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

Okay. Good afternoon, and good morning, everyone. Thanks for everyone to attend the meeting. I'm Ray from Morgan Stanley. And today, we are pleased to have Phison CEO KS, with us, and he will talk about the financial results and also the company outlook and go over, and we'll have some Q&A. And yes, so without ado, let me pass it to KS. Thank you.

Good morning or afternoon, or evening, ladies and gentlemen. Thank you for joining Phison's, our 2023 Q4 earnings call. So this we start the call. Okay. We made a summary regarding the memory company, the CQ4, 2023's OP, gain or loss. With SK Hynix is going to deliver profit just because of HBM memory due to the AI's crazy demand. The loss is narrowing around minus close to TWD 3 billion. We believe by CQ1, most likely will turn to positive. So this shows the NAND market is overcome the most difficult period. This is a Phison our CQ4, the distribution. You can read the consumer portion increased quite a big number just because the CQ4 is an original retail season. And also the NAND price tend to tie the price increasing, helping us to gain the revenue and some profit. And controller wise, from this table looks like declining, but actually not declining. This is just a ratio. Controller itself has increased 12%. Our NAND company controller demand slowed down since second half 2022 due to the COVID issue. 2023, they are digesting the inventory. Second half of '23, we can see the demand slightly impact and the controller turned to strong from CQ4 and carried to CQ1, CQ2. So the controller business, we made a lot of design win into the NAND company. We can see the big growth in 2024. The rest of our gaming module and embedded module, industrial module by dollar amount actually also increased, okay. So the CQ4 financial results, they were you already know from our announcement around close to TWD 16 billion. The gross profit will hit the TWD 5.6 billion. Actually, the Y-o-Y is 64%, Q-o-Q 42%. But CQ4 '23, the gross margin itself, we hit an all-time high. So it's a little bit surprising, but I think this is just a depict. Phison, of course, NAND price bounced back with inventory help. Of course, we gained a little bit gross margin. But we will compare to the CQ -- pre-CQ to last year, we still keep kind of mid-30% -- actually low 30% of the gross margin. Just the Phison, we've made a lot of design win into the system, which we're able to gain the better gross margin, even though, during the first half of '23, the market was still bad, we're still able to keep low 30% of gross margin. So we believe that CQ4 last year is the all-time high in the gross profit. This is going to carry to CQ1 and CQ2 because the design win activity just turned to the revenue. So we are proud and happy that we are able to keep the all-time high at the last year CQ4, even though the market just started to bounce back. So the full year revenue is TWD 48 billion, declining Y-o-Y 20%, but the gross profit declined 7%. On the other hand, what we can say is that we gained the gross margin rate in our business. So this is our revenue trend. You can see this can be V-shape, okay? We see the all-time high in the CQ1 '22. Then slightly down, touched the bottom last year CQ1, and after that, the revenue starting slightly, but bit growth in the CQ4 last year. So this is a V-Shape, and we believe -- this growth was still carry to CQ1, CQ2 this year and hopefully will be CQ3. Okay. This is a gross margin rate, 36%, which is also outperformed than our internal expectations. So this 36%, therefore 1.4% is a reversal from our inventory write-off, okay? So we take out this 1.4% where gross margin, 34.6% still in all-time high. Again, this is just different, of course, inventory price up. But as I said, even though in the '23 first half, the market is still tough, the NAND still [ ugly ] terribly low. We keep better gross margin just because we win a lot of design-win activities. This is also to telling Phison, we transform ourselves and took it for many years. We transformed from retail to embedded to design to design service and to a lot of -- for turnkey. So this to show the Phison is totally going to the high-value business model. So with 36%, we are good, and we have a confidence in the CQ1 this year, we're still able to keep high 30% of our gross profit. So earnings per share, in this CQ4, we are TWD 10.3, close to TWD 10.4 earnings per share. And the Hosin, our China investment company, basically, first 3 quarters, they keep bit minus in their business. But the whole year, they turn to profitable, means CQ4, they have a big earning from that business. So in the last 4 quarters, since CQ4 '22, these 4 quarters, Phison suffered a quite big amount of the investment loss due to the Hosin loss in the China business. But we overcome. And we also believe by 2024 Hosin, the whole year will keep quite reasonable or quite attractive profit, Phison able to recognize. So I mean we don't have any burden on our China investment. So with this, TWD 10.4 EPS, the whole year of Phison earning per share is TWD 18.5 something, also over our expectations. So again, we are proud Phison people, we work very hard. We win many activities. This is to show to our shareholders. We hit our target. We over hit our targets. Okay. This is some highlights in the P&L -- our income statement. The margin itself is 36%, which is a record high. The OpEx also higher because we have our employee compensation. And also, we have to make -- keep investing to our technology. [indiscernible] Actually, we have a quite big of [indiscernible] due to just Hosin's turn to the profit in the quarter, okay? And the whole year's income statement, 2023. The full year's gross margin 33.4% is all-time high and the expense also all-time high due to the -- we have a 7-nanometer tape-out. We have also preparing employee compensation. We also have a treasure share recognized exercise to employee at the last year's CQ3. So -- and the full year's nonoperating gain and loss actually returned to the gain versus 2022, again, due to the Hosin turned to profitable. So overall, 2023, even though there were new -- dropping 20%, but we hit the gross margin rate 33.4% all-time high, and we're still able to achieve 2-digit of earning close to 20. I think we are happy to tell to shareholders. We really worked very hard. And we are very optimistic about 2024. About the balance sheet, okay? Inventory-wise, we kept like TWD 24 billion something. In cash flows in CQ4, we still in the cash rich in the operations. The overall ROE, ROA, we are improved a lot versus 2022. So we keep building our inventory because we foresee the supply is getting tight in the Q2 and Q3. Okay. This is regarding TIF and non-TIF differentiation, okay? So this is about our CQ4, okay? To be honest, the gap here is quite small, this is just because of we have a stock option write-off every month. This is rigorous. So this amount is kind of small. So the impact here is small, only like point something percent. But the whole year actually is around non-TIF EPS increased TWD 2.2 due to the treasury stock exercise in the Q3. And this impact around TWD 1.1 happened in the Q3, okay? So this -- as we explained to shareholders, we are like to follow on the U.S. [ game rule ] We have a TIF and non-TIF disclosure that you can make your own decision and your own study. Okay. Consolidated revenue of February is TWD 4.6 billion, revenue Y-o-Y, 42%. And the consolidated 2 months is close to the TWD 10 billion Y-o-Y 58%. So February, we have around 1 week -- more than 1 week [indiscernible] holidays. So Q-o-Q is declining a little bit. But overall, I think we are happy to see the business with this revenue. Okay. Again, since many years, the investors, the analysts, the fund managers keep saying the systems company -- system company value is low, PE should be low. But again, I need to define what is a system company. They have a 2 kind of system company. One, they buy component assembly as a system or they design their own IC, but revenue coming from the systems. So these 2 companies are able to show you how they create value. They own the in-house IP, IC technology, but they are not getting revenue from IC. They're getting the revenue from the modules, which they're able to increase huge amount in the revenue. On the other hand, they also get big amount as a gross profit, which Phison business model, we start this model since day 1 when the company started. So Phison, I keep telling to LLPs, when you're talking about the value of the company, you need to study if the all the foundation is a chip design, IC design, the IPs, the value should be much different than the traditional system house, okay? So Phison, we are in this model. Okay. What I'm saying that we are -- the activity is a chip design, but revenue coming from the module. So better ASP and a much better gross profit. And we show you even though Q4 market just little bit bounced back but we hit all-time high in the gross profit because we are excise with the gross margin -- with the modules. And -- this is what according to the TSMC Chairman, Mark Liu, they're saying that in the coming years, system company is going to grow, okay? But the design house is -- growth is a bit less -- it's 10%, the IDM is 4%, but system company is 17%. And MediaTek also saying that MediaTek already transformed to the system company. So Phison, we don't mind to keep saying we are a system company, but we need the analysts to know what is the value of my definition in the system company. Okay. So this is what we are doing, foundation with the IC design. Then revenue coming from the modules. This improves our value in gross profit. Okay. We are [indiscernible] to get the award of our very close partner Micron. This award happened by last year November. We have the outstanding supplier in the semi -- category of semiconductors. So they have only one winner in every category. And in the candidate, they have still much bigger size than Phison, but want it. Why we make it? Because any request for Micron in the chip design, system design, Phison fully deliver on time. So they're happy about Phison. Due to Phison, we keep investing our strong enough resources, human resources, internal resources in Phison, we are able to react the request from Micron, and to make their products with the market on time. Their products also won a lot of upbringing award from other delivers just because Phison, we contribute our IPs, our know-hows and our design to them. We also won the KIOXIA award last year December due to they're happy to see Phison helping them to win their new generation of flash memory, which is a [indiscernible] We are putting that into their coming high-performance SSD. So this step show you Phison's -- our R&D capability already recognized by the NAND company. Through the NAND company, they also bring us to the Tier 1 system company. So we believe by 2024, Phison will be able to get engaged with a more bigger system company, which including the server, data center AI, automotive, aerospace. So we are happy to tell the shareholders. We work very hard, we invest it much, but we have a good achievement. Okay. This to show you we try to split the segment in the revenue. In the core SSD controller, this is among attempt from the some research center. Phison, we are at 20% of the share. I think we're good because Samsung still in-house, Hynix still in-house. But we hit our group market share in the controller segment, but you go to the module, Phison running at 3% of total TAM, means Phison still have a big room to grow our revenue and our share in the coming years. With Phison's in-house IPs and our customization service, I think we are able to work with the more Tier 1 PCs, servers, and such application to help them make a difference of the products, then we can gain the revenue from 3% to some certain double-digit. So we are potential to grow. In automotive, we are already doing hard in the controller side. You can see in eMMC, in the auto, we are 40%. The TAM is only like TWD 200 million. In the [indiscernible], they have a TWD 3 billion plus of TAM, Phison is less than 1%. So from this entry, Phison start to work very closely with a lot of the Tier 1, the brand company. We are here, and we're happy also we have a very strong partnership with those brands, and we are starting to gain the business from them. We believe by 2025, Phison revenue in their auto modules will go to the big growth. I believe we'd like to go to the double digit in the total TAM. In the mobile, Phison also have I mean 20% in the controller share, I think it's quite good because Samsung, Hynix still in-house, Micron UFS still in-house but we gained some share from the NAND company, and also we are partnered by ourself and also in China to make modules. Again, go to the modules, we are only like 2% of total TAM. So again, we work hard. If we can get this close to 10%, then we can enjoy the big revenue. This, we have to directly work with the phone company in China and in Korea. We are trying to be hard on that. Talking about Gaming Storage, Flash and NAND controllers, but in this gaming TAM, Phison is 7%, we are already doing good. I hope we can go to the more than 10% in the coming years. The reason we can make it because we have many in-house and unique technology, we are able to work with the console makers, with the gaming machine makers to customize the products what they need. So this -- we also potential to grow. Enterprise, which is the biggest of the consumption in NAND, Phison unfortunately or fortunately, we are less than 1%, much lower than 1%, but from last year, our products ready to the market, we believe 2024, the portion of enterprise SSD in Phison will go to double digit in Phison revenue. So we are going to grow these products into the market with our -- not only Tier 1, we have asset partner, we have ODM, OEM, EMS partner. So this also can be one very potential growth in Phison in coming years. Industrial storage, I think Phison doing good, okay, we're doing good. This is very slow such as automotive is very slow, but we keep engaging with many, many local partners to gain that business. And we also put this into the aerospace. We get a lot of aerospace design win. And a lot of new applications. We are helping them to make the customization. So this is still growing but a little bit slow, but we are happy about it. Talking about high-speed interface Redriver/Retimer. Redriver is a very small market. Phison gain over 50%, okay? We are a newcomer, but we can -- but unfortunately, it's a small business. It's okay. We show -- Phison's our capability to the customers. Retimer, we are ready. We are shipping samples. We are doing a POC, we are doing everything. We already have 2 digit number of [indiscernible] with a server company. We believe second half, we can see the revenue coming from the Retimers. So we are a newcomer, but we can see the revenue in the first year when products ready. Okay. As Phison commitment, we keep telling our shareholders, we are going to keep investing into the R&D, okay? And when we look to the Phison's many achievements in the business just because we have a strong R&D, fundamental people, equipment, resources, know-how and accumulation. So 2023 due to the revenue declining, but OpEx increasing. So we also hit the all-time high in the expense -- R&D expense, 22% unbelievable. But this number is going to be controlled, is going to controlled. We are starting to use Phison inventory adaptive AI solution to design our own firmware software chips documentation. So by 2025, a lot of R&D design were used machines. The machine is developed, invented by Phison. So we are going to control our headcount, means we are going to control our expense. Okay. So this is today's earning call material. So we call it some Q&A., just we finish Q&A when we open online.

Okay. Dividend, this morning's shareholders' meeting, we decided dividend [indiscernible] here, okay? Based on our finance book, EPS is TWD 14.7 in the second half. 55% is our principle. So we are going to define [ TWD 8.09 ] per share is our dividend of second half. But as a commitment, last year, Q3, we exercised our treasury share to employees, which the expense is around TWD 1.1. We committed this TWD 1.1 coming back to the profit as a company profit. We put this TWD 1.1 for 55%. Then we got TWD 0.75. And this we also pay to shareholders as our dividend. So overall, the total amount of the dividend will be the [ TWD 8.84 ], which is close to last year's finance book 60%. So shareholder may ask why not increase the dividend? I'd like to express that at Phison, we are still growing. And I foresee, I foresee '24. '25 we are going to grow much rapidly than what happened in the past. So we still need a lot of cash flow to grow our business. So we like to take care of our shareholders. We try to maximize the dividend. But on the other hand, we also need the cash flow to grow our '24, '25. So this can be a good balance between the company and the shareholders, so [ TWD 8.84 ] dividend by last -- second half. Okay. You may read from the media, from report Phison, we are launching our aiDAPTIV+ solution. So why is that? Noting, I have time here, but I try to summarize what I said. Basically AI is crazy, okay? It's crazy. You can see the U.S. market. Those are big guys. They are doing a lot of [indiscernible] AI models, okay? As users, small, medium size users, we need to have a fine-tuning. By fine-tuning the equipment is so expensive, it means the users can either go to Microsoft or Google or Amazon asking for service or by the high amount dollars of equipment. A lot of our government, financial company, [ the lift ] company, they're not allowed to share the data to the cloud. They are not allowed. So but they are also not capable to buy the expensive equipment. So starting, they have nothing to do. Phison will launch our aiDAPTIV which is low entry ticket in dollar amount to help any individual company or a single person, you can fine tuning your data by ourself in your home, which is a low entry. It means if you go to today's AMD or NVIDIA model, you need a few million dollars. Using Phison Inventor solution few $10,000. You can start to have your own fine-tuning. This is like magic, but it's okay. We have no time to talk about this. Next week, GTC -- NVIDIA, GTC, Phison partnership is going to launch the server in the above, then I think the world will know what happen on [indiscernible]. So this is an example. We need to do some fine tuning. But with the -- I mean, okay, sorry, we have a -- something I have a nickname of aiDAPTIV. I think it's a poor man's AI. Poor man will not have money. So if you have only TWD 1.5 million, you can buy only this GPU. You can only fine-tune the model 13B. But 13B may not good enough. So even to go to the 70B, you need to put more money there, okay? But with Phison solutions with extra TWD [indiscernible] million, you can expand your memory size, then you can run much, much bigger the AI model to have a better achievement accuracy in your inference. So this is what Phison invented. We're just able to make the fine-tuning to go to the popular in the market in second half. So who need this fine-tuning? Back to the first page. A lot of persons, obviously lawyer, doctor, engineer, the core system, the government, anyone, you have a data, you need trend, then potentially, you will need this service and this equipment. So again, this is Phison's invention. Okay. So Phison's we provide, this one is what we call adaptive edge, okay, which is the lowest entry ticket to go to the fine-tuning. We also have adaptive cloud helping the rich people, when they adapt Phison aiDAPTIV solutions, they're able to improve the performance. That's our study and testing, maximum can go to the -- up to 30% in computing, okay? Means you save time, you save the power, okay? So this is Phison introduced to the market. And by GTC, we are going to launch with our partner. By Computex, we are going to show everything in Taiwan. We believe when Computex happen, these things is going to be very popular, okay? So this is going to benefit a lot of professional users okay? Again, low entry ticket in the dollar amount, good to use, easy to use and you don't need to put your data to the cloud. All the data you just keep in your home, okay? So this is about aiDAPTIV. Okay. This is saying that we see the narrowing the loss in the NAND company, the demand actually is doing good. We will also keep hearing the data center start to ask take amount of SSD to expand their data center. So the demand, I think, is doing good in the industrial, but consumer wise, is a question, the price going up too much also impacts the end user to buy the storage. And also, their user may not buy the high capacity, they buy at the half size of the capacity. Question is retail is questionable, but for AI system, data center, automotive, AIPC, AI, phone, IoT blah, blah, blah, the demand in the NAND still very, very strong. So the question is a flash price is going to raise? Answer is yes. We keep hearing our supplier going to raise another 25% by CQ2, to raise another 30% by CQ2. We're happy to see the NAND company turn to profit. If a price keeps rising, I don't see this as a good symbol to the industry, okay? So I got so many calls from shareholders, analysts, fund manager this week. The rumor saying that KIOXIA is considering to resume their capacity. Basically, I asked to KIOXIA, they said no comment. But I believe, definitely, they are starting to increase their capacity in their factory. Definitely they have to wipe. I was in Tokyo 2 days ago to ask for 30% extra supply from them, I need extra 30% because my design win, my design win customers keep complaining they got not enough supply, which impact their systems shipment, is a big amount of their revenue. So I need my supplier to improve their output, they're able to have a better allocation to me. Yesterday, I got the other message for my supplier. They're saying that second half, they are going to cut my 70% allocation, 70%, not 17%; 70%. Why? Because they got so strong demand from the data center, of course, my response to them is totally unacceptable. The reason is when market was slow, we're helping them to accumulate big inventory, helping them to use their NAND to go to the design-win activity. Finally, design win happening since the last second half, the business is growing if they cut my 70% who are capable to have my customers. So the answer is no. So then the question is, my analysts saying that when KIOXIA increasing the NAND supply, their market will crash. Again, this is not going to happen. If a NAND price keeps going crazily, what happened? The system company eventually there to cut half size of the capacity, because of price too high. If they cut half size of the capacity, then the NAND market return to the power, which would -- through industry. This is totally not acceptable. The best scenario is NAND company right now, I believe, with the selling priorities start to have a much reasonable gross margin with a reasonable operating profit, net profit. We hope they can increase the capacity to keep in new supply with a reasonable price, then Phison will be more than happy because we got so many design win business. So we're happy to see Japanese, Korean start to resume their capacity. This, it will be healthy to the market. So quite stable, everyone happy. System company happy, supply happy, we are happy. Okay. The gross margin, last Q4 all-time-high. We believe first half this year, we can keep the high 30% of our gross margin, okay? So this is not just because of inventory gain, but we have a lot of design wins, which customers they're willing to pay premium to Phison. Okay. Talking about inventory. Since CQ1 last year, we start to reverse our write-off, okay? So we believe because the market price is going up. So '24 Q1, Q2, we believe we will still reverse our write-off. And based on the CQ4, we still -- the write-off portion still have like 7 something percent, seven point something percent of the inventory. So means the inventory starts turn to healthy. Okay. ESG, anyway, I think we keep doing a lot of our -- doing all our best to -- in the ESG. So every ranking area we are improving, gradually improving by every quarter. So this is to show our commitment to our -- to environment, to governor and also to the social activity. Okay. So above is my present today. We have like 25 minutes left. We can go to online. Can you hear me?

Sorry, I was. Yes. So yes, so like before having questions from investors, maybe can I follow-up some questions. First is -- like in the past quarters, we also have some like very good contribution from NREs. Can you also share about how is the NRE contributions in not only last quarter, and also maybe ongoing quarters, what do you think about those customers' feedback and also NRE contributions?

Okay. NRE wise, Phison, we have 7 NRE mainly is in service to the main company and making customization to the system company. NRE wise, CQ4 we keep frac versus CQ3 and this year, we expect NRE increase in Q2, we get requests from the CSP company, storage company, NAND company, and some more industrial partner asking for customization. So NRE wise it's stable. I don't expect NRE can grow rapidly, but stable. This year, my goal still to improve our revenue in the -- our products, both controller and modules.

Okay. Got it. And also, like it was pretty impressive when we share about the AI adaptive solutions. So can we share more about like the potential clients and how it works with the current like AI system? And maybe how can we price this? And what's the potential revenue contribution to Phison?

Okay. Talking about the AI, right, we have to define end user, the user. The user, they need to have a server, which server including the GPU card. GPU card with Phison Adaptive, this Phison Adaptive. This is served with the GPU card. And they also need to have some software platform, okay? Then end user can start to train by themselves. We are engaging server -- we have more than 5 server company branded or ODM doing the POC and some of them were launching their server next week in the GTC -- a week after in the GTC. Next week, we are also going to have press, to joint development, the Phison Adaptive with one of a key player in the ecosystems they are going to provide the service. It means they have a user interface, they have a software to let the end user easy to use in fine-tuning. Of course, we are working with a GPU supplier to optimize our adaptive into the GPU systems to make better performance in computing to reduce much dollar amount in the systems. This is ongoing. So after TTC, by end of the March, one, another GPU company will also launch the architecture with Phison Adaptive. So we believe this is a very new concept. We need to prove many, many POC and the good thing is Phison, we've done a few set of a server to the Yamin, Jiao Tong University. Many AI professors use this. And next Friday, they are going to present their final fine-tuning results, and this is going to be public. So I believe the products will start to go to popular after second half of this year, and Phison revenue will come from our SSD with NIM AI 100 with the Phison's middleware. So revenue will happen by second half of this year. Okay.

That's very clear. And maybe lastly, on the -- on the NAND supply related. So we did -- I think to this share [indiscernible] maybe some suppliers are cutting supplies, by like big amount, 70%. But as such, like some suppliers like KIOXIA will be more supportive. So can you share about like what's your view on the -- like into the second half? Are we seeing some potential shortage on the net supply or like we can still have a pretty good secure on the supply chain?

Personally. Personally, okay, I cannot represent the NAND company, okay. Personally, I believe the NAND company already start to resume their capacity, I believe. Of course, in the public, somebody say no, somebody yes, somebody say no coming back, but I believe they are starting. But since you start to resume your capacity, this is not easy equipment need to warm or need to final adjustment. And whether in and out, you may need 2 to 4 months, okay? So even though the wafer in the output will be after 3 to 4 months. So that's right now, I'm facing a big, big challenging is I have a demand, I have a order, but I don't have flash. So that's why I need my supplier, hopefully, they start to resume their capacity. Okay.

Yes. That's really clear. Yes. So let me check, if like investors can please hold your place [indiscernible] we can put you into question. Thank you.

Tony?

This is [indiscernible]. May I know more about mask cost in terms of fourth quarter and first quarter this year. Will there be any quarter-on-quarter increase or decrease impact?

Okay. This is [indiscernible] Phison, we are count their mask as expense. So when we talk about the shift that happened by the day, okay? This quarter, we have a few 12-nanometer tape out, problem is not that much expensive, but again, the mask cost is there, right. This year, we are going to have a 2 to 3 piece of 7-nanometer, which is super expensive, may happen by second half this year. So means CQ1 and 2, the mass cost is not as heavy as the last year Q3. Okay?

[Operator Instructions].

Yes. So can I start my questions? So my first question is in terms of your gross momentum. So -- just wonder what kind of growth drivers for Phison in following quarters. Should we expect that the shipments can be the major drivers or the pricing?

Okay. Of course, when we go to the client, controllers, we gained a few NAND company as controllers. But unfortunately, 2022, they are digesting the inventory. So we see the new demand in focus. So in controller wise, we're doing good. In the client SSD, we are working with a few Tier 1 PC makers, we customize our controller module to them. And this revenue coming from CQ4 this year. So this is a big amount of modules business. We also win also some SSD modules to the Tier 2 SSD Tier 2 PC makers. So -- we -- and we also believe that NAND supply will getting very tight Q2 and Q3. Since we have allocation, we are able to support our acquisition partners. So this can also turn to our growth. So go to the auto. Auto growth is slow, but we are gradually getting a lot of heavier. This growth will happen second half this year, but main growth will happen by '25 in automotive, okay? So when you can see a lot of press, lots of joint development, a lot of activity with our auto partners in the market. Back to the mobile. Actually, mobile in the last 2 -- I mean, CQ4, you can see that China demand is good. We get a lot of controller demand also by the eMMC UFS sales, we gain the numbers. So this is the other -- this is the other growth for Phison. In the coming years, we were able to launch several UFS controllers. This will help us to gain middle low-end phone makers in China. And Phison also going to have joint venture with our India partner by end CQ2, then Phison can take the India mobile storage business through our India joint venture. You can count like our China joint venture, we are coping 1 into India because India hope they can develop by themselves. So mobile, we are going to gain on in China, but also in India. Gaming, I think, due to the inflection, due to the interest, gaming is kind of a slow, but it looks like Phison is very unique players. So we only 7% of temp by second half, we have a new model working with a console company. We believe this can turn to a big revenue. I'll go to the enterprise. If you ask me what is a big growth of Phison this year will be enterprise because last year, we're almost nothing, okay? But we are ready. So this year, this revenue-wise from enterprise will be a big jump. Next, industrial. Again, I'm saying that is gradually improved, increased, but this is a slow, so don't expect too much. If you're asking about growth, industrial is stable but not big growth. Next is a retirement. It's totally new. We can see some forecast already happened by CQ3 and CQ4, but controller revenue will be 2025 big growth. Then go to the Adaptive. We believe revenue will start to happen by second half, most likely by July, August, okay.

So yes, so my second question is in terms of your retirement business. So it seems like you had several qualification, especially in enterprise clients. So when do you expect that we can have a contribution coming from maybe CSP clients or data centers? And other question is can we provide a total solution, including NAND storage or SSD controller or even Retimer to provide a bundle or a total solution to our -- maybe and the clients to maybe -- so can we expect more contributions or design wins or any potential upsides coming from this kind of segment?

Okay. First question. We believe we are working with a lot of IVL, not only with the CSP, but also with the server OEM and server OEM. We believe that revenue will start to come slightly from CQ3. CQ4, we can see a significant number and a lot of activity ongoing. Unfortunately, I cannot show you what we are doing there, but we have confident CQ4 significant growth on Retimer. Second question, the answer is yes and no. Basically, those CSP or server company, who in charge of Retimer and the storage is a different group, totally different group, okay, a different person. But we have a good -- the synergy, when we talk to the data center supplier about SSD, we also bring our Retimer. Since they have a good -- they are comfortable about Phison technology, service, feasibility, blah, blah, blah. In SSE, they are happy to test prices retirement. And we also see some CSP server company. They are softer current Retimer, maybe price, many service, maybe technical issue, Phison show very hard working fast we add to them. They're happy about Phison Retimer, they approve Phison test and go to AVL. On the other hand, when they're happy about Phison Retimer, we also said, "Hey, how about bringing our storage"? So this can be a big leverage, but it's not 100% combined, okay.

Okay. So my last question is in terms of your controller business. So I think practically, you mentioned that we see the trend that all the NAND manufacturer player -- manufacturing players are all sort of thing to data centers, controller to the professional design house like Phison's. So do we expect this kind of -- is this kind of trend or demand will continue in the future? So how's our outlook in terms of the...

Okay. I believe the answer is yes, but this is not going to happen tomorrow. Not going to happen next month, not going to happen next quarter. Most likely, this may start to talk second half this year and happen by 2025. We have a confidence. Okay?

Thanks, Jason, for the question. Jason, do you still have questions?

Sorry, this is like -- let me repeat my question. So my last question is in terms of the -- your SSD controller business. So practically, you mentioned that the...

You're just talking about outsourcing, right, outsourcing I just answered already -- answered already. I said yes, but not happen tomorrow, next quarter, but most likely start to -- actually start to talk something already, may happen by end of this year, and we can see the result in the end of 2025.

Okay. Then let me pass the question to Nomura, Donnie.

My first question is regarding to you have a qualitative guidance about that business will be growing rapidly in 2024 and 2025, and you have answered some of the progresses in different products. But just curious, if you are considering the strong NAND price as well in the near term, just wondering if you could give us some rough idea about the revenue growth in 2024 and 2025. Is that -- what kind of percentage would be driven by NAND price and what kind of percentage will be driven by all the efforts we've been investing into these new products? And also, you also mentioned about the supply resumption time line could be a couple of months lagging behind the moving equipment. Wondering if you could give us some colors on those NAND makers production resumption time period in the coming quarters? And when do you think their production will be back to normal level?

My perspective based on today's price offer from the NAND supplier, they already overcome their cash flow problem. They're also going to the OP is positive. I believe this is happening. So of course, NAND company that was the price going double again, but this is not really going to happen, as this I'm showing here. If prices keep going high, the system company will cut half capacity, half capacity into the system. So this then will queue the market. So I believe with a reasonable NAND company gross margin rate like 35%, 40% is really healthy company. It's healthy business. In this case, I believe the flash price already going to touch the top of the selling price. And we also hope that NAND companies start to increase their capacity because the market needs a more component, the market cannot accept the price going very much high. If this is going to happen, demand increase with a reasonable profit, then NAND companies start to accumulate the profit, then by CQ2, they may announce to start build a new fab. Then the industry of enhanced start back to the healthy cycle. We hope this is going to happen, okay by CQ2.

Yes. So yes, so back to the first one. So rapid growth in 2024 and 2025. So it sounds like 2024 for sure, there could be some support from the NAND price recovery from a very low price in 2023, right? In 2025, what kind of growth in 2015 you are seeing, is I think that's not just purely depends on NAND price, but more like the new product growth, right?

Yes. We have a big confidence on Adaptive products. We talk to every server makers, ecosystem users, government officers. They all agree Adaptive will help the human to have a low entry dollar amount start to have their own fine tuning. If this happened, this equipment will go popular very, very rapidly to the market. And Phison we invent this solution, we have our software, our patent. This will help Phison to grow our revenue. And no doubt, we need to have support from the GPU company. We wish after we launched the products in GTC in end of March by one of GPU makers and candidates, we hope GPU company to endorse these solutions to help the human able to use a small amount of dollars [ start to ] they have fine tuning. So Adaptive will be one of big growth to Phison, and no doubt. Retimer this year, I think CQ3 small revenue coming, CQ4 gradually every quarter improve. I cannot tell you how much I can make it, but everything starts from nothing. We have good confidence, we are going to gain shares. Industrial, again, industrial is very slow, okay, but it's our good fundamental revenue. Enterprise. If asking me again, enterprise will be much, much critical because this is a high [indiscernible] -- every piece can be a few thousand dollars, just to give you a number, I just got the 1,500 pieces of our SSD value is at $3 million. So this will help us rapidly growth in the revenue. Then gaming. First half usually gaming is a slow, but go to the second half, Christmas season, summer season, gaming can helping us to gain our revenue. Mobile. Mobile only controllers, but also module in our China partner, our company. India, we are going to have a joint venture. This can be a new growth. So in the mobile module, we are very optimistic. Auto. To get auto slow, we can see the growth next year. Last is the SSD for PC, for retail, for Adaptive. So this is the big growth. Hopefully, I answer your questions.

Yes. Understood. I just have 2 follow-ups here. So the first one is that I understand that the strong pipelines in terms of the new product, but considering you also mentioned about NAND makers will resume some production or review the fabs, just curious, what's your view on the supply-demand situation into 2025, regardless of the strong new product pipeline, we are seeing at this time point. And another follow-up is could you elaborate more on what kind of system companies we are working with on the AI adaptive system. And also, can you give us some quantitative guidance in terms of the sales contribution from AI adaptive system as well as Retimer's in this year.

Okay. If second half this year, if no, any NAND makers announced to build a new fab, 2025 second half, there will be crazy shortage, okay? So we wish many companies start making money, CQ2 start to announce they made a new fab, start to order equipment. The equipment factory can be ready within a year, then start to rent up. Then second half '25 will be healthy. If not, '25 second half, I think everyone had to suffer the high price on that. So we wish they start to build a new fab by CQ2 or CQ3. Talking about the adoptive, yes, we have a main activity with -- again, with the ODM, OEM, SI. But unfortunately, I cannot tell you how big the market, the dollar amount, but I think everything can be more clear after computech. But again, we are really optimistic.

Donnie, do you still have questions?

No, no, I'm fine.

Next, we'll have Simon Woo from BOA. Simon, are you with us?

[indiscernible]?

Okay. And maybe let me ask a question from the line, then I will come back to Simon later. So there's a question from a chatbox like SMI said that, it expect revenue from NAND supply to increase by 50% this year. Did we see the same?

Okay. SMI saying that, I'm not SMI, right, so I'm not to comment about. I don't know if SMI counting the NAND supplier from China or not. So this is a question. But Phison, we believe, again, Phison's revenue, when you look to my distribution, right, it's like 30 plus/minus percent in my revenue. So I'm -- I'm not telling you our controllers portion, but Phison company policy controller only sell to the NAND company and [indiscernible] and our China company vessel. We didn't sell controller to any [indiscernible] module house, traders, brokers, we never -- so if you ask me, most likely Phison controller go to the new company. So this is a totally different with the SMI as a business model. So when SMI saying that, they gain the share from -- I mean the revenue come from NAND 50%. On the other hand, they lost their China [ Santen ] module house controller wide because the price is broadly in there. Okay. Yes, this is my answer.

Okay. Back to Simon. Are you with us? Okay. It seems like there's a line issue. So yes, so maybe -- these are all the questions for today.

No, I saw one question about the Gen5 design win. Yes, we have a few, but I cannot disclose who, but we have a few more than 2.

Okay. So Yes. So I think that's all the questions we have for today. Yes. So thank you, everyone for participating...

Hello Simon?

Yes, sorry. Can I ask for one question quickly?

Yes. Yes. Sure, sure.

So yes, your presentation great. But I think a lot of the global NAND capacity based on the still 112 or 128 layers, not the 176 or 200 layers above, so if the mandate makers increase their utilization ratio, their concern is they are having lots of the legacy lender chips rather than fresh new high-density NAND. So do you still believe maybe Japan, Korea, NAND makers can increase easily to their NAND fab utilization. Again, we do see the global NAND capacity is still very, very absolute old.

No, actually, I don't care, right? We use flash, old technology or internal we just use the memory, right? So I believe I can see some of my vendors start to migrate to the 200 layers above and quite smoothly. And of course, the U.S. player maybe ran up in the 232 China were 232. So no much worry. What I can see is in Korean supplier, basically, they are a little bit behind, but I believe they are going to catch up.

Yes. That's a great point. Maybe very quickly, your adaptive business model really makes sense with AI, but it sounds not much relevant to the cloud storage. So that means you believe lots of the B2B, even the B2C customers, they're going to establish standalone the SSD storage device rather than relying on the hyperscale cloud.

Okay. I lost your voice. But I think, I catch your question here. In Phison, we have 2 solutions, whereas the edge mainly is for the B2C not B2C, mid to small medium-sized company, I think this is mainly lower the entrance ticket, entrance amount. This is going to be popular and the big unit is going to ship at second half, and we also have to prove, we would prove, we are able to help the cloud to utilize their GPU to improve performance. So this we need to make many POC, but this we need to endorse by the GPU makers. So this may happen after 1 or 2 quarters.

But these guys, I do remember they prefer maybe a large NAND makers SSD solutions. So are you still confident to compete with a big NAND makers like Samsung to sell your...

Phison, we never compete with a NAND player because we are too small to compete. But I would like to tell you Phison is a complementary with the NAND company. It's easier, right? NAND company if they invest their resources -- human resource to build the solution, they are not able to sell and supply, because the demand in this is not storage is in computing. So they cannot sell as many as is they wish. But ultimately, or unfortunately, already many patents. We have many patents in our adaptive, this every NAND vendors very close with Phison, they are my customers, they use my design controllers. And also they are very close customer helping them in last year's special Korean supplier last year was tough. We helping them carry the inventory. This year, we helping them to make a lot of design win. I agree to you the large cloud they prefer to buy from NAND company. But NAND company, if they think they're going to invest, the return is small because the low is a bite. And Phison also will feel uncomfortable with our patent. So most likely, we are going to work complementary with the NAND company. We provide our design service. We believe.

Yes. Great point. Maybe lastly, I know it's very late, but the one last question. Yes, everybody is saying memory cycle, semiconductor cycle getting better, but because of Media or AI team, we get -- when we look at the traditional -- even the China smartphone, PC, even the conventional servers, we still see the quite weak sell-through or timeline growth. So how do you assess the Q1, maybe Q2 over the NAND chip demand, except AI-related things?

Okay. Again, I know the question. But to be honest, my answer is this is not my business, cannot manage, right? But I believe with today's agree consumer very weak. But for data center actually turned to very strong, you can go to call the Korean supplier turned very strong, okay? A lot of our AI system built from nothing is strong. So I don't know, overall can be just a little bit shortage, but Phison will grow too much because with the new applications. So I wish the demand is not much strong, there Phison able to get the more supply with a much reasonable price. I wish, if they're NAND going to strong like 2021, crazy that die or my investment loan because I cannot get fresh. I cannot make revenue. So I hope what you say is right. There Phison able to get a more enough flash with a reasonable price.

Yes. That's a great point. Yes, I think already over 6 p.m., but the rate is okay. One question from Europe, one European investors asking one question to me. So it's okay if I read. The long-term investor question is your business model with the working capital burden, according to your presentation material, December quarter inventory [ TWD 24 billion ], right? However, your COGS number is about [ TWD 10 billion ] which means already more than 2x of the COGS number. I mean the cost of goods sold number is inventory. So is this a normal inventory amount going forward versus previously much lower than this? So what's the reason? And then you're going to retain this kind of high inventory level through the rest of 2024?

Okay. 2022 and '23, I have a high inventory, not because I wish I have no choice because NAND company came to collab as a long-term partnership, I help, so I carry high inventory. But this year, I have any high inventory because the visibility of supply is unclear, but my demand is very clear, okay? So I don't care about whatever you call the percentage healthy, healthy INE component, I have a real event. So one thing I want to share with you, if we said the [ TWD 24 billion ] is higher, but Q1 much higher, because visibility is low. Some I showed to you yesterday when I lean Taiwan from Tokyo, I got a call from Korea, they said, "I'm sorry, I cut you 70% second half. You say what? Cut me 70%? Okay? So the smart people now is to keep high inventory for my next quarter business.

All right. So clear, KS, and thank you again, your great presentation today. And also congrats on the 2023 great result.

Okay. Yes. Thank you, everyone. Thank you, everyone, every investors and thanks management team, KS, for the great presentation and Q&A. So we will conclude the call here. Thank you.

Thank you. Have a good day. Thank you.