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

Good afternoon, everyone. My name is Jeff Ohlweiler, Head of Research at Macquarie, Taiwan. Very happy to be hosting Phison's Fourth Quarter '22 Earnings Conference. So with that, let me turn it over to K.S. Pua, who's the CEO of Phison. K.S. will start with the presentation, and then we'll go to Q&A after that. So K.S., over to you, and thank you for your time today.

Yes. Thanks, Jeff, and thanks to everyone. Just we start today our presentation, then we'll go to the Q&A. Okay. Okay. Then we'll go to the -- okay. In first page, we'd like to have some communication with our analysts and also the generalist and also our investor. In these few years when reports in the memory, actually, memory, they cover a lot of memory, so making a lot of confusion. But what I'd like to try to read definition, we're talking memory, we -- in our mind is [ DUM ]. And talking about the [ book] is no. But talking about NAND, we define this as so-called storage. So Phison, we are in the storage business. Okay. Let's say Phison now we cover both mature products and also much advanced growing business. In mature products such as you can see the medical, industrial and a lot of high-end camera. The mature business actually helping Phison to create good gross margin. Of course, this business, we are not able to create a big growth in revenue, but helping us in good in our portfolio. But in the more advanced growing business such as data center, automotive, which we need to keep injecting big money into our R&D development for our future technology. And means that with the heavy investment, we are capable to have a big growth in coming revenue and potentially we try to get more gross margin. So with the new Phison, we are capable to maintain our gross margin just because we have a lot of diversification on the mature stable business. So later I will show to you. And this is less R&D investments, but good profit and on the left-hand side, we have a big investment and waiting for our next booming in our revenue and profit. This is our '22 Q4 breakdown in our revenue. In controller side, we're still in the total revenue still above 30%. So this is good to us. Consumer business growing it a bit because during Q4 is the Christmas season, a lot of Christmas demand coming, especially last year, is the Christmas after the pandemic. So we got some good demand in the consumer business. In gaming business, in the last Q4 actually it is very, very slow. I think due to the inflection impact. But since last almost in December, the PS5 demand suddenly improving. So recently our PCI Gen 4 high-performance demand, which is PS5 upwards, we got multiple X of demand. So this is helping Phison to digest our summer inventory and try to get a better -- a little bit better margin, gross margin in our business. So, by the way, in our embedded ODM, seasonal, the PC business shut down, the smartphone software high inventory. So embedded ODM, we are declining. But we hope coming quarters embedded ODM can help us to gain our revenue. So Q4 last year, the revenue close to TWD 12 billion. The gross profit TWD 3.4 billion is the third highest in the same period, okay. And the gross profit Y-o-Y minus 27%. So due to the revenue up 26%, so almost the same ratio. And we have summarized in [indiscernible], by year 2022, we have 34% revenue coming from controller, and this is the highest in the present record. So in the last few years, our heavy R&D investment helping us to gain a lot of NAND companies, controllers outsourced business. This is helping us to gain a better gross margin and also helping Phison to gain a share in the market. And in the controller, the growth Y-o-Y is 17% and the PCIe, NAND, the Gen4, the growth is 15%. So both are record high. And margin was 70% coming from auto business and the PCIe y-o-y is 9%. But unfortunately, last Q4, the PC business frozen. So we hopefully, by this year, we're able to have the other improvement again. So this is our revenue, you can see since the last Q3, revenues starts dropping because of inflection and the China COVID lockdown. So revenue-wise, we are lowest in the 2022, which is Q4. And gross margin-wise, by last year's Q4, we are 28%, which improved 4% from the last year Q3. Based on our study in the Q4, we still have to write down our inventory. And this, in fact, 5% of our gross margin. So just in case if the market is flat, no -- the write-down, our margin can be 33%, but [indiscernible]. But even though write down 5%, we still keep 28% as our gross margin. And overall, by 2022, the total [ weather ] impact our 2.8% of gross margin. So again, if [indiscernible] we return back 2.8% to 28%, we are 30%, close to 31%, which is a history high in our business. So this chart show you Phison's our -- diversified in our [indiscernible] mainly we have a lot of auto, industrial and gaming, helping Phison to gain much better gross margin. So business to Phison is much, much healthy right now. Okay. I think everyone more concerned about the profit. Okay. We have to explain here. By the Q4, on the book, the profit at the end EPS is TWD 1.1. And why and what happened? Phison, we have an investment in China, okay. We own 39% of the company in China, which there suffer China lockdown, China the delivery problem, pandemic and also their overall weaker demand. So they have suffered the operating loss and also the inventory write down. So we have to write down this -- taking this loss close to the 3.9, almost 4 [indiscernible]. Again [indiscernible] we cannot do anything, but this happens. And we wish the market turn to good, they are able to try to digest the inventory and return back the LCM write down. The write off back to our write down, then we are able to take some write-off back by this year. So we [indiscernible] our investment company. We still have EPS [indiscernible], but after they suffer the loss on the book is TWD 1.1. Okay. This is our balance sheet highlights. I think you are more concerned is our inventory. Basically, by end of last year, inventory actually declining, we are managing actually quite good scale in our inventory. And after the big amount of inventory write-off, our total cost in our inventory is very competitive. So in the cash flow wise, actually, our cash flow improved versus Q3 last year. So at this moment, Phison still manage a very good high portion of cash. This is helping us capable to support our suppliers. And also, we are also capable to getting much lower price from our supplier at this moment. So overall, in finance, we are still very healthy. And inventory, we are still under our manage. So hopefully, this year, everything can go to positive, there we can turn our inventory back to our cash. And the company, the debt value is [indiscernible]. Okay. Okay. Back to the income statement here, if talking about gross profit, you can compare here Q3 and Q4 revenue declining 15%, but gross margin declining 3%. Actually, on the other hand, means our gross margin rate actually improving. Operating expense, we are keep -- okay, Phison, we are not laying off people. We are not cut down people. Actually, on the other hand, we keep increasing our R&D headcount, but due to the economy issue, right, the bonus write-off, we are cutting down a lot of bonus write-off. So overall, the OpEx by 4Q last year little bit declining versus 3Q compared to the last '21 4Q is 24% cut down. So employee number increasing, but we are managing well in our OpEx without layoff the people. Talking about the OP, actually OP Q4, improving in Q3. But again, unfortunately, we are taking the loss from our investment company in China, which we had to suffer total up to overall, including the foreign currency and the investment losses of TWD 1 billion this is quite painful to Phison. But again, [indiscernible] this happens. We are trying to recover back from these situations. Okay. So gross margin-wise, actually little bit surprise to me, after write-off of 5%, we still have 28%. So means, Phison, our business combination is very healthy. Okay. I'd like to also show you our [ TF and non-TF ] comparison. That's really the difference, okay, the gap difference here is mainly the employee stock options, the cost of that option. So not much big difference. So the total percentage is at 0.5% and 0.6%. So this is no big impact. Okay. Then we're back to our business highlights. So a few players you may [indiscernible] Phison, now we are working with some of our third party. We, Phison, our enterprise SSD already earned the [indiscernible] certification. And very soon or later Phison's enterprise SSD is going to build a fabric on the moon start to test if everything going well, 2025, our products will start to operate on the moon. So this is a big milestone of Phison to show our technology. If Phison [indiscernible] can be good on the moon, then we don't need to argue how about on the earth. So we are trying to get more data center business. This is helping us as a proven of Phison technology and quality management. Phison, this is our first Gen4 enterprises the day we got award from Taiwan excellence award. So this is also helping us to gain a lot of spotlight from our client. 2 months ago, in the [indiscernible] Phison's customer [ MFI ] with ODM, our Gen5 to them, which we got the hardware award, best in [indiscernible] 2023. And this is -- today is only Gen5 products in the market. And also, this is a report from the [indiscernible]. We are working with one -- okay, showing here some icon. There are new client SSD development solution with the Phison controllers E21. What this [indiscernible] give 100 point, means full point of this one. And they name, this is the best [indiscernible] in the world with our Phison controllers with Micron 232-layer NAND flash. So hopefully, second half, this drive will get more PC OEM business helping Phison to gain more our controller revenue. For Phison design win by Q4 in OEMs, we put our -- this is our highest PCIe Gen4, higher performance that drive into the OEM notebook. And also, we are putting our Gen3 with the [indiscernible] for military use, and this is a higher margin business. For gaming, we're also putting our Gen4 SSD built into the gaming laptops, which is a high-end product. Now it's going to MP and we believe this will help Phison to get more. This is not only a controller, but we are supplying the controller and the fresh all the component is [indiscernible] it's quite attractive. India automotive, we are putting our Gen3 BGA into the [indiscernible] entertainment. Right now, the EV, especially in China, they are aggressively to put the entertainment system into their real estate. And Phison, we got many design win in China market. And we're also putting our enterprise SSD to few server customers and requalified by Tier 1. For industrial, we're putting our Gen3 into a [indiscernible] systems, put together with our industrial partner. And also we are startup product into their video surveillance systems. So I think most attractive to Phison is gaming laptop and also the entertainment in the EV. And also Phison, we have design service business, we are helping the game console key player to put our controller with our former administration of NAND. They are moving upward to the next NAND generation. So with Phison's controller firmware of customization. We need that service for them. And we also have a design service to our NAND supplier, the high-end Gen4 enterprise SSD into the automotive, which asking for secure and safety. And sooner or later, we are going to have the samples to our customers and give to the Tier 1 automakers for testing purposes. And in Japan, we get our [indiscernible] platform customization business. And India -- I need to highlight here. The [indiscernible] from different brand looks like it's the same product because not much differentiation. Recently we are working with a few phone makers to customize Phison EMC and UFS features to help making the phone has little bit different features, performance to make sure they are able to show the phone difference with the competitors, then they can get something higher ASP from the competition. So we got award from one of [indiscernible] phone makers, the 2 years award to prove to [indiscernible] Phison as the best technology supporter to them. So we are talking to them. We have a 3 generation of UFS controllers working for them, means [indiscernible] the phone makers. Okay. The last, some outlook here. I think we need to really careful here about what happened in this market. After the Chinese New Year sale week in China, keep looking and checking, investigating what is going to happen. I can feel the China system makers there aggressively to launch, to develop, integrate their new products. They try to gain more business to get a better ASP. So we believe the demand momentum is there. But inflection [indiscernible] making the demand slowly, but they are preparing. So we believe something is going to happen soon. And again, due to inflection, due to a war, due to currently the bank. So the price of NAND is getting low, but for sure one thing you can read from public, every NAND maker, including the biggest NAND supplier start to suffer minus operating margin. All someday, I can say, they may suffer minus gross margin in the NAND business. And I believe this is not going to sustain for a few more months because it's negative cash flow in this business. So we also believe the capacity cutdown from China [ fab ], from Japan fab, from Singapore fab, from Korean fab is happening. And the last our observations from the PC supply chain, from the smart phone supply chain, from IOT supply chain, we got the intelligent number that, the inventory of storage actually declined quite a big number, but they're still not willing to start to push for -- to buy the storage products just because they think tomorrow can be -- potentially will be cheaper, so they are working. If they keep waiting, supplier getting big minus and system side has a low inventory and the season is coming. I mean, the summer season timing, the back-to-school season time, Christmas season also coming. So when that happen, right, we believe they will create the shortage period in the market. So this is my view in our outlook. Okay. In the R&D side, you can see Phison, our headcount actually keep increasing, by today we already have 3,000 headcount. Some shareholders asking Phison to have a layoff to save the OpEx. But again, this is Asia. And Phison's only hire the engineers, we need to spend at least 2 years to train the engineer. We still -- again, we have many projects still [indiscernible] customers pushing. We don't have enough skilled engineers to cover the project. So we don't know where to layoff, but we keep hiring the good talent to make sure when the next cycle [indiscernible], we are capable to get most of the order and the share from the market.

Okay. We [indiscernible] Q&A. Let me finish this Q&A, and then we can go back to online. Many shareholders, many investors asking, "Hey, when is the PCIe Gen5 is going to popular in the market?" Somebody saying by this year Q4, but first of all, I don't think this is going to happen. Look to the CPU makers, [indiscernible] the profit. Look to the PC makers, they suffer, look to everyone slow down their R&D investment. So we believe PCIe Gen5 will push to next year second half or next year Q4, start to go to the market, okay. Means at least a 3-quarter push out. But this may create a good window to Phison. Why? [indiscernible] market, the high-end PCIe Gen4 SSD, the more finance actually is Samsung, [indiscernible], the rest looks like is Phison's group, Phison's customers. So if PCIe Gen5 push out for 3 quarters, the market will needs a high-end product, Phison, we are the major players. And just few weeks ago, months ago, they have reporting Samsung's SSD have some quality issue, some [ armor ] issue. This is also the reason why Phison with the new, we got multiple X of demand from our high-end Gen4 business. So we believe that Phison is going to benefit our Gen4 business. On the other hand, Phison also to next year we have a Gen5 ready today for the [indiscernible] business. We also have a new most advanced 7-nanometer controller for Gen5, which is designing into the PC Tier 1. And we are prepared to make sure ourselves ready by end '24, we are able to ship to the market to take the share from the market. And about Phison, our cash, again, the cash most important to Phison is to maintain our business. Today, Phison [indiscernible] from the bank. We all inventory all by cash, and we still hold a big portion of cash. So if market keep going down, I believe, of course, we will suffer some inventory loss again, but we -- our cash able to buy more and much cheaper NAND component. By the way, [indiscernible] cost is much lower than the supply cost because now they are in a big minus. If I'm correct, recently, we buy a NAND, a piece of NAND from a supplier, they are losing 2 pieces of NAND. So you can imagine how [indiscernible] in supplier side today. So we keep our cash mainly in the business development and also in R&D development, then we are ready to share some portion to our shareholders. So this morning, [indiscernible] approved by last year, last Q4, last second half, Phison's total [indiscernible]. This time, we decided to improve the dividend up more than 55%, 60%. So number is relative small, but the ratio we are increasing. Hopefully sooner or later, we are able to pay a bit more dividend to the shareholders by our group profit in the coming future. Okay. This is a more concern about Phison's inventory write-off. We are -- this is to show you, okay. The -- above the 0 is the write off, below is the write-down. So you can read since last year Q1, after the pandemic happens, market price turndown, moving slowly, then we are writing off quarterly big amount number of here, okay? So by end of last year, total write-off number is close to 11% of our inventory, 11%, okay. By this year, Q1 January is a write-off, but February already write down, okay. Means we have a reversal from [indiscernible]. The reason is we -- the price already touch bottom and we keep selling our components, then we have a reversal from our write-off number. Overall, we expect the total, because by end of March, we still buying some components [indiscernible] big amount of component, which is so cheap. So potentially, we are going to write off some more numbers, but we are managing like close below TWD 200 million. So overall, we are writing off, but we're still able to keep our gross margin. So this is more concerned about Phison recently about, talking about analyst that report this, but I prefer you can know what is analyst saying, look to our charts here. Phison's every time big growth, the big growth actually coming from a big [indiscernible]. By 2009, we have a big jump. 2010 because of the [indiscernible] we jump. 2018, due to the oversupply in 2D to 3D, we suffer, 2020 big jump. This year '22, we suffer due to the COVID, again, COVID recover, but we potentially believe sooner or later, we may have a big jump because we have covered more controller here. We cover more important lines. We cover every application from auto, medical, industrial, PC, gaming, IoT, data center, blah-blah-blah. Okay. And really [indiscernible] I think sooner or later, by Q1, you can read the report. It's so broad, I don't believe this is going to sustain any more -- any cash. So when markets happen, bounce back, I believe Phison we are able to -- have done a good job. Okay. This will show you when NAND [indiscernible] happened. Phison in the past, we are favoring the gross margin. But by Q4, the NAND actually oversupply is like 13% according to the report. Phison, we are maintaining the 28% gross margin. Actually it's much healthy than before. So Q1, our growth grew as good as Q4. Okay. The only issue is that revenue-wise because ASP going down that much in March. So we are working very hard in revenue. So we are still able to keep the gross margin because of business diversify. The other concern is how China investment, which suffered loss, big loss in the Q4 last year. So, on the book, Phison, the total value of [ housing ] which is around close to TWD 3 billion, okay. And hopefully, that business will turn to good, then Phison going to recognize the investment gain from them. Actually Phison we -- again when we decide to [indiscernible] Phison gained a big amount from this entity. So hopefully, sooner or later, we are able to gain more. ESG, in these few years, we are working super hard on the ESG. And this is the index from the [indiscernible]. Phison, now we are in the 35 points, mid-high. So we keep improving ourselves. So you can see from 2020, 41, 53, last year 75. Hopefully, this year, we are able to get a high 70 or low 80. Okay. This is all the Q&A here. So we get back to the online.

Great. Very helpful. Before we open the Q&A to online participants, maybe I could ask a few questions first. So I guess one of the question I've been getting from investors, obviously, since [ 1 TC ] [indiscernible] prior to that, what was your business with them in terms of controller sales and NAND purchases and what changed that? And how did that impact Phison?

Okay. After last December, Phison cannot ship anything to 1 TC. Okay. But on the other hand, Phison have been 1 TC -- enable a lot of smartphone and data center business with Phison controllers. Though already in the phones area, so on the other hand, the phone makers, they need to buy the same configuration, Phison controller 1 TC, right? I'm not able to sell the controller to them, but I'm able to sell controller to third party. They are combining from 1 TC and assembly, the same configuration product to the phone makers. So on the other hand, actually Phison will benefit on this issue.

And then for your China exposure outside of [indiscernible], any other subsidiaries of -- that you still have in China that could either be positive or negative?

Actually, in China, we have 2 main subsidiaries. One is [indiscernible] and the second one is doing some solid for the security products, which is [indiscernible] product. Their size is too small. It's too small. So we suffer some loss, but the number -- compared to the [indiscernible] is a single digit. So it's just economic.

Okay. And talking about -- maybe start with PCIe Gen4. Obviously the initial start you had was with game consoles and then you are working with potential PC OEMs and then also for server. So can you talk about that potential market for gaming? Is there more upside from where you are now? Obviously there's lot potential PC upside, but are we seeing PC adoption, PCIe [indiscernible] already or is that really still a kind of a next year story? And then for PCI Gen5.0, is that a server first or is that a PC-first story?

Okay. Talking about Gen5, we believe the gaming desktop, high-end desktop is happening. We are now shipping the Gen5 module for gaming desktop. But I think the big volume happens soon is server, not PC. And for laptop, Gen5, I believe, will happen only by end of 2024 because of a reason that cut down, the layoff defect, okay? So back to the Gen4, we believe this year, most of the laptop bundles are most likely Gen4. But potentially, some PC makers still hold some inventory with Gen3 SSD, which the forecast that plays with supply happen by end of '21. Imagine the market actually shut down by last year, April to May timeframe after the Shanghai lockdown. So before that, most product was Gen3. Okay. So market there for Gen3 inventory or I can say there is some high inventory in Gen3 in controller, in module, but Gen4 actually is less inventory. And this year, we get from the PC makers, the mainstream of the storage bundle into direct hub will be Gen4 512 gigabyte and Gen4 1 terabytes. So this is good to us because Gen4 512 and 1 terabyte in the market inventory is low.

Okay. And when you talk about whether it's PC, whether it's desktop, notebook or servers, is that all going to be found in your embedded ODM business? Or is that not be spread out into other areas or?

Right now, we keep everything in the embedded ODM. And sooner or later, when my enterprise SSD business growing, we will take out from the embedded ODM. I mean when the number can be over 5%, 10%, then [indiscernible]. Yes.

Okay. And also the last years, you've seen a nice uptick in your controller as a percent of sales. Can you talk about ASPs and units in terms of last year? Was most of the uptick from ASPs or was that mostly from units?

ASP big growth actually was 2021 because of [indiscernible]. 2022 by second half Phison already volunteered to cut down the price to customers. We don't care -- actually, the [indiscernible] packaging cost still high, but we want to have a cost down to our customers because at the time we can feel, my main supplier start to suffer from their gross margin. So as a long-term friendship, we are helping them to [indiscernible] we suffered little bit margin, but this is to keep for long-term relationship. By this year, we believe ASP on controller is still difficult because demand is still very bad. But Phison, we are capable to earn much more profit from the modules. The reason is in margins, right, the net price dropping already Y-o-Y more than 60%. So we are capable to gain some [indiscernible] win business, which the price dropping 20%, but actually cost dropping 40%. So profit wise we are good. Yes.

And a reminder to callers, you can put a question in the Q&A box so I can ask and also, we'll also ask for great hands and you can ask directly as well. So K.S., I've got a few questions here in the Q&A box. So first one, as to big growth, what's our thoughts for 2023 big growth? Is 0 a target? Or is that -- what are you thinking for this year?

You talking about revenue growth or what?

Phison big growth shipments?

Yes. I believe this year will be the big growth is a big improvement because the ASP of [indiscernible] so cheap. So I'd be -- okay, you look to my January, February -- actually, I read my big growth little bit higher Y-o-Y, little bit higher, but revenue number is so low because price is already 50% down.

Next question. Is there any chance that enterprise level revenue will see 10% of revenue next year?

Yes, definitely, yes. And this is going to happen because in the coming few years, Phison big growth, our revenue growth has come in from the enterprise and auto.

And are those revenues, is that all module? Or does that include just some controllers as well?

Enterprise, we don't have a controller business because they have no controller customers. Controller customer is only the NAND makers. So it's all modules. Auto, we have modules and the controller business.

Next question. So whether there will be a new product for the combination of UFS 4.0 and BGA SSD?

Yes. We are working UFS 4.0 with 2 NAND makers and 2 phone makers. Okay. The challenging of our UFS today is, the demand in this year still weighs more. We are concerning if we make it ready, still no business. So we have pushed out little bit schedule. Now we are getting 4 project awards by our NAND and phone makers. And for BGA SSD, actually recently booming due to the EV entertainment demand, it's a 512 gigabyte and 1 terabyte and Phison is a key player in the BGA. So, we are working hard with the EV makers in China.

Next question. Are there a lot of supply opportunities for first-line [ CFTs]?

This is a good question. Actually, first line CFT is not Phison's customer at this moment because what they're asking price is super low. So I think this is all the NAND maker business. But in the CSP customers, Phison, we are looking for controller defense service potential business, and we have one ongoing.

Next question. So will the next generation of mainstream game consoles, 1 American and 2 Japanese, will Phison be able to get designed in all of those or just keep the same 1 American and 1 Japanese that you have now?

Basically, American side, we already met many design wins. So we're working very hard. And we are working with them. It's a 3 group working Korean supplier, American console customers, and we provide the full controller and [indiscernible] business. Japanese is a quite -- I'm not able to talk that much. But first of all, in upper market, we are taking the major share for next-generation business, the development, we are working hard, okay? We are working hard. But I don't believe this is going to happen soon. Based on roadmap from them, this may happen only in -- after 2 years. So we are working on that.

Another question on automobile related. What's the expectation for contribution by 2025 in terms of revenue for [indiscernible]?

Okay. Still hard to say because for the autonomous, this is not only that technology concern, but also a lot of regulations. So, okay, let me try to summarize what happened in the automotive today. Today, traditionally the storage in the automotive is mainly for the net of deviations and also the video recording, okay? So they are consuming only like less than 100 gigabyte per car. So this is a so small business, but we occupied a big portion of eMMC controller. Revenue is low, but share is high. The reason, again, I keep emphasize that EV tried to put the entertainment into the auto, into the vehicle, which they're asking for 500-gigabyte or 1 terabyte, and this is higher ASP. We are working on that. If this happens, we can gain revenue growth and the gross profit. The last is autonomous, which they're asking terabyte, high-end enterprise level, safety, trust and Phison looks like is 1 of 2 designer in the world. But again, we don't know this, when it's going to happen. But potentially, for customers start to ask Phison to ship the controllers. We got the forecast already. So that one if happened, if you are able to provide the terabyte to us, then you can imagine that to us it's a few hundred dollars. So we expect that is going to happen by '25.

And if I go down your list of revenues, controller embedded ODM, gaming, industrial module, consumer retail, what grows faster than average this year? What grows lower than average this year for you?

Okay. Let me go one by one here. Controller wise, I think we are stable. Recently, we got a few more design win from the NAND makers. Potentially the big growth, the biggest growth was coming from embedded ODM because we believe PC is going to recover. By the way, we got the Tier 1 PC customers forecast increase in the Q2, which never happened in the Q4. Q4 was totally new. Q2, we already got the focus up. And the smartphone use by China is booming up. So a big growth definitely coming from embedded ODM. Controller will be stable. Console will be stable. Gaming, I don't know yet, recently, gaming was so strong, but I don't know, able to sustain until end of this year.

Any questions from the floor that want to raise hand? Well, [indiscernible] see the right-hand button here. Do you -- if anyone want to unmute themselves and ask question?

Hello, K.S., it's [indiscernible]. I think I have maybe 2 questions. First one is regarding to your revenue contribution in fourth quarter. So controller is like 32%. If I remember correctly, it looks like to be one of the highest sales contribution from controller within a quarter, right? Because I remember, in previous quarter, it's most likely 20%-something. So is there anything related to our driver or those non-controller IC business booming in fourth quarter?

Okay. Actually Gen5, the driver on the Gen5 motherboard, Phison market share is the biggest in the world. But unfortunately, Gen5 this year, as I mentioned, right, the market is so slow. The company keeps cutting the [indiscernible] they also suffer the gross margins or slowdown or the new product. But since last week, the driver forecast coming from the key motherboard in Taiwan finally increased 2x, 3x meaning the market is slightly coming back. But whichever itself is below $2 product, there's a small revenue. But I mean meaningful to us is we're able to put the driver to the PC, but now we are trying to put our new driver into the server, okay. We have our new driver coming back 2 weeks ago, already put our driver on the -- some server, AMD-Intel platform, Gen5. If that happens, then the driver can be between $4 to $5, and they are going to use the second piece per driver, so -- per motherboard. So if that happen, will help us to create a lot of revenue.

So, may I ask, how much sales contribution? I mean within the basic controller business, how -- what's the breakdown right now? Is like not 90% controller or?

You mean the driver, the portion, right?

Yes.

Okay. I gave a number, okay. We are shipping like 2 million pieces in the quarter, 2 million pieces with $2 is just $4 million, easily you can see almost nothing now. But if we put this into the server, then amount can be big.

And second question is regarding to the EPS has been pretty low in fourth quarter, right? So I mean, it's almost back to 2008 levels. And you have mentioned about gross margin may be relatively stable in the first quarter compared with fourth quarter last year. But how about the [indiscernible] in China? Will we see deteriorating EPS in the first quarter?

Okay. Last year, I mean, now it's totally different with the 2008, 2008 Phison only with USB drive. So when market crashed, we crashed. But now we have so many diversified in the product. So [indiscernible] this low earning is not caused by Phison operation, it's caused by our investment. And to be honest, I can't do the math. Okay. I believe by Q1, [indiscernible] still suffer their inventory, still. But I still no idea the amount because Phison we are nominating [indiscernible] we just as an investor. So we have to wait until the accountant to have a report. So we are keep monitoring them. But hopefully, hopefully, that business is more simple. When the market price pull up, then the loss will turn to the end. So I hope this is helping Phison potentially to return our loss in the last year Q4 and this year Q1.

So basically, maybe in the near term, in your view, maybe for the NAND cycle or the earnings momentum, maybe first quarter should be the lowest point. Is that a correct assumption?

In my view, yes, but I think better to call [indiscernible], whether they are going to keep producing or not. I totally don't know what happened there, but again, until end of this month, you can work from every supplier, every NAND makers, minus gross margin, single-digit gross margin, big minus in the operating profit. In the end, the question is how long [indiscernible] can be sustained? Yes.

The next question is coming from Jason from CLSA.

My first question is in terms of your gross margin in Q4. If we look at your gross margin in Q4, if we don't recognize your inventory write-off, it's just like your Q4 gross margin had the improvement compared with Q3. So I just wonder how to get such improvements during this NAND or module ASP downtrend?

Okay. This is [indiscernible]. Okay. Imagine, Phison have so many diversified [indiscernible] we make a lot of design win into the system. If a fresh price dropping 60%, I need to have inventory write-off. But on the other hand, the design win project, the customer is not much sensitive in the price, so we just lower like 5%, 10%. So on the it hand actually we gain more from the design win project, which can be industry, can be auto, can be IoT, can be telecom, can be medical. So at Phison, we cover most of those business, helping Phison to gain the gross margin. So this is a big difference between Phison and [indiscernible] in China, mainly in the consumer market. [indiscernible] today like Phison 2008, consumer. But Phison today, we cover everything. So if you're asking me, downtrend in the market, I'm more happy because when [indiscernible] today, my cost in NAND is much lower from my manufacturers. So you're talking about the module price competition, we can be much competitive than the NAND makers, and we are able to gain more profit from those business. Okay.

So your design winning products or projects have the higher gross margin compared with maybe other [indiscernible].

Yes.

And my second question is in terms of your applications. It seems like your consumer product lines or segments have the sequential improvements in Q4. But your industrial segment has a huge correction in Q4. Could you give us more color on these 2 kind of product lines or segments? Do we see any recovery from the consumer side or it's just your design wins or designing a project to sustain your gross momentum in Q4? And I just want to know the more details coming from your negative growth or traction in industrial segment?

Okay. In last Q4, it's seasonal, so consumer market turned good, but again, due to the inflection, last year, you imagine a lot of corporate layoffs, they start with high interest, they pushed out their demand. So that's why industrial, we are declining. But recently, what we get from the forecast from our designing customers, the demand gradually back, gradually back. So if you ask me potentially in the coming few months, which is stronger, I can share with you what the embedded ODM because smartphone lower inventory in storage; PC makers, lower inventory and sooner or later they need to get something. And consumer wise, I think usually Q1 is a slow season, Q2 is a bit good, Q3, Q4 pickup. But this depends on the macro economy, okay? And inflection looks like from days ago, U.S. market looks like under managed, under control. Hopefully gift shopping in the second half this year consumer market able to boom up and we are able to benefit.

And my last question is, can you give us your guidance for your operating expense, no matter the numbers or percentage?

Operating expense, I think, okay, let me have the numbers here. You can see, okay, I think here. We increased the headcount. But because of P&L going down, we are not taking that much of bonus. So we believe operating expense we'll keep [indiscernible] in these 2 quarters. Okay.

That means the number or percentage?

I'm not talking about number, number. Specifically it's hard to say numbers. Okay. I have like to share with you when they, NAND suppliers saying they're okay, no more, they don't want to say loss, no more. And no inventory players, they need to buy inventory. The world is suddenly changed in one night. So the number -- I mean, the percentage, I'm not able to tell you because I don't know yet. But number [indiscernible].

The next question comes from [ Anthony Jones ].

My first question is about the UFS business. You just say that you have some pipeline for phone makers and also for the NAND makers. I want to know the phone and NAND makers. Recently we have seen something like the smartphone, especially for the biggest UFS, NAND makers. Is there any chance to get the share in the phone [indiscernible] the phone markets? Yes, I want to hear some view. And when do you expect this to happen, if this is true?

Okay. The phone today [indiscernible]. So we have to get the either one controller business, but it looks like Korean to Korean, they use all in-house, okay? So potentially, we can get the other one as a controller customer to put our controller into the MCP. And in this [indiscernible] side, we are much easier because we are direct work with the phone makers. So that's what I'm saying it. In the [indiscernible] we have main customers using our controller. We have 2. And on the other hand, we have 2 phone makers. We are working with them on controller.

So for the phone maker side, is this just [indiscernible] the R&D or design? Or it is just the pipeline and we will see impact second half of this year to happen?

Actually, UFS [indiscernible] happen now, is happening now, but that's slowly went up. Yes.

And my second question is about the inventory write-off. You just say that the first quarter, the market will have some more write-offs? And overall, we will see continued inventory write-off. So will we see the total inventory write-off to kind of back string from fourth quarter? And I just want to know that total, including inventory write-off the gross margin trend?

Okay. Based on this chart, okay, I just share with you, February is the reversal is inventory write-down, not write-off, okay? So means inventory weakens, okay. Much because we keep buying more [indiscernible] from a supplier. So potentially, inventory need to write-off something, but the number, I think will be a big declining. And potentially by Q2, the whole quarter's inventory is writing down, means will turn to positive. It's a reversal. Yes. So now I'm not much worry about the inventory write-off because the price is almost bottom. So when I just boom up, price up, then suddenly all the write-off we have to return back as a positive number.

So we expect inventory reversal in this -- from the second quarter onwards.

Hopefully, yes, because February [indiscernible] already, yes.

So K.S., it's Jeff again. So one more question for me. It sounds like you're very confident that NAND pressure at the bottom, which I certainly agree with, but why wouldn't you be more aggressive in buying inventory even?

I do. I do.

Okay.

Okay. Not because I like to buy much, every NAND supplier keep coming to me. So while they offer, they must aggressive price, and they are taking minus 60, 70 gross margin, then why not?

Yes. Okay. A couple of more questions from the Q&A box here. So Phison invested in [indiscernible] global company a few years ago. Is there any IPO plan this year or in the near future?

Okay. Let me clarify. Phison, now, we are just a pure investor. We are not getting any [indiscernible] in the operation in our decision. So that's why I don't know what happened [indiscernible] but I believe they have a plan to go to IPO especially in the China market now, the government looking for more domestic designers. So I believe there's a plan, but I don't know when. Hopefully they can make it happen soon and then Phison we are able to take our investment bank to help make more income from investment.

Another question. So Micron, Western Digital [indiscernible] and other have delayed production expansion. Will it affect the progress of development or development of the main controller?

Answer is yes. Actually they are not just only delaying, they cut down of CapEx. So I'd like to say they may skip the 2xx level. But on my hand, right, controller is ready. If they move from 2x to 3x, then Phison can use a current controller, optimize the firmware. So to me, development is nonstop, nonstop, yes.

The launch time of the new e2017 is due to the announcement of SMI and [indiscernible] new generation Gen4 [indiscernible] supply. How will Phison respond?

Okay. For the E27, this is a dedicated design for the 2 NAND makers, is the highest performance with the full function on the [indiscernible] controllers, okay. And yes, we get from SMI and [indiscernible] we test their products, we file their PCI interface compliance hassle, many issue in quality wise, still long way to go. And for SMI, yes, they have a product. But my question is by this year, the PC total amount by unit declining means control demand declining, okay. But Phison we end the design win from the NAND makers from our partner [indiscernible] and other, our module customers. So controller, potentially we make growth because more design wins, but we're able to get our gross profit from the module business, which -- and by the way, the investment in the controller is so high, so expensive, okay. So I don't worry about [indiscernible] and I no worry about SMI.

Okay. I've got one more question here in the box. So Korean NAND factory enters the main control supply chain opportunity. I'm not sure if that means are you seeing more chance for you to gain share or get into the Korean NAND makers supply chain or [indiscernible] buy more NAND from them?

First of all, Korean NAND company, they are not going to sell controller for sure, right. So then my understanding is then NAND, Korean NAND is going to outsource and answer, yes, because I can look to this market. Every NAND maker layoff, cut down the bonus, cut down the salary. They want to lower on all the OpEx, all the expense, right? But they cannot miss the time-to-market projects. So definitely they have to outsource. And that's why for these 3 years, we're increasing engineers, and I'm not going to layoff engineers because we have so many inquiries for the NAND makers, not only Korean, but also China, also U.S. and Japan. That's why we need to have a good amount of the good skill trained engineers. And the answer is yes. We are getting a few projects from Korean NAND makers.

I have one more question and maybe give everyone last chance if they have prepared questions before we end. But -- so I guess, Silicon Motion agreed to be acquired by MaxLinear at some point last year. Is there any impact on you? And whether or not that deal goes through, what's the impact of Phison either way?

I don't know whether this is going to happen. I still keep listening, they're waiting the [indiscernible] the trust decision, but rumors in the Beijing almost are -- this rumor [indiscernible]. And if that happen, right, they are laying off people [indiscernible]. And potentially, based on experience, history and if design house acquired by the other design house, most likely, the activity will slow down in coming months. But again, Phison not layoff people, we are keep hiring people. We make ourselves much healthy, [indiscernible] the project. At the end, I think we are able to benefit from the acquisition.

And maybe another question from me. With a lot of tech companies laying off workers over the last 6 months, is it easier for you over the last several months to find new people. That was obviously a year or so ago.

Yes. Yes. Actually I [indiscernible] people hired, engineer hiring since -- actually since the last year March when the Pandemic happened in the [indiscernible]. Okay. So we slow down. I keep more space for the coming, more talent with, make it simple, much lower cost for the talent, recently, yes, which are some good talents from the market.

Okay. All right. Anyone have any last questions? Okay. Great. Now I think it's all the questions we have, K.S. I want to turn it over to you. Any final comments before we end the call?

Okay. My comment is Q4, we're doing good. Unfortunately earning not good because of investment and nothing to say, but we're working hard and my observations, again, NAND supplier [indiscernible] NAND already big minus. And the inventory level in systems side is so low. So sooner or later, I don't know when, I don't know when, maybe you can make a call to Samsung to ask when they are going to turn the market. But sooner or later, we are going to make our sales much healthy. And again, last, we keep investing in R&D, never stop, never slow down, never layoff. Okay.

Great. All right. Thank you very much for your time. I really appreciate it. And thank you everybody for calling in.

Yes, thank you, Jeff.

Have a great day, everyone. Thank you.