compared with previous down cycles when we have higher revenue mix from retail and consumers?

Okay. I'd like to, and show you why we keep the consumer business because when next bounce back, when market turned to good, the first bounced will be the retail business. At that time, this will help us generate good gross margin rate. So that's why we have a full range of products, okay? Every single day, some products may suffer competition, some products will may able to enjoy. That's why in the last few quarters, our gross margin is quite stable. Even though today, CQ3, the market turned to bad, take out the write-off, we still maintain 29% as a gross margin. So this is because of a very diversified to every different application. But when next bunch back, consumer business will help us a lot in the profit side. So next bounce back, we are going to focus to the consumer market first to earn better profit.

And what's the percentage of revenue for China by now? And has the revenue all went through HOSIN Global or Phison as other direct path for China sales?

Okay. Phison, by this year, our top 10 customers, not any single larger than 10% revenue, okay? The top ranking, #1, #2 is below 10%. So Hongxing is like our top ranking #5. They are helping us to cover the China market. And by this Q2 lockdown, China demand dropping big numbers. But overall Phison, our business mainly is still managed by the semicon, U.S. and Japan. And we have started to have some Korean semicon business. The whole market, talking about the cloud data center is a U.S. base. Talking about the smartphone, yes, is a China base. So I have no number to show you China, how many percent. They were new, but Hongxing is helping us to cover this. And again, the good opportunity for 2023, China smartphone makers. So this will help Phison a lot.

Will the IPO schedule of Chinese subsidiary be delayed? Will there be a subsidiary equity disposal plan this year?

I'm hard to give a comment because they are managed by the China's regulations. But let's see. Let's see next year, if they are going to apply to go to IPO. I can't comment.

All right. Thank you, K.S. And that's all the questions I've got from investors for now. [Operator Instructions]

Yes, just a reminder it's 6:00 p.m. already.

Okay. And I see Jason still has a hand up. And Jason, do you still have some follow-up questions?

Yes. It seems like your embedded ODM product lines still had a strong growth in Q3. So can you give us more details or outlook on this business?

Okay. This embedded ODM and this design win project to smartphone to PC to data center to a lot of IoT medical systems, we defined as embedded, meaning this is a module business, okay? And the average capacity per device last year was like PC is 256. Now we move to 1 terabit. For smartphone, last year was like 32, 64 now migrate to 256 gigabyte. So to us, like you mentioned, embedded ODM will become Phison's much because of portion in the revenue because this is a module base. But just unfortunately start from Q2 top down, Q3 market turndowns so that's where we started off. But we keep a lot of design win activity in the mobile, in the computing, in the IoT. When the market turned to good, this portion will become much faster growth in revenue and will become our biggest portion in the revenue. Okay?

Got it. So this business may have the better or lower reductions than end market. That's right?

Yes. Yes.

We have one more question in the chat room. And K.S., can you give us some color of 2023 big growth?

Big growth in what? In buying, in selling? In supply side, in business side?

Selling. In selling.

Next year, basically Q1, if market turned to the stable, then customers more willing to place the order. And today, we are making the enterprise. Enterprise mainly is a full 10 terabytes. It's a high-capacity product. With the enterprise, we are starting making a lot of design win next year. Enterprise will become one of the strongest growth in our business. So I still don't have a number to telling you how many big growth we're able to achieve. But overall, supplier as to Phison for next LTA growth of 40%, they asked Phison to increased buying cheaper by 40%. So we are still study, negotiate the price, the supply. And also, we need to make sure we are capable to enable the full range of products to the system embedded application, auto and data center, industrial. So definitely, next year, Phison big growth will be increased, but sorry to say, I don't have any clear picture yet.

Okay. And that's all the questions for today. And if there is no further questions, let's end today's call. So thank you all for joining us today, and thank you, K.S. for your time. And have a lovely weekend. Bye.

Thank you. Bye.