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

Good afternoon, ladies and gentlemen. Welcome to participate in Phison 2023 First Quarter Earnings Call. This is [ Jack Chen ] from Citigroup, serving as host today. Today, we feel honored to invite Phison's CEO, Khein-Seng Pua, to join our meeting. For today's agenda, we will first begin with financial results, business outlook and also question collected from investor and Q&A session. As a reminder, this meeting will end in 6:00 p.m. Right now, I would like to turn the call over to CEO, Khein. Mr. Khein, Please go ahead.

Good afternoon, good evening, good morning, ladies and gentlemen. Thank you for attending Phison '23 Q1 Financial Report. First, we still like to redefine again in the media and a lot of analysts keep saying memory. But Phison will prepare -- in NAND, we are going to say this is storage. Memory basically is a point to the DRAM, okay? This is what we collect from the market. This is the last quarter. Micron is different. Micron is from December to February. Basically, this is what they are lost in this 3 companies. Most of them, they are covered via NAND and DRAM. But based on our study and from the resource firms, in the last 3 months, basically, DRAM still maintained profit. So most likely, the loss are coming from NAND. So these 3 companies, minus TWD 8.3 billion. And the other 2 key players, definitely will be released by the next week. [indiscernible] IPO we believe by middle of May, they are going to release the report. So personally, I guess total loss in the net industry potentially will go to TWD 12 billion to TWD 13 billion. So this is to show you how bad the market of NAND. And we also believe with this kind of a loss, the name makers, they have no more room to cut in the price. So this is -- I believe this can be a signal to the market. Okay. In the '23 Q1, I think the ratio basically is quite similar as the last year's CQ4. But we from this breakdown, we are able to get also some new signal. Basically, gaming modules, gaming modules since last CQ4 last year, you may get the report from a lot of media, PlayStation is selling good. So on the other hand, Phison, our Gen 4 upgrade SSD for PS4. We have around 4x demand versus CQ1 versus CQ4. So this is helping us to gain some more revenue and with a better gross margin. And for embedded ODM, you also awarded the PC makers, it's last CQ4, almost didn't place any PO. Smartphone makers also don't place any PO. But from CQ1 slightly, we have some order from [indiscernible] CQ2, we also got some Tier 1 delivery increasing. Actually, it's quite stable, okay? So I believe at this moment, also from our study that some PC Tier 1 makers, smartphone makers, they don't have a high inventory anymore, okay? Inventory that to kind of much healthy. But at this moment, they are still not willing to place a big order. They still try to negotiate the price. They are trying to add a lower price. So we still need to work in monitoring what is the real demand from the end user side. Okay. The CQ1 revenue is close to TWD 10 billion. And the gross profit is TWD 3.2 billion. So revenue-wise, we are declining 41% and the gross profit declining 40%. So from this revenue trend, since the last year Q1, it looks like every quarterly, the revenue declining. Hopefully, we hope by CQ1 is about, we hope, okay? And we also need to monitoring the demand from the end user side. Basically, from the system side, system means smartphone makers, PC makers, system makers, inventory is low, but they're still not willing to place a big order, they still try to negotiate the price. So basically, still supply side and the customer side due in the market. Okay. This is Phison's -- our gross margin rate. By CQ1 this year, our gross margin was 31.7%, which is the second highest in our single quarter in the history, okay? And in the Q1, we also have a reversal of write-down means inventory, we are able to reverse around 1%, which helping to our gross margin. So if we take out this 1% reversal, the gross margin is around 30.7%. So still higher than the last 3 quarters, maybe last 4 quarters. Then you may like to ask why? In the CQ1, Phison, we are not willing to go to compete price in the market. We still insist we need to ask a reasonable price. Second, Phison, our product portfolio, as I mentioned, we have gaming modules, we have industrial modules, which is a better gross margin. It's a high mix customization, which we're able to get better margin. And the NAND price, we're still able to get a lower price than every quarter. So we are able to put lower price NAND into the high-value products. And the fourth, we are getting some more design service project -- later I will mention. We have a design service project with Navi base. And those Navi helping a lot in our gross margin rate. So the earnings per share, CQ1 on the book, finally, the earnings is TWD 1.26, basically, personally, I'm disappointed, but it is what it is. And the reason -- again, the reason is we have to take a loss of our investment in China, which cost us around TWD 2.8 loss in the EPS, okay? So we are doing very hard to make sure Phison, our own gross margin rate, our own gross margin able to keep reasonable, but unfortunately, the investment still taking loss. But good sign, potential good sign is in the CQ2, the loss from our investment in China may go to flat -- may go to even. So hopefully, this has not become our burden in the coming quarters. Okay. So this is caused by our investment in China. Okay. The balance sheet, which investors more concerned is about cash flow. We still have TWD 10 billion cash on hand, which you may a little bit confused. Last quarter was TWD 17 billion, then went to TWD 10 billion, what happened there? Basically, we have around TWD 3 billion, the account payable which we postponed to the Q1. We negotiated with our supplier there, asked Phison to help to put in the material, but we ask the longer payment terms and they take it. So originally, a lot of AP had to pay by CQ4, but we pushed to the CQ1 around TWD 3 billion. And we have engineer employee bonus cash by TWD 2 billion in CQ1. We also have a shareholder dividend, cash dividend by around TWD 2 billion. So overall, TWD 3 billion; TWD 2 billion for employees cash bonus and TWD 2 billion for shareholders. But with this TWD 10 billion, I believe we still maintain very healthy in the cash flow. We're still running the business with a 0 debt from the bank. Inventory-wise, we keep its freight inventory versus last CQ4. And the write-down portion is around 11% of our total inventory. So we still keep 11% room potentially able to reverse in the coming futures. And the total net value still maintained is similar as last quarter. And this is the inventory turnover rate. Basically, inventory is a flat, but the revenue wise, customers come to us only asking lower price. Then they're willing to place all the -- but in some time, we are not willing to take a lower price, so we reject. So we prefer to keep our gross margin. And we also believe that NAND suppliers, they're also not willing to cut price anymore. So we believe we do need to -- at this moment, we have enough cash flow. We don't need to dump inventory in order to get a revenue by loss in the gross margin rate. And by the income statement, revenue-wise, we are declining like 20 percentage. Gross profit declined a little bit and the operating expense, actually, we are increasing. So we still didn't slow down our R&D activities. We still keep investing our new engineers, new projects, new tech out, okay. And versus last CQ4, the NAND operating again -- China loss is a big portion. CQ1 is -- the gap is smaller. Hopefully, by CQ2, we're able to, hopefully, okay, to keep this to even, but they need to work very, very hard. But even though not going to even the minus were -- going to small. They're much smaller than the CQ1. And gross margin wise, we're doing good, is second highest in the history, okay? So this is the income statement. So we also like to disclose our [ TF and NAND TF ] the difference. As in the operating profit, actually, the gap is a small, it's like 0.7%. This is all about the stock options to our employees. And we have started exercising our stock options. So in the coming years, Phison will have more in the stock options and also in the treasury shares exercise. So we believe in the future, the TF and NAND TF, the gap will become much bigger. So we have to try to -- as plan, to shareholders to tell you what we are doing. And we need to also get the incentive from this option and the treasure share to attract more talent to join Phison. Okay. So by April, the April revenue is TWD 3.3 billion, a little bit declining by MoM. The reason is customers, they're pulling some material by end of March. By April, after Samsung announced cutting their production, customers still asking lower the price, okay, which we are not willing to take lower price order. So we insist not to take that kind of a low price order. So that's why the revenue is declining. And by last year, March, we also issued a service -- design service to customers. And by April, this portion is small. But by CQ2, we still have a big portion income coming from [ Navi ] design service. That I will explain more to you. Okay. Some business highlight in the CQ1. Our partner, actually, we get very good in our PCIe 5.0 express, and we believe it's only one supply in the market. And the products itself already in the market, and our customers also get very good review -- results from the -- a lot of reviewers. And we are working with our partner, Crucial belongs to Micron, Micron will get closer to Phison. I believe they are launching the products after a few hours. It's the 5th of May by U.S. time. So they are going to ship the product to the market, you're able to give the market, and they are getting very good point from the reviewer. So this is all about Phison. We are working very close with them. And hopefully, these products are able to help Phison and our partner getting much better gross margin because it looks like this is only Gen5 supply in the market. Also our PCIe Gen4, our partner in Japan, which is for the PS4 upgrade, they get also with a good recommendation from the magazine. And this demand actually increased quite a lot because of PS5 keep selling good. And this product also helping us gain much better gross margin. Okay. Basically, CQ1 is a very slow season. Smartphone makers was low, PC was low. But embedded industrial, basically okay. And we also made some design win into the PCs, into the tablets. We are more focused in the gaming business. So we believe the gross margin gaming is much better. And our enterprise SSD getting more design win. But the problem today is even though we get a design win, Samsung still in the CQ1 cutting price. So we are not willing to compete with them to take minus margin to get the business. So our activity right now [indiscernible] when the market price bounce back, we are able to use our low-cost inventory to take the big market share from the customer side. And industrial demand is stable. We have slightly increased our market share. Okay. CQ1, we announced our new business model in the -- especially in the Bay Area. We've got very good and positive response from our system customers. You know, Phison for these 20 years, we accumulate a lot of our IPs, not only in the circuit, but also in the analog, high-speed interface and firmware integration, system integration. So we announced and promoted design service model, and we already got a few Navi design service project, which mainly in automotive, in PCIe Gen4 SSD model for the automotive business. And also, we have serviced to few Android phone makers China. Android phone basically now, other than Samsung, it's most likely from China. We have serviced 3 of them in the UFS controllers customization. UFS 4.0, customer designed a new ASIC and the firmware and also the new EMC for Android phone to migrate to the 176 player of a NAND. So this is all about Navi base, with Phison, our strong portfolio, strong R&D resources, and we are more willing to help customers to make customizations. And we have our customization, the storage to the customers, they are able to increase value in the phone, which directly they can get a much better ASP in their selling price. So this is helping customers, also helping Phison. So we are good to let you know. We are already in the design service business and already generate some of income through the Navi. Okay. This is some summarize, okay? Again, you read from every public media, NAND makers suffered the loss. I believe in the history, this is a single quarter, close to TWD 12 billion to TWD 13 billion in the NAND industry, okay? So we believe they have no more room to cutting the price. So last month, April -- actually this last month April, April 7, Samsung also saying that they are cutting their production in the NAND. And we don't know if they are willing to cut it more. But if the loss in CQ2 still as a similar as a CQ1, I believe they may need to cut some more production, okay? And what Phison, we are trying to do is transform ourselves to go to the design service, which is helping us to get our much better profit margin from this industry. In supply side, I think we don't need to spend any time to talk about supply side. You know everything very well, no more room to lose money. Now today's question is what happened to the demand side? Okay, demand side, basically CQ1, Western market is still very weak due to inflation and high interest rate. China slightly recovered, but we still need to see CQ2, CQ3, how strong the rebound from the China market. But anyway, we keep ourselves ready and controllers development, we keep investing. We still accumulate the low-cost NAND flash from our supplier. So inventory-wise, we keep like TWD 21 billion, potentially may increase TWD 1 billion to TWD 2 billion by CQ2, depends on if we're able to get a better price, we are willing to collect more NAND from our suppliers. So today, I think the only question is when will the market demand rebound? This is what we are now keep monitoring, okay? Again, Phison, we insist, we are not going to lay off engineers. We keep hiring more engineers. We keep investing. This year, we have 2 7-nanometer tape-out, few 12-nanometer tape-out. And this is all decreased by the NAND semiconductors inquiry. So by all the expense, due to the revenue declining, so the ratio is surprising, 20% is high. But we believe the slow season is a temporary. Slow season cannot keep for a few more quarters. So by customer, they may need good service, good products when the market bounce backs. So we keep investing. And hopefully, we can see we are able to gain some market share. We got some Q&A from the host. So let me clean up the Q&A, then we go to the live.

This is asking by Samsung, what happened to Samsung? They are cutting -- they are taking loss in the NAND business, but are the investments high? Why? I believe if a company you are doing healthy in finance, in cash flow, the much, much smart -- the wise thing to do is increase your R&D, because we believe bounce back will happen very, very soon, okay? And we have to make ourselves ready for the new technology, new products and make the team healthy to prepare for next bounce back. And the production cut, I think, already happened. If CQ2, they still -- the loss still big, we believe, okay, the cut may happen again. But it depends on also the demand. If the demand, CQ3 is not coming back, I believe NAND market may cut more in production. And by the way, in China recently, they have 2 module house, NAND module house just public. So we're able to read their report. Also from the report, both of companies are taking minus, okay? And also, they are super high inventory. They need to run off their inventory. This just deferring the NAND market is so bad, but Phison, we're still able to keep revenue and also with our gross margin rate, which is a second history high. But again, prices are not going to -- not going to decrease the R&D investment. We keep insist to develop the more projects and to build a strong team. Okay. Just get a question from this afternoon since our announced [indiscernible] and saying that they are going to managing their expense. Again, Phison, we are clear. We got so many inquiry from the NAND makers, from Korea, from U.S. and Japan. They are asking Phison to prepay more controllers, more firmware, more systems for their new generation NAND. We also get inquiry from automakers, smartphone makers, system makers, PC makers for a lot of applications. So we still tight with our engineering headcount. Of course, we are not going to increase headcount crazily, but if they have any good talent, Phison, we are willing to take it. So we are not going to slow down the R&D activity, okay? And based on Phison's history, I just made some study, 2019 NAND market also suffered the low cycle, okay? In that period, when you read the Phison, this is a yellow color, Phison R&D, we decide to improve, increased R&D activity. This helping Phison in the coming 3 years, we gained revenue, we gained profit. So what happened to today? CQ1, all the NAND makers, I mean, the U.S. NAND makers laid off. Korean NAND makers, they slowdown activity. They cut the CapEx, okay? They cut the R&D investment. Controller house, they're cutting their expense. Phison, we insist to keep. The reason if 2019, what we did happen and we enjoy after 3 years, we believe sooner or later, when markets tend to healthy, Phison will be able to gain our much better profit from the market, and we're also able to gain more market share. So this happened in the 2016, 2019, we believe, again, let's keep watching if we are able to realize our commitment. Okay. Again, Samsung earning -- but Samsung, they highlight the big growth rate as is the market expectation. Why? When NAND getting cheaper, the system content, they are willing to increase. So [indiscernible] today from China is a 256 gigabyte smartphone going to 256 gigabyte to 512 gigabyte. PC going to 512 gigabyte to 1 terabyte. So this actually is helping the NAND capacity penetrate to the system. On the other hand, NAND makers losing money, they lost more. System makers, they are willing to use more NAND. On the other hand, this helping the growth in the NAND industry. So we believe today's -- what we are concerned is no more talking about supply, it's talking about when the demand is coming back. Okay. This is -- we get last week from the Digital, saying that -- they may be rumor. But yes, the NAND supplier, they are not willing to lower the price any more than March 31, okay? They wish they're able to raise the price, but you need to see if the demand happen or not, but they are not willing to lower the price anymore, lower than the March. So I think this is a signal to show, okay? There are no more room to lose money. Okay. This is to show you our inventory, the write-down and the reversal. Basically, the Q1, we reversed some inventory back. I think I remember, it's around one TWD 100 million to TWD 200 million. But for the second quarter, we still have to write down. Then you may need to ask why. We made some deals by CQ1 from our NAND supplier, which price is -- is kind of low price but shipping to Phison by April, May and June. So the cost we lock is quite low. This may pull down our average price. So we may suffer against some inventory loss. But overall, this is still helping us still very healthy. So we believe by CQ3, supplier, they are winning. They try eagerly to increase their price is for helping Phison to reverse again. So just to highlight, we may need to write down some. I think it's around TWD 200 million, okay, by our CQ2. But this potentially will reverse by CQ3. Okay. This is our -- again, our data. CQ1, their supply/demand is much, much oversupply. I think it's around 10%. It's around like 13%. So anyway, market is badly, supplier lost by TWD 12 billion, TWD 13 billion. But we're still able to keep our good gross margin. The reason is a wide portfolio, design service, we are capable to lower our net price cost. And we're able to get a little big premium from our products. So we think when market back to normal, we are able to maintain our business. And this is happened [indiscernible] 2010, 2015, [indiscernible] because we don't have design service, we don't have high mix premium products. But today, we're doing okay. Yes, we talked [indiscernible] since the last CQ3. Then CQ4 is a big loss, CQ1, the gap smaller hopefully by coming CQ2. We hope even or just a little small loss, okay? And we also collect the 2 companies, which is public in China, this is probably in Shenzhen, probably in Shanghai, and they are losing money in CQ1, but surprisingly, their market value, unbelievable is RMB 40 billion, which is much larger than Phison. So I don't know -- I'm not able to complain, but it happened. So we keep encourage of how we push, the need to hurry up. They need to work hard to make sure they are able to go to IPO. And ESG-wise, we just get the new announcement from this OTC, Phison, we are ranking top 5 among these 700 companies, this in the OTC. So we are working hard in everything ESG. So hopefully, I wish our hardworking shareholders who are able to know and appreciate our team members. So both is today's file, then we can go to the live.

Okay. Thanks, CEO, Khein. So right now, we're entering Q&A session. [Operator Instructions]

My first question is just one. Can you give us more details on gross margin side? It seems like end price has declined in first quarter, but your gross margin can still improve in first quarter this year. And in third quarter last year, you mentioned your gross margin was driven by more design win with better gross margins. So I just wonder for this quarter, how can you make better gross margin compared with Q4. And also for the reversal of the write-off because I think spot and counter price still declined in Q1. So how can you just have such a reverse from the inventory write-off?

Okay. Again, just -- I keep mentioning the gross margin, right? First of all, we have a wide portfolio, which cover industrial, gaming, auto and design service. I think the contribution more in the -- okay, basically, now through design service gross margin is 100%, okay? So we are able to get some good design service project, and we are able to take the Navi by CQ1. So this helping us more in our gross margin. So Navi is a most biggest contribution. Second is about industrial module and gaming modules, which our net costs declining, but we're able to keep the module ASP freight or just slightly declining, okay? Because there is a premium product. It's a customization products, okay, and mix products. So that's why they are able to generate the gross margin to us. And talking about reversal, actually, reversal is only like 1%, okay? It's not much, okay? Just reason the -- okay, we are buying NAND from 6 supplier, okay? And this is complicated, okay? We are not buying every quarter from this 6 supplier. Maybe 3 suppliers CQ4, 3 suppliers CQ1. For some reason, I think I know much -- I don't know much, but anyway we're able to reverse 1%, only 1%. But CQ2, the reason CQ2 we have to write down, the reason we are asking to low cost from suppliers. Of course, we are happy. We are happy, right? We're able to get the supply with a much lower cost. But on the other hand, that lower cost pull-in were influencing inventory. So we had to write off around TWD 200 million, okay, by CQ2. So basically, when markets turn to use -- turn to normal means, supplier is not going to take loss, right, means the price is going to increase. Those write-down will be slightly -- not slightly, rapidly reverse to our gross margin. So when market prices are going up, supplier increase the price. By coming 2, 3 quarters, we will have a big portion through the reversal from our write-down.

Okay. So my second question is can you just give us the outlook from -- for the gross margin in Q2 or in the second half this year? Or do you have a range of gross margins for year '23, can we expect that if the spot price or NAND price bottom in Q1 or Q2. And we expect our gross margin to further improve from the current levels? I know that your target gross margin is 27%. But that means if the spot price bottomed or may have some revisions in second half this year, do we expect this kind of levels can further revise up?

Okay. These have a few factors, okay? We need to take consideration, okay? First of all, CQ2, we still have an Navi income, okay? So this is helping our gross margin. But on other hand, we had to write down TWD 200 million, as I just disclosed, okay? The market today, the NAND market today, Samsung announced to cut production by 7th of April. By 27th of April, they are saying they are cutting much effective of the production. So I don't know effective equal to 30% or 40% or 20%, I don't know. But the fact is the market today, today still not strong. I don't know when the market is going to turn to strong. This depends on the system makers, PC makers, phone makers, when they are willing to pull in the material. But for sure that the inventory of NAND storage in the smartphone supply chain, PC supply chain is low. I also have a con-call with one of my supplier at Tuesday, which they're saying the reasonably, they got a big portion of SSD order, the client SSD order recently. So by CQ2, I mean, by June/July time frame, you may be little bit surprised, some of NAND maker, the revenue may start to bounce back, okay? I cannot disclose who they are, but they said they're already able to achieve their revenue target. They are no hurry to push Phison to buy the NAND material from them in CQ2. They post the shipment to CQ3. So this -- further, the client SSD demand is coming back. Of course, I don't know what price they are negotiating. But again, for firstly, the price today is still not yet increased, not yet increased. We hope, I don't know, May or Juno or July, I hope when the system makers start willing to put more material, the NAND supplier want to raise the price, if that happened, that will help in our gross margin. So conclusion is by CQ2, I believe we're still able to maintain either high 20% or low 30% gross margin, okay? So still follow our -- I believe it's a 27% plus something, but I don't know how much I'm going to commit, but it depends on May and June what is going to happen in the NAND market.

If any quick question, please feel free to raise a button. While waiting for the question, we also collected some questions from chat box. So the first one is the investor wants to know the development progress of Retimer. Can Retimer contribute to revenue in 2024?

Okay. Our Retimer samples already start to work together with the several makers in Taiwan. We have 2 or 3 server makers start to test our Retimer. Because this is a for server industry, okay, they may take many, many months for test and qualifications. But I believe by '24, second half, Retimer will start to contribute some revenue to us, some revenue. But it's not that much, but hopefully, by next first half, we're able to start to try on the samples and ready up for MP by second half next year.

Okay. Got it. Also another question is about the E25 PCIe Gen4. The investor wants to know the order status for this product.

E25 is a customized design for one NAND maker, okay? This is a customization project. So basically, this is unacquired by the PC makers. So run up hopefully by next year, by CQ4, run up by CQ4.

Okay. Got it. And then the question is about the wearable devices business update, for example, like sport watch [ ARVO ], I wonder whether you can provide some update on this?

I mean very, very, very honest, the CQ1 sport watch ARVO is very, very weak. I believe Q2 is still very, very weak. And the total capacity in sport watch is like at 16, 32 gigabytes, okay? The ASP is very low, but we have a big portion in controller business, okay? For controller is like TWD 0.50 per piece, okay? ARVO, I'm a suspect, to be honest, I suspect about this market, because what the use is only like 4 and 8 gigabyte, only for putting. Demand is weak and contribution to the business, ASP is very, very low.

Okay. Got it. We got a question from Simon Wu. By the way, one quick suggestion, hosting the earning call Friday late afternoon these days, I think it's not great for the young people. So maybe next time, would you consider your earnings call maybe either maybe early week or maybe at least early afternoon, right, rather than Friday 5:00 p.m., Thailand time, 6:00 p.m. Korea time is tough, right?

Let me explain. First of all, we need to match the New York timing. Some analysts from New York, they express they want to participate. Second, the reason we select Friday, we know the impact, okay, in second day in the market. So we'd like to take a weekend, we get the investors digest what we are thinking.

Okay. It's up to you, sir. Just a quick suggestion. The number one -- yes, we appreciate your great presentation, all the details. But question number one, year-to-date revenue down around 40%, right? And then going forward to make this minus 40% becomes 0% or plus 40%. What could be the catalyst? Is it more volume driven? Or you have to restore your product price back to last year level? So how to make today's revenue 40% lower than last year level? When the revenue can come back to the last year level? And how, is volume or price? That's the first question.

Okay. Better you look to Phison, our portfolio configuration, okay? Controller-wise, by revenue is kind of almost flat. Of course, the last year Q1 controller was good, but I remember CQ2, CQ3, CQ4, CQ1, controller revenue is kind of plus/minus single-digit percent. So controller is very stable. But look to the NAND price itself, I believe that the price declining on NAND is over 65%, 70%, okay? So if Phison revenue only dropping 40% means actually we get the gigabyte share. Then the question is how Phison able to back the revenue as last year or year '21. First of all, we need to increase a lot of our business product portfolio. We need to increase the content in our systems, which able to get a much higher ASP. Of course, based on today's NAND price, every NAND supplier, they are taking minus gross margin, which is not able to sustain in coming few quarters. Eventually, the NAND price were back to above cost, means the price is going to increase. So we try to keep getting more product portfolio. We tried to increase the gigabyte in our systems. We try it -- eventually, NAND makers need to pull up the price. If this is a case happened, then Phison, our revenue will be back to '21, '22. Of course, I need to grow up my revenue. I have to grow up my revenue. So that's why we have a high-density enterprise SSD, high-density automotive SSD, high-density smartphone embedded SSD. Of course, high density industrial SSD, okay, gaming SSD. So conclusion is NAND price has to go up. We need to increase our portfolio. We need to increase our shipment number. We need to increase our gigabyte in the systems.

So basically, your revenue upside is more based on the volume rather than the price?

No, both. No, no, no, both important. If Phison today, we are doing nothing, invest to the new project, new products where the price bounce back 30%, then we're able to get 30% revenue by doing nothing, okay? But of course, we are still investing, right?

Yes. Okay. And then maybe last question is your inventories is more than TWD 20 billion. But your monthly revenue like TWD 3 billion or TWD 4 billion. Quarterly revenue low teen billion dollars. So it's very exceptionally high versus your economy generating revenue. So do you think this is the strong business model going forward, holding the inventory like almost higher than the revenue? Or do you have any extra plan to make the inventory leaner and leaner going forward?

Okay. I think if you ask the same question to Samsung SK, they also don't know how to answer you. They are not willing to produce that many inventory. But unfortunately, the market changed due to the COVID, the top line, inflation, war, interest rate, okay? I am not the guy willingly to get that much inventory, but I have no choice. We are in this business. Next supplier keep coming to me to call help, and my customer also ask Phison to prepare inventory for second half demand. They ask Phison. So -- and I need to grow my business, I need to sell more my controllers. So when the NAND makers come to us to buy NAND, we ask them, hey, you have to use my controller and they take my controllers. So this is kind of a business negotiation. And second, again, I am not willing to take this revenue, but I have to for that many reason. Second, all my inventory still using Phison on cash. We not have any debt from banks. So I'm not that much worried or not much hurry to dump my inventory. Third, look to the Q1, okay, Q1, the total loss, I believe, is TWD 12 billion; TWD 12 billion to TWD 13 billion. Q2 potentially will be a little bit higher or lower, but still over TWD 10 billion. I don't believe Q3 NAND makers willing to lose money. So this also indirect to tell everyone, my inventory cost is low enough, when market turn to healthy, Phison able to get extra profit. And I'm not stupid right, why I'm dumping today. So the answer is, even though my turnover, day in inventory is still high, but I'm not in hurry because so many signs telling us, the price definitely will come back very, very soon, okay?

Do you have another question on the line? Or I can raise one more question? Yes, you can question, you can go ahead. Okay. So one last question is, sorry for keeping asking about inventories. But in the past few quarters, your balance sheet continuously showed about 20 or higher billion inventory numbers. So in a memory chip, I'm believe that it must be fresh every quarter. If you keep the -- still hold the 1-year ago NAND-based product, 6 months ago NAND based product, sounds like kind of the quality issue or older generation issue. Because memory chip, as you know, every quarter, you should evolve, right? Next year, mainstream NAND chip will be more in the fourth generation or the PCIe or more advanced eMMC and also the NAND chip will be more advanced. But if you hold the inventories, like the 6 to 12 months, even 12 to 18 months ago, NAND space product, don't you think it's the risk for your future business?

No. If Phison only doing the mainstream business, your answer is yes. But Phison will cover a lot of embedded industrial design, which they ask Phison to supply for 7 years. If we design in one project into the system, we cannot change firmware, we cannot change hardware, we cannot change the NAND for 7 years. And in the history, NAND -- legacy NAND when markets start to go EOL, the NAND go EOL, the price potentially will go up for 3x, okay? Because a lot of high mix, slow and small volume customers, they are not willing to change their configuration, which we're able to gain a much, much better project. So to me, holding the inventory, if Phison only doing the mainstream business, retail business, your answer is yes, but we have so many customization industrial business. Actually, this is helping present to generate our gross margin. So look to Phison gross margin last quarter, 31%. If we take out the [ NRE ] design service, we still maintain of product gross margin. But you go to look to the China NAND makers, which they are copy right? Their gross margin is like 1% to 3%. Why? Because they are in the mainstream spot market deal, we are in the design end. So we hold inventory eventually helping Phison to get more extra profit. And second, we have enough cash to hold our inventory. So we no worry, that you're talking about the quality. We have a packaging house. We invest packaging house. We're able to manage the quality by ourselves. So I don't see this as a risk.

Okay. So also there are some question from the chat box. An investor wants to know about the charging station. Just wondering a company whether we receive any orders from this customer?

Actually, Phison is -- we are the biggest so-called industrial SSD market supplier. And recently, they have -- the other one supplier, I don't want to get a name, but that SSD suppliers start to go to build their own industrial PC motherboard, which they are going to compete with their customers. This is pushing a lot of IPC customers come to Phison. So we are getting more design win project. Okay? But I need to highlight in this the so-called charging station, the storage using in there is not terabyte SSD, it's like 128 gigabyte. Of course, the value the very is good, but the total amount of SSDs are low. Yes, we are getting more design win, but deferred to our revenue is too small, because capacity is too small, okay?

Okay. Got it. Also, we got [ Jason ], if you want to ask any question, unmute yourself.

Thank you, Mr. Pan. I think, I missed the NRE part. So would you please give us more details on NRE. It means, how much the proportions of the total sales? And is it -- how's the visibility on this NRE part? And what applications or clients that we can work with or collaborate with? So, yes.

Okay. Yes. We didn't break down our NRE, because now is not continuous every quarter. But recently, since the last CQ4, CQ1 NRE, the number is getting much stable, and we already got our CQ2 numbers, okay? We are considered in the coming future, we are going to present our NRE portion in our pie chart, okay? So see, CQ1 NRE is around 6% of our gross margin. So it means in revenue-wise, 6% coming from the NRE and deferred is 100% gross margin rate. And we hope we are able to get in more NRE projects in the future. And we also see more NAND makers, system makers. They are going to use their customization project. At Phison, we are able to design the controller through the design service to them. So this may help us to get a much stable NRE income in the future.

Got it. So you design the SSD controller for the module downstream supply clients?

Not really, actually they have -- at Phison, we are not like GUC only doing the silicon, now coming from silicon design from where design system integrations. But the much bigger portion were coming from silicon design. So we are working with automotive customers, [ from ] customers, design the chips to them, which we are able to get a much better NRE.

Got it. I know that NRE or Design Service business cannot have longer visibility. So do you have any target that it can contribute what kind of levels in all product mix? And is it now recognized in the other segments or in reach of our revenue applications segment?

Agree, now EEE visibility is not that long, but we also agree that NAND module customers in the hyperscale HPC, smartphone, auto and some potentially military. They are asking a higher level of customization, okay? And we believe this kind of inquiry we're getting much, much more than before. The reason is the NAND become essential in every system. And every system they want to have different performance, different features. And NAND makers, they are not willing to support, okay? And every customization on the NAND modules, you can only know using controllers to make the difference. And going to the controller supplier in the market, again, to be honest, they have 2 suppliers. And our competitors, they are saying that they slow down the R&D activity, layoff, they are -- okay, I think, it's which one? Okay. So they are going to slow down engineering people. They're focused to mainstream business. They are not going to take any kind of customization. It looks like in this world, Phison is the only candidate. So if this is the case, right, we are going to get a more NRE project. And recently, they have many small medium-sized customers come to Phison because the original controllers company not able to make the good support to them because they are not enough in R&D headcount. So if this is happening, I think NRE will become much stable to Phison, and we can have a longer visibility.

Got it. Got it. And my last question. [Technical Difficulty]

Yes. Hello? Jason.

Jason, we couldn't hear you.

I think we lost him. Jeff, I think we run out of time. So we better to.

Jason, sorry about that. So due to time constraint, we have to close the meeting right here. And thanks, Mr. Pan, for his efforts, and thank you all for your participation. If you have any further questions, please feel free to contact Phison's IR team directly. This concludes the meeting today. Have a nice weekend. Thank you all.

Yes. Thank you. Thank you, Jeff. Thank you, everyone. Thank you.

Hello Mr. Pua? I am here can you hear me?

Yes, I am, yes.

We didn't ask the dividend. Did you confirm any last year dividend number, sir? Sorry, we didn't hear.

Yes. We announced already 4.5 [ NT ].

4.5?

NT.

Yes. So yes, I know you have to go, but you've been looking at the memory industry for, I think, about 30 years, I also have a look at the industry for 30 years I don't know. We never experienced this kind of a deep down [indiscernible].

No, no. 2008, 2008. Don't forget 2008, it's is similar with 2008.