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

Good afternoon, everyone. Welcome to Phison Second Quarter Earnings Call. This is Jason Tsang from CLSA, Taiwan. Today, it is our honor to have Khein-Seng, the CEO at Phison here with us. Khein-Seng Pua will share the recent update and outlook for both NAND flash industry and Phison Company itself. After that, we will open the floor for Q&A section. So now let me turn this call over to Mr. Pua. Thank you, Mr. Pua.

Yes. Thanks to Jason. And again, thanks, ladies and gentlemen, to participate Phison's our Q2 earnings call. So as we go to today's -- the part we are presenting. Okay. Again, we keep repeating to talk to the investor to define what is so-called the memory. At Phison, we are in the storage business. We are only covered the NAND flash industry. We are not in the [indiscernible] and we are not in a [indiscernible]. So this is what we call it till yesterday. I want to share with you, we shared this in our CET1 earnings call. By CET1, the total loss in this 5 memory company exclude YMTC is at $10 billion. And CQ2 [indiscernible] not announced yet, [indiscernible] by $8 billion. And [indiscernible], what the rumor is saying that chip is still in the big minus. So this I just want to share with you. If the NAND price is not bouncing back. memory company, they are not able to make money because the NAND cost is never come down, unless they move to the next generation. If they move to the next generation, they need to spend big CapEx to get the next-generation flash ready. But unfortunately, right now, everybody cut CapEx due to the poor income. So CQ2 keep losing, I believe [ accumulative ] may be like $9 billion. CQ3 if price not bouncing back significantly, CQ3 is still around $7-plus billion. So this is not healthy, but the market is not turning back. The NAND company, memory company will still suffer. But we believe since the flash keep getting cheaper, we also observed the content per device actually have a significant increasing. So to Phison wise -- what I'd like to say is if a memory company keep losing money, it's we, Phison, we are buying much cheaper material from them. So we don't see this is back to us, but we can take much lower component price to met to the products to the market. But of course, we wish the market back to the healthy, NAND company able to make money. So this is only where is the NAND price have to bounce back. okay? So supply side, I believe, right now, according to many news, Korean, U.S., also Japan, they keep cutting their production in NAND. So hopefully, Q3 their production reducing and Q4 demand coming back, the market will turn to normal. So this is Phison's breakdown. I need to highlight here, Phison, we are putting the enterprise module that were new into our pipe. We, in Q2, around 4%. And back to this record, actually, we have a certain 2%, 3% in the past by quarter. Recently, we start to get some significant orders. The revenue in their portion is increasing. So by 2024, we are doing a lots of design in activity. We are accumulating the products, the component. We are doing a lot of designing. So we believe, again, when market get back to normal, we are able to increase our revenue in the enterprise modules. And in controller side, I believe this is in the several quarters, this is the first time lower than 30%. The reason is, actually, since last year's CQ4, the NAND company, Phison controller, we are only selling to NAND company and to Kingston. The NAND company, they are digesting their inventory, it's where they cut down a lot of focus and order. So this lower demand in controllers happened by a last year CQ4, sequenced CQ2 referred to our revenue. So this -- the number is first time below 30% of our total revenue. But since May, from May the NAND company start to ask the new forecast, and we are starting to order our new wafer into our foundry, both for TSMC and UMC. So we believe the forecast demand were back as a normally every quarter. So we've been softer for around 2 to 3 quarters a lower demand in controllers, but now it looks like the things back to normal. Not normal as 2021, but at least the new demand coming in, we have a focus, we start to release our wafer to the production. So I believe this will help our gross margin in the coming futures. Revenue earning published to the market, the revenue by CQ2 is at $10 billion, and the gross profit is at TWD 3.2 billion. So gross profit down Y-o-Y, but up around 1.5% Q-o-Q. Revenue trends looks like the numbers are similar as a CQ1 due to the price dropping too much, control demand actually very weak. And the overall demand, even though by content is self increasing, but it is still very weak. So anyway, it's a continuous 2 quarter, we keep in the $10 billion revenue. But -- we need to improve our revenue. But this we have to wait until the demand back to the normal. U.S. market looks like gradually getting better China looks at not yet. So we need to see August, September if China can be a little bit stronger than the last 2 quarters. So gross margins by our CQ2, actually, little bit surprise. The gross margin rate is 32.48%, which is history high, okay. It's all time high in our company's record. Then definitely, you are going to ask why? Later I will explain why. We -- in CQ2, we also read down inventory roll impact our minus 0.5% of our gross margin. So it means Phison's, overall, the business from our controllers module design service, we are getting much, much healthy. And the overall 32.4% record high, and we are happy about that. And we hope we are able to improve our gross margin rate in the future. But right now, what we are trying to do is to increase our debt revenue. Okay. The earnings per share, CQ2 on the book is TWD 2.28 EPS per share. We still suffer the investment loss from our China investment subsidiary. And if without this loss '22, we are keeping TWD 4.2 EPS, overall profit a bit. So -- and on the book, EPS went to the 2.2% is better than the last quarter. Of course, it's still not enough to us, but gradually we try to back to normal, okay. And this -- again, we suffered the housing loss for already 3 quarters. So it's around close to [indiscernible]. But anyway, the loss in the GAAP is reducing from 3.9%, now lost 2.7% total loss. I hope CQ3, they are able to get even back, they are still fighting way. But at least the gap is getting smaller. Okay. Income statement, I think you are concerned more in the gross margin rate. So I think all-time high is good to us. And the OP margin is 7.2% because we -- the overhead in the engineering investment will increase a little bit. okay? But the net profit improved from 2.4% to 4.4%. And this is a first half income statement. Overall, gross margin 32.1%. I still -- I remember this is also autumn high in the first half of the year. So we keep looking hard to try to increase our gross margin and our revenue. And balance sheet, the cash flow until today, Phison is still running our business with our own cash. So we still have TWD 30 million cash on hand, which is much healthy than any other module house. And it looks like we are still actually capable to buying the wafer, name wafer and the semicon wafer. Inventory-wise, actually, keep like TWD 20 billion. We have write-off like 10% of total our inventory. And if the price still keep weak in CQ3, we are going to increase our inventory. The reason is that price is so cheap and NAND suppliers selling them to us, they suffer minus 20%, 30%, 40%, 50% gross margin, then why not just buy it. So we have enough cash, right, we hope to increase our inventory on hand. But overall, the price per gigabyte is much -- can be much, much lower which is helping us to get the more bounce back when the market turn to the normal, okay? So overall company is still doing healthy. We still have enough cash on hand. So -- Okay. There is also some supplemental information about TF and non-TF, our analysis to you, okay? By CQ2 we have the share-based payment, okay, around TWD 66 million, but this impact to margin is quite small. Anyway, it's at 0.6%. And by the net income, I think the impact is small. But again, we, Phison, we consider in the coming future, we are going to exercise some more options, stock options and some trace out share. And if this happens, I believe the OpEx in this may increase. So we'd like to let shareholder to know how we use it. Okay. By July, revenue is TWD 3.3 billion. MOM is down 1%. July still is summer holiday in Europe and in the U.S. So China is still weak. Even though we try to push more business more revenue, but unfortunately, we're still not able to improve a lot. So we hope by August, September and October is a traditional season back-to-school and also Christmas, we hope we are able to gain more revenue there. For business highlights since the -- Phison announced our first controllers to the market. And we -- looks like now the market, they have a Samsung. Otherwise, Samsung looks like Phison.So we enable many of our partners here. And these products margin is still quite comfortable and the demand looks like for gamer, the demand is increasing. So we are happy to bring our partner to this market together. And by these competitors event, and we also have a partner to get us some awards in this event. So we are happy to see that. And yes, this is by Patrick, okay? And the good [indiscernible]. Okay. By CQ2, Phison also announced, we got award certificate of automotive as by certificate level 3 and look by Phison is the first independent house to get this certificate in the automotive. Actually, including the NAND company, I think we may be still the only one to get the CR3, okay? So we invest this for 2 and half years R&D to develop and to study. Finally, we're happy we get this. And recently, the automotive market has some changing, okay? Phison, since we got this CR3 announced to the market, we've got so many inquiry from the U.S., from Europe, Japan and also China to ask Phison to be one of partner in the EV and the traditional auto storage partners. So we are busy on that. We are working hard. I believe this, hopefully, by 2024, Phison -- we are going to put the automotive storage into our [indiscernible]. Now this quarter, we put enterprise. Next year, we are going to put automotive. So some business highlights. By CQ2, we put our high engine 4 into the notebook OEM. We start to ship the products to some gaming notebook. In server wise, Phison's [indiscernible] products already in the market and we get more than 35, 40 design win in the system. So this will help us to gain some more revenue in the coming futures, okay? And in automotive, we have many, many projects to work with our partners, Europe, U.S., Japan and China. Okay? So this will reflect our revenue by 2024. For industrial demand, we made a lot of customized design into our partner, okay? And IoT, there's a lot of IoT special for edge computing and recently the AI application we put our storage into the many Singapore CPU port with our SSD. And Phison, since 3, 4 years ago, we announced we are going to have a design service business. And every quarter, we have some income through the design service. And out cost management is in the PCIe 4, PCIe 5, UFS, EMC. And also, we are working with the phone makers to customize the storage controller and firmware, and more customization happened in the automotive, okay? We have many, many projects ongoing with the automotive players. So looking to the reason the industrial semiconductor industry, what happened today? We believe that NAND maker, they are trying all their best to lower the production since the demand is still not bounced back that much yet. So only way to put the price up is cutting production. So to Korean and 2 U.S , one Japan company already announced they're going to cut, again, certain percentage on the NAND output. So the output after 3 months, means by end of Q3, the output is going to decrease again. And every NAND maker also keep announced to their customers, module customers, wafer customers saying that they are going to raise the price, okay? So there were some news in the media saying that Korean company raise how much? This raise, but they are trying to raise the price by themself, okay. And the CapEx in the next-generation NAND looks like -- most likely pushed our gain. Japan, U.S. and some Korea, they pushed out their CapEx in the next-generation then. So it means in the coming years, 1 or 2 years, the NAND output in petabyte may not be increased that much, okay? And overall, we also observed the U.S. market is slightly back. China, again, still very weak. We need to see what happens in August, September since the government start to introduce some policy into the market. So what Phison is trying to do is we agree right now, supply side, we're already clear on supply side. They want to raise supply on the production, but demand side is a little bit complicated. But we believe, again, the NAND market, the demand storage will come back again someday. So we keep invest into our R&D. So we believe with our investment in R&D, we'll get to show since 4 years ago, with a heavy continuous investment, the gross margin, now we're able -- even though the market is so bad right now, gross margin, we are happy about that. We hope when markets turn to good, we are able to get more returns from our investments. So talking about the investment, a little bit heavy by -- in the second half, it's 20% of revenue went to the R&D investment. Of course, the revenue dropping, but the commitment is here, we are not laying off. We keep hiring the new headcount. We keep investing the new project. We migrate to 7 NAND maker projects. So this is a heavy spend. But this is to prepare for future. So we hope our shareholders now to agree what our decision. But at least today, we show our gross margin all time high due to last 4 years heavy investment. Few weeks ago, Phison announced our activity in AI. Of course, we are not trying to tell the market we are AI-related company, but for many years, our controllers, we implement an AI algorithm to improve our controller aero collision. So we have like 60-plus air engineers in the lab, doing all the design for our controllers. By the way, Phison, we outsourced our module to the factory. In many years, we also suffered the using the AI, they have a lots of fail, okay, fail investigations. So my engineers -- AI engineers, they jump into the lab. They try to use the algorithm to train the AI machine. The fail rate from 40%, now we improved to fail rate 1%, means the pass rate from 60% now improved to 99%. This actually happened in our outsourced factory we use a lot of our human account, and we proved our algorithm on AI is good to use. So we also propose this to several SMT companies in Taiwan, which is a big size. They have 20 SMT in line in their factory. They are using Phison's -- our AI solutions, the AI, AOI solutions. So we are going to turn this to a new business. As a service business, we are going to provide a total solution, including our SSD, our -- the server with our enterprise SSD, then we provide algorithm and service. Hopefully, this can be -- this is a service fee. So the gross margin is 100%. So we hope -- after this 10-plus our partner, they are satisfied comfortable, we are able to push this solution to worldwide, okay, to improve presence our revenue and our gross profit, in upcoming features. So anyway, this is [indiscernible]. And we're happy to see this. And hopefully, next year, if we get some significant number return, then we are going to tell you more in this number. We also figured out this [ nonengine ] in the AOI, but also in the XI, which is AOI's optical, ASI [indiscernible].So now we are increment -- AOI to XI is the same algorithm, same application. So if we can make AI good, we believe XI and other application we are able to gain some share in the market and helping person to gain more profit from this business. Okay. Above is our presentation about CQ2 and some Q&A let me finish, and we'll go to the line Q&A.

Okay. This -- today, we have our board meetings about our first half dividend. The EPS by first half is around 3 something but we decide to have a 4.5% cash dividend to the shareholders, okay? The reason is, actually, the loss on the investment didn't impact our cash flow. It's just on the book, the China investment loss. So if we don't count the China investment loss, I think we are capable to pay 4.5% as a dividend, so we did our best. And hopefully, we are able to make company much profitable and we're able to pay more to shareholders. In today's Board meeting, also they have a resolution from our GM OEM and due to his personal carrier planning. So he decided to step down from the general manager. Then Board members appoint him still as our Chief of Staff, okay? Still providing the strategy and advise and consult of the company development. And the board members appoint [ CS Mark ], our R&D VP as Phison's general manager. So Phison company policy, the general manager must be an engineer because Phison is an engineering company. So with a new President at [indiscernible], I believe we are still capable to improve our R&D activity and efficiency. Asking about, since keep losing money, is that the demand will bounce back? I think demand has nothing to do with the supply side. Demand is about more in economy. U.S. looks like gradually turning to better. China, we still need to wait and monitor. And overall, the demand content per device still increasing. The only problem is the price is not bounced back that much yet. So we need to wait until the new signal. If demand starts getting strong with the production cut, I believe the imbalance is going to happen, okay? The market looks like still consume the inventory, okay. Store in the NAND supply side. So when inventory went down, inventory going down, we believe the market definitely will defect, if the NAND price is not bouncing back. Since the NAND cost is not going to cost down, means the loss every quarter still will be the same number, say, $10 billion, $8 billion, $7 billion. I don't know how many quarter, company able to suffer. So by this July -- turn into July, we already read from news several Samsung saying cutting, SK, cutting, [indiscernible] micron-cutting. So I believe with this cutting, right, the impact will happen after 3 months, so means by end of Q2, the output will decrease again. And this ask about the flash is potential to go to pipe again. So we're back to the history. The flash a big drop by 2008. After 2008, big bounce pack, okay? 2010, the other drop, 2011 bounce back. 2018/'19 big drop 2021 bounce back. So since they've hours maybe like 18 months, the price dropping. So next bounce-back definitely will be much, much stronger than the past. How many months market drop? Means, how many months the market will bounce back? So anyway, what we are trying to do is keep ourselves ready, keep all the product ready, keep the future investment ready, so when the times happen, hopefully, we are going to get more our [ iPhone ] market. So we also have been asked by how the margin come to the 32.48%? I think there are a few reasons. Phison, since for many years, we have a lot of customized NAND module, including for auto, industrial, security, encryption, any kind of firmware development for every kind of applications. We built a lot of this design in businesses. And right now, the material cost is going so cheap, but the system price is still able to maintain. So that's why the gross margin we are able to increase. But what we need to do also to improve our revenue? At Phison also, we have engaged many of our partners to doing the design service. So every quarter, we have some good amount of coming, okay, from our partners. So this also improved our gross margin rate. So I also believe with our heavy investment in the R&D and also the NAND controller company is very parenting in the investment and also the gross margin. So if we are able to hope the development, I believe we are able to gain a share in the business. Means, we are able to improve our gross margin rate again in the coming futures. Same question about Phison gross margin? So Phison, since we transform ourselves after 2019 engaged with AMD CPU. After that, we are able to manage our gross margin higher 27%, okay? So even though the market -- the gap in supply demand still is oversupply. But we -- even though oversupply, I didn't see the material price dropping anymore. The NAND company, they want to increase the selling price. So I think by gross margin-wise, we have confidence to keep much higher than 27%. So we hope market turn to normal. Inventory, we still have a inventory write-off of 10%. So when market bounce back this 10% able to write down, right back to our book, and this is a significant amount of earnings per share. So hopefully, this is coming soon. And during the AMD visit to Taiwan, we have some event in the Telkom Universit, and we've been asked what kind of IFRS participate? We are doing some POC with several server company. This is all about the training model, large language model is doing POC. We believe -- we think 4 to 6 weeks, we are able to finish the POC, then we're able to see the efficiency and the performance of our SSD into the AI. So all is complete, then we are going to make an announcement about this program. So we still keep finding more patterns on this architecture. And we are working very closely with several server makers -- AI server makers. And we believe almost this POC proof is a good use we are able to gain the more AI server company to engage with us. So let's see, by end of CQ3, we are going to announce more about this program. And talking about our inventory, we still write off in CQ2, and we forecast CQ3 potentially, we still may have some because we keep buying the lower pricing component from suppliers. Since suppliers calling Phison to buy more, so we may able to benefit little bit lower price. So then we need to run off the inventory. But overall, I don't believe that NAND price will have a big truck anymore. And this is about China investments. Unfortunately, we keep losing for 3 quarters. I hope CQ3, they are able to keep even or just a little bit minus in the finance -- and we're still helping them to try to gain more share in the China market, and we try to make them more healthy in the finance. And hopefully, next year, when markets turn to good they're able to have price to make more money from the market. And look to the -- since [indiscernible] public and they announced some loss both companies CQ1 loss and CQ2 loss more. So I mean [indiscernible] current impact. But look to the NAND direct market, Phison is one of several companies still able to keep profit and profit still growing. So this -- again, this is all about R&D investment. And back to the ESG, we gather some new road shows, ESG rating. Overall, it's improving, okay? So every segment, we are improved by 2022. So we're still investing. We're still working hard to improve our ESG score, okay? So this is all about today's Q&A. We came back to online.

Thank you, Mr. Pua, and we now can start our Q&A section for online participants. [Operator Instructions] So we now have a question from [indiscernible].

You have mentioned that some NAND flash suppliers has delayed their process migration into 200 layers and above. So I'm curious if Phison would also have to postpone our product development road map with the delay of migration of our NAND flash suppliers.

Okay. Let me clear that again, okay. Actually, Development of the next NAND flash memory delayed it a bit, not delayed that much, okay? Development delay but keep going. The question is on development ready going to mass production they need a big CapEx to buy equipment, they don't have money. So in this case, right, actually, we follow now they have a 5 plus, one NAND flash maker. We follow the 5 makers. If they push out the CapEx, then I don't need to invest on the resource today for that flash development because time to market, right? So we are able to keep flexible in [indiscernible]. We're able to take the more project for recent NAND flash just to improve our revenue and profit. So we are making every judgment almost everywhere and to follow the change of the CapEx.

Now we have a question from Donnie Teng. Donnie, please go ahead.

My first question is regarding to the progress of the driver and retirement. And wondering if you could kindly give us some update on these 2 businesses and the potential opportunities maybe in the AI applications in 2024. And secondly is that there are 2 important mergers related to our business outlook. So first one is potentially like [indiscernible]. So because there are some uncertainties and lots of news coming out recently. So I was just wondering if you could kindly provide some insight to us.

Okay. Talking about the driver in the motherboard, I believe Phison is a bigger, we're getting the biggest share of the motherboard in [ gaming ]. But unfortunately, the total amount is not that big. It's a few million pieces a year. Right now in the market, they have only one supplier, which the supplier service team mainly located in U.S. and India, but retirement customers 90% in Taiwan, so create a lot of service program. Phison, we delivered our Gen5 -- samples to those Taiwanese server makers by May, June and July for testing. We deliver the samples. Most of them are very happy about our performance. And also, they are much, much happy about our service because we are on the same language. So they are pushing Phison to turn our samples to mass production. So our production version will be ready by CQ1 next year, okay? So hopefully, when the CQ1 sample is ready after quart, then we are capable to ramp up by CQ2. Then second half of next year, we are able to take the share and come to the revenue. So we are very optimistic about our retirement business, okay? Talking about the M&A, KIC and [ WD ] -- asked more than 1,000 times can they merge? Can they marry? To me, I'm very simple every M&A, you need to get the antitrust approved mainly from U.S , Europe, China, Japan, okay? These are a few big economy territory. So -- based on today's observation, I think it's hard to believe, China is going to approve KIC and merger. The reason is simple. China don't have any benefit from [ KIC WD ]. And since from news, China -- I mean the U.S. and Japan still strengthened the equipment shipment to China. So I don't think -- this is able to convenience China to approve U.S. company and Japan Company M&A. So again, I don't think this is going to happen even though maybe they are going to engage, but -- the waiting party will never happen, okay? Second, SMI mixing, I think it's hard to comment. I mean, this is really dramatic announce a day after a few hours, then they said no. And I mean a lot of our shareholders suffer. But to my opinion, I don't know what's going to happen, and I'm hard to comment, but I believe the M&A potentially will carry. I believe this is my personal comment, so don't ask me, okay? I believe CQ1 by much in the call, somebody asked me about how about China, the SMN model is going to approve the [indiscernible] I remember the time I said, yes, because I visited in February, then many investor comment to us coming, but this is no comment, okay? I believe they are ongoing, but I don't know how to comment anyway. But overall, this is nothing impact to Phison, Phison, we still keep investing in our R&D activity. We still gain our customers' confidence. Imagine one thing, if you are telling the customer you are going to sell a company, you fail, then you tell the company, tell a customer, you are not going to sell, are they going to believe you or not. So I think this is how customer trust to the company. So I think they have to work hard to get better trust.

We have several questions from on my chat. So first one is how do we look at the Chinese market competitions?

Okay. Let me back to the question here. The first question [indiscernible]. I think for many years, right, we keep telling our investor, Phison only selling controller to NAND company and Tencent. We never sell any controllers to the central module house. And we are not willing to sell because broadly market, okay? They use a lot of [indiscernible]. They don't care about the quality, they care about only like fast food. So we don't have any business there. But since [indiscernible] in a great e-store going aggressive, the SATA controller went down to $1 [indiscernible] but to be honest, I'm not interest, okay? And I never take that. But this queue Silicon motion a lot. From the financial book from Silicon Motion China is the biggest market. The biggest market is coming from central module house. So this is hurting, Silicon Motion controller shipment. So this is a signal to them, not to us. okay? And for China market, when China company coming to the market with a gross margin, 10%, 20%, what they're trying to get is subsidized from the government, they try to get money from capital market, they don't get the P&L. This business is not healthy. So where I'm spending my resources to take their business. But other than that, Phison trying to sell more modules to the China, customize module to the China market because we believe with our good quality of controllers, we have much better cost structure of our NAND flash, we're still able to gain a share from China. And on the other hand, for those China controller business, a low-end market business, we let Hongxing to take their business, okay? So if there's a broadly market, then there's a broader territory to participate. So this question is better you need to ask to the Silicon Motion after sizing because nothing to do with Phison. So second question, enterprise revenue. Revenue-wise is increasing, and 2024, we believe the demand in the enterprise SSD by gigabit definitely improved a lot, okay? But unfortunately, right now, every enterprise SSA record, Samsung always can be lower than Phison because they want to move their inventory. So I don't see now it's a good incentive to heavy promoting, selling the enterprise SSA. I'm just trying to get more design in to the customer side. I believe, again, NAND price then costs never go down unless new generations, Before new generations, unique CapEx. Before CapEx, you made money, they cannot make money. So if net price cannot go down, to make money only way is to raise the price. So we believe the price will back to normal, NAND company is going to make margin. When that happened, when NAND company raise a price, Phison cost, still is our cost, still inventory cost still very, very low. So we are able to gain more share and profit when it happened. And they will turn to revenue. So 2024, I'm very optimistic in our enterprise SSD revenue. But I'm not able to tell you how many percent is going to improve. The reason is when market go to the tight -- go to the undersupply, we need to take all our inventory to support those design in business. So it means industrial embedded enterprise will increase a lot in revenue. And retail business will go down, okay? I again -- conclusion is I can't answer you how many percent to grow, but will grow a lot. Third question. Approval for server-grade automotive SSD? Yes, this is ongoing. This is a very completed project. We are going to have CES to customer by next CQ1. We invest this over 4 years, 4 years, okay? So this also is a commitment to show to the auto player, Phison, we are already committed into this business. So I am not eager to see the business revenue coming from this, but this is a significant. It's a credit in this auto market. So all this happened, I think Phison able to get more business other than the server grid, but also the EMC, UFS, Gen 4 SSD from those auto player. So this is able to help to build our credit in the market. [indiscernible] no good for second half. Yes, due to the smart phone. Smart phone is. But again, Phison, we have so many customized module, again, in the industrial, auto, security, okay, many different form fatter design. I think smart phone is not doing good, but the storage still improved in the content, storage company, NAND company losing money. They have to raise the price. So we are waiting to gain the business here. So mobile phone market, especially in [indiscernible] is very, very -- it's terrible bad. But when market is coming back, hard to say. But I want to give you one observation, since by middle June, we got several rush order from the EMC and UFS module and controllers. Just a week ago, we got the other rush order 20 million pieces from customers. So for middle, low and form looks like countries, India, Africa, Southeast Asia looks that demand is coming back. Of course, the price is terrible. But demand is coming back a little bit. But for high-end market, I think it's accretion, okay? So I not much worry about myself in the smartphone business. The reason is the sem controller, sem module, we are also going to the automotive, going to embedded, going to the industry. So I believe we're okay. Then this question is about [indiscernible] 36% of the share. We'll not do much business with them. By the way, the Chairman is a major shareholder of the company. Why he willing to suffer the loss from Phison? So I think the question from you, right? I'm totally disagree why you're asking this because we didn't making more revenue [indiscernible] doing their own business in China business. We are supporting them controllers, supporting them the technology and helping them to gain the trust from the auto mobile server makers in China. So we never asked [indiscernible] to suffer Phison's loss because the biggest shareholder is the Chairman, he is not willing to do that. And [indiscernible] looks like gross margin is getting better. Of course, I hope they are able to keep even by CQ3, really challenging. But definitely, the loss is minus will be the lowest in the last 4 quarters. And for sure, by CQ4, they will turn to... There are loss is mainly coming from an inventory loss. So the inventory loss realized since last CQ2 and some will happen by CQ3. So Samsung keep highlighting to [indiscernible], they are going to raise the price and their cost is low enough. So CQ4, they will turn to profit. So hopefully, this is able to help them to turn to profit and not become a burden anymore. And when [indiscernible] turned to profit, I believe China now they have 3 public company in the NAND storage, [indiscernible] definitely the Chairman wants to bring company to public, hopefully, then Phison will be forced to assesses our share [Audio Gap].

Thank you. And now we have a question from [indiscernible] please go ahead. Simon, you may start your questions.

Number one quick question is top line growth, the July revenue to TWD 3 billion. if the month-on-month revenue remained flattish on other kind of the $10 billion quarterly revenue for September quarter. So question is, when do you expect sort of a meaningful time line growth because near-term guidance among the memory makers or supply chain companies not really bullish. Meanwhile, your July revenue is still flat. So any view for the inflection point to see the meaningful sequential revenue growth?

My policy, if I want to gain the revenue, I think I can [Audio Gap]. And the system business so far, still flat little bit be increased, but the ASP slightly down 1%, 2%, 3%. But with the design in Phison, we keep the good gross margin. I'm more willing to catch the business, but the growth is not that much. Recently in Phison, they have many, many bids in EMC, UFS or smartphone, the price is a minus 30% gross margin. I'm not going to take it. If [indiscernible], they then take. And since they are using money to turn to revenue, this will also force the NAND vendors, has to selling much cheaper NAND to the module house, right? Then I'm able to use my own cash to buy more flash with a much lower price. So with a certain China today's market, I have no any interest to try revenue. With U.S. with Europe, yes, we have a many design win in the U.S. market, but turning to the economy demand looks like slightly big, but most company executive, they are in the vacation. They're happy, okay? So we have to see August, September when everything back to office back to normal, market demand turn to better, then we are going to take a more revenue. But in China side, if the demand all coming with a big minus [indiscernible], I wouldn't do that.

Yes. Great point. Very quickly, you have a great point. The NAND price is very, very low, exceptionally cheap. You have a cash, so why don't you buy more and more NAND flash chips from Korea, Japan and then why don't you try to increase your inventory if you're really confident to see the NAND price recovery late this year or next year. It's a great opportunity to buy more and more NAND chips, don't you think so.

First of all, we did. And second, not volunteer because every NAND makers came to us to ask please, can you? If you look to our inventory dollars a month, it's not increased that much. But the [indiscernible] itself is almost double Y-o-Y. So we accumulate a lot of [ asset ] by on hand with much, much cheaper cost. So I still believe CQ3 every NAND vendor will come to Phison to ask Phison to buy because we still have a cash long way. So yes, we are happy to work with the NAND supplier, but also at this moment since Phison we need to support them in the NAND component buying. We also wish that -- Phison in the new controller project. okay. This is always our strategy. So recently, we also gained several controller projects from our name partners due to we are able to buy the name from them.

So you believe the NAND price recovery sometime maybe in December quarter, late summer or autumn or a best case scenario is just flat?

Let me call Samsung CEO later answer you, okay. It's all Samsung decision. If Samsung decided not too aggressive in the SSD, not aggressive in the modules then price definitely increase. It's all about Samsung.

One last is, you think that Phison can do some extra PCIe Gen 5 for the AI server SSD going forward? Because I'm sure that the lots of the AI server coming from even China even without [indiscernible] GPU, I think we can see the AI server. So what do you think, sir, AI server, PCIe [indiscernible] opportunities?

Yes. We found some architecture like what we show in this page. Now we are doing POC. Actually, we already proved our concept is workable, but we need to improve the efficiency, the performance -- so within 4 to 6 weeks if we work with the server makers in Taiwan, we prove, then we are going to announce and go to the GPU company to work together with them. So 4 to 6 weeks.

Is it a Gen5 or PCI Gen5 or?

Both Gen4 and Gen5.

So I think we have another question from Donnie Teng. Donnie, please go ahead.

Sorry, I don't have further questions. I just forgot to cancel the hand raising.

Okay. So I have a question in terms of your operating expense ratios for coming quarters. Do we have any outlook or guidance in terms of this kind of number?

I think the total amount still will keep stable in the coming few months. Phison, we are not heavily increased head count like we did 2021, okay? So we are still managing -- we increased some new talent, but not crazy. And also for some internal R&D, which is less performance with Lego, no fire -- Lego. So by R&D expense, we believe we are to keep kind of stable in the coming few months. Until Phison turned to the good revenue with the group profit, we are going to increase more R&D expense as a bonus for R&D. So if that happens, we are going to increase some expense on R&D. And we believe someday we will be asked to exercise some share of [indiscernible] when they are going to apply to public. Then, Phison will turn to the good return. There, we are going to write off some income to R&D expense.

In the interest of time. I think that's all of our earnings call today. Thank you very much for your time and participation on this call. Thank you, Mr. Khein for sharing your insights for commentary and your view for the industry and Phison's. So if you have any questions, further questions, you can reach or connect with IR team after the call. So thank you, everyone. We will see you next time.

Thank you.