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

Good morning and good afternoon, everyone. This is Tiffany from Morgan Stanley. Thank you so much for joining us today for Phison's 2024 Fourth Quarter Earnings Conference Call. And it's our honor to have CEO, Mr. K.S. today to share about the financial performance, market monitor and business outlook for Phison. After that, we will open the floor for Q&A section. Now I would like to turn the call over to K.S. K.S., please go ahead. Thank you.

Good afternoon, good morning, ladies and gentlemen. So thanks again to join Phison the 2024 CQ4 and the whole year's earnings call. In this section, I will combine some speech with the Mandarin, which is easier to -- Taiwanese local investors, easier to understand what we are talking about, okay? This is our CQ4's configuration. From this chart, you can see consumer is a little bit better because it's back to the traditional consumer season. And controller-wise is flat. Industrial is almost flat, but the enterprise is down just because of some inventory in the market, but it looks like this inventory is slightly soft. But overall, we are happy about our configuration, which is still over 70-plus percent are related to the nonconsumer products. So financial report revenue-wise is the bottom. It is the lowest in the last year, the whole year, the CQ4. Gross margin is TWD 3.8 million and Y-o-Y is down 31% just because of low revenue and the slow in the market due to the inflection from the U.S. market and the worldwide -- impact by the worldwide inflection. But overall, we're still happy since the NAND market and the DRAM market was very pessimistic in the CQ4, but we're still able to get kind of acceptable gross profit. So this is -- we keep working very hard on this. So revenue-wise, CQ4 is the lowest in the last year. We believe in this last 4 quarters plus this year's fourth quarter, CQ4 is one of a slow season. We try to recover from our coming CQ1. So the gross margin rate, I think we need to briefly to you. The overall, the CQ4 gross margin is 30.8%, which we have write-down 4% back from 4.7% from our inventory. CQ4, the market price is really bloody because of demand is slow and China module house, they are dumping their inventory. So if you read some reports from China module house, if they are public, you can see they also suffered their gross margin and some of them suffered the minus net profit. So overall, the gross margin average is 30.8%. The whole year is 32.4%. So the 2024, the gross profit actually will improve because of revenue growth. So the earnings per share by CQ4 is TWD 11.6. So we have some explanation here. Basically, we have -- you may know we have exercised our investment in China. We brought some extra investment profit back to our financial book, okay? Due to that, we have extra profit. We also write off some profit to the R&D expense by the CQ4. So 2024, the whole year's EPS is TWD 38.95, which is close to the TWD 40. So let me use Mandarin to explain market share. [Foreign Language] So the income statement, you can see here, I think you may need to know about our operating expense. We increased to TWD 4.8 billion due to we have an extra profit above the investment. So due to that, we write off a big amount of the profit. So in the OP, OP turned to minus just because income is from extra investment, but after we write off to our overhead, then this impact to our OP. But again, overall, the net profit in the CQ4 still close to 11. [Foreign Language] So in our balance sheet, revenue-wise, actually, we grew quite a big amount. I think it's a good growth of 22%. Gross profit, we also improved by 18%. But the R&D expense, we also increased R&D expense close to the TWD 12.5 billion. This, I think, is the highest just because we have extra profit. And by last year, we are tapping up the two 7-nanometer chips, okay? And you may know the mass cost is very high. So this year, we still have 1 or 2 need to be tapped out. So last year, revenue growth, gross profit growth, by the way, the R&D cost also improved, increased. But anyway, the net profit, EPS after tax, we still delivered a good result to our shareholders. Okay. So this is our total asset. And I think by inventory-wise, I remember by 2023, the high year's inventory was close to TWD 3.2 billion -- TWD 32 billion, but now we are lower to TWD 24 billion. But in the coming CQ1 and CQ2, we are increasing quite a big amount of inventory due to we book a big amount of the low-cost inventory in January, February and March, okay? So later, we can explain more here. [Foreign Language] So back to the NAND chip. By CQ4 due to extra income, we write off overhead. So the OP we tend to minus. But we take out this impact, the real operating profit without the extra income and the extra R&D bonus and R&D cost, the OP is around TWD 722 million and the gross margin profit rate is 6.1%. And back to the net income is around here, okay. So basically, the business in operation, we're still in positive. But of course, CQ4, the demand is weak. The price is challenging. But overall, we still delivered positive result to the shareholders. [Foreign Language] Regarding the whole year I remember CQ1, we have the treasury shares, CQ4, we have extra exercise investment. So overall, if we take out these 2 impacts, the OP is around TWD 6.5 billion and OP is 11.1%. So the basic EPS is TWD 35.3, okay? So this is just to reflect our operations. [Foreign Language] Okay. So this is about our 2024 financial report. February, our revenue is TWD 4.5 billion and cumulative is TWD 8.1 billion. We believe -- I believe 2025 January by monthly is the bottom, okay? We can see the demand month by month, MOM is increasing. We can see also demand trends to be strong. We also can see the consumer market, embedded market, PC, OEM, mobile, enterprise, industrial, they are willing to keep asking to buy more storage and controllers from us. So bottom line is -- the bottom month is January. [Foreign Language] Okay. Then we have some business highlights. Last week, we have a press release regarding our enterprise SSD, which launched to the moon. According to the updates most news from our U.S. office, this already landed on the moon, but they have some technical issue. But overall, the SSD is still working. So we are waiting the more testing report from our partner, Lonestar from the U.S. And we also launched our first -- in the world, first PCIe Gen5 [indiscernible] line. We got some design win in the Tier 1, Tier 2 PC OEM already. We also start mass production for the Tier 2 PC OEM. And this controller, we win several NAND flash controller outsourced to us. And we can see this controller will start to bring more value to the PC industry. And we are also taking not only the TLC, but also going to deliver the QLC products to the market by the CQ3. We also started to release our UFS with the QLC solution to the China 5 mobile makers. So next week, there is called China FMS, we are going there to test together and to engage how to bring the QLC into the mobile phone. So we have a full line UFS 2.2, 2.1 and UFS 4, which cover the QLC for the China mobile market. One more thing is that you may also like to ask about aiDAPTIV. After the -- actually during the Lunar New Year, the DeepSeek, everybody know about that. And yesterday, the Alibaba also announced their Qwen QWQ, okay, which is the newest model. This is just to prove one thing. To create a model, you don't need to use a multiple billion, just what they claim is $5 million. So the new model easy to be correct, then this is helping the AIM much easier go to the edge. So Phison, we are working closely with many system partners, server partners and also GPU card partners. So week after in the U.S. GTC, Phison is going to launch the newest aiDAPTIV solution in there. So we can see according to a lot of research and the market discussion, the training is not need to cost them much anymore, so much easier to do in picture. But post training or we call fine-tuning is necessary for this industry. So Phison, our aiDAPTIV proof, our solution is the best for the fine-tuning and also we can improve inference. So week after we are going to announce this solution, the newest solution in the GTC. Of course, we can see more our partner is going to engage with Phison from medical device, from the server business, from the industrial business. So this we believe that -- okay, so fine-tuning is coming. Edge is coming. AiDAPTIV is the best solution. Okay. We also take one example. According to the news during China New Year, they have a Professor faculty, she announced doing the 1,000 training set, training under [indiscernible] and cost is $50 in the cloud computing, okay? And also they use 16 NVIDIA H100 GPU and cost is higher, but the spend 26 minutes. Phison's team did the same thing, fine-tuning the 1,000 set with the professor from Yang Ming Chiao Tung University with aiDAPTIV with a piece of a GPU card, which is a 3% cost of what they use and the training cost is around TWD 500 to TWD 600. So this is to prove to fine-tune model can be very, very low cost, affordable and everyone you get a server in your office, in your server room, you can do it by yourselves. So trend is coming. We're also working with the hospital in Taiwan to doing the VRM and this POC done and start we're talking to how to move this to the clinic use, okay? So a lot of activity is ongoing. We see after this GTC edge AI computing is coming. Okay. Let's have some summary. Basically, last year, everyone talking about cloud AI, cloud AI multiple billion, 2-digit billion, 3-digit billion. But this year, we believe we'll be talking about how many K dollars, which is go to the on-prem, go to the edge computing and Phison aiDAPTIV, we work very aggressively with many of our industry partners. So hopefully, after GTC, when the market start to award the edge is coming, then we are going to deploy our solution to everywhere. On the same week, they also have AMD GPU event in the Beijing. So same week, one in the San Jose, one in Beijing. So Phison, we are going to join both there. Okay. 2024, we even though we try to manage our head count, but the worldwide R&D head count actually is still increasing just because of we are eagerly to go into the enterprise SSD, we are hiring more for the aiDAPTIV. And due to the geopolitical conflict and customers asking to have R&D team other than Taiwan. So the overhead wise still around 21% expense from our revenue. So to let you know where is our distribution. Taiwan still is a headquarter. We have around 3,000-plus engineers in Taiwan. In Japan, we have one subsidiary doing the customization for the local industry. And in Malaysia, due to, again, asking by the U.S. customers for Taiwan Plus 1 program. So we have around 60 engineers in Malaysia doing the enterprise SSD, automotive solution and also the AI solutions. We also built another new entity in the China Xiamen to deploy our enterprise business there. China asking to use local content. Without our local designer, I don't think we are able to get the business. So the China, we have around 60 head count doing the enterprise SSD for China home market. And U.S. in the San Jose and also the Bonfield, which is mainly for enterprise and also engagement with the cloud partners, system partner, GPU partner, CPU partner. So -- but no matter what, Phison already start to manage to control the head count, growth of head count. So we are asking internal engineers start to use aiDAPTIV AI to improve the design, not to increase the headcount anymore. So we can see some good progress. I believe second half, we can share more results to everyone. So let me have some summary. The NAND industrial start to cut production since last November. So we can see the impact is happening. And the whole channel, no matter in consumer or in industrial and the mobile phone, they carry very low inventory. So recently, we can see the good demand coming back. And DeepSeek proves the AI, the LLM cost is not that expensive and [indiscernible] is coming is only like 30B versus DeepSeek 671B, only like 5% of the parameters, showing the same performance. So it means you want to use LLM AI, not necessarily to use cloud. You can use the on-prem solution with affordable investment. [Foreign Language] So this is today's report, and let me go to the Q&A from shareholders. This morning, we have a shareholders' meeting we decide to have top dividend for second half. And dividend is coming from the net profit, we took like 65%, so close to the 8.6%. And last year, we have -- first half, we have for this year, we take out 55% back to the shareholders. So overall, it's TWD 12. So by 2024, the whole dividend is TWD 13 plus TWD 12 is TWD 25. And inventory, TWD 24.6 billion, which is a distribution here. We still try to accumulate more component for enterprise. We can see the demand is there. And the embedded OEM for PC and mobile also getting stronger. So this will help us to increase our revenue in this year. Controller-wise, we got the Gen 4, Gen 5 PC OEM, which recently, we are a little bit shortage in the Gen 4 controller supply due to the earthquake here and due to the sudden increase from our NAND customers. So overall, we believe this year, we can grow the whole business, but one only -- one worry is second half, we may not have enough flash even though we purchased a big amount of the NAND flash by Q1. And ESG-wise, Phison, we keep get a lot of good improvement. So we can reach here we are -- our ranking is keeps improve. And in the OTC, Phison now is a top 5 in the whole industry. So we keep improving our ESG. We invest a lot using the green power doing the society supporting and also improve our internal transparency. So this is our report today. So we open to the Q&A. If anyone you can ask by English or you want to use the Chinese, I will deploy accordingly.

Yes. Thanks, K.S., for sharing the insights. And now we open the floor for Q&A. [Operator Instructions] So first, I would like to start with some questions for K.S. So do we have a target for 2025 full year revenue and also the margin side as we already see margin pick up in fourth quarter? Do we expect it to continue to go up in the coming quarters?

Phison, we didn't give the financial guidance to the market. I think it may be it's hard to me to answer. After answer the OTC may call us to give the guidance. We are in the market. We agree NAND is a volatile market. But this whole year, we believe the NAND is very positive. And we can see the demand in the -- demand from the PC from mobile, from server, especially from the edge AI getting stronger. Of course, we have a goal on the revenue side, but we keep doing our best. Only worry is we may not have enough inventory by second half if the production cut start impact the CQ2 supply. okay? In gross margin-wise, of course, last CQ4, I think is a bottom gross margin. We can see the gross margin start slightly back due to the demand stronger, and we're also able to collect big amount of wafer supply from supplier at CQ1 with a much lower price in the market. But gross margin-wise, we're also happy to see on aiDAPTIV, the demand is increasing. This definitely will helping us to improve our gross margin rate because this including the software licensing and software, you may know this is 100% gross margin. So overall, revenue-wise, 2025 will grow versus '24. Margin-wise, definitely will grow versus '24.

Now we will open the floor to the analysts. So Jason, feel free to unmute and ask question.

My first question is in terms of the pricing in coming quarters, we know that some of the players, they are cutting the capacity or utilization rates currently. So how do we expect the price impact in coming quarters? Do we see some of the wafer price or die price or even SSD module price or even finished good price can reverse in second quarters or even continue into third quarter?

Pricing-wise, after Lunar New Year, we have 2 NAND suppliers increased the price around 9% to 11% on the wafer. So what I'd like to say this is happening, okay? In the spot market, spot market, the price already for some low density products already increased 30%, okay? For the middle capacity, middle capacity is still like only 5%. But we believe in the highest density because high density will consume more flash memory in the CQ2, definitely price will increase more than 2 digits. So the answer is the NAND supplier already increased the wafer price and the spot market deferred the price. And in the retail SSD, we can see the leading key player already increased 5% to 7% last week. So we believe the price trend will keep growing until CQ3. But of course, again, we keep talking to the NAND supplier, they have to increase the price back to the reasonable margin. But if price growing fast that much, same story may happen by 2023. But this time, I think one thing is an exception that 2023, they have no AI edge demand. 2024, you can look to the China. China now start to push the edge server for DeepSeek. So what is AI? AI input is a power supply, output is data. So when AI start to use in the edge, the SSD in the edge demand will definitely increase. SSDs, since the last, we can see the China demand on the high-density SSD demand already happened. So I'm still personally more optimistic, the price in the March, April, May definitely significantly increased. Hopefully, by CQ3 price increase with a single digit, not that much. So the whole year, I think still very positive.

Got it. Got it. And my second question is in terms of the impact from the U.S. new rules. So I think a few months or a few weeks ago, U.S. government restricted the south. There was no supply to China. That means they need to actually add in the wireless vendors. But your competitor, especially in China, they are still using some of the 12 or 16 nanometers. And we believe that some of the capacity for back end are in China. So do we see any positive new orders because of that kind of new rule happened in this year, especially for your SSD controller business?

Again, this is hard and sensitive to make a comment in the public. But the answer is yes, okay? The whole market worry the supply chain uncertainty, which that's why I'm just saying that our Gen4 controller was in tight supply due to the -- our NAND customer increased the controllers. Our U.S. module house also increased the controllers. And on the other hand, we also try to gain some share in China retail business. So answer is yes, but let's keep monitoring.

Okay. My last question is in terms of your OpEx for this year. I know you never give the guidance for your financial numbers. So can you give us some trend or outlook that whether you will expand your R&D head count or you probably will set up a new office or R&D center for this year? How do we expect this kind of OpEx for this year?

Okay. Since early 2024, we start to manage the head count increase in Taiwan. So basically, Taiwan whole year, the head count increase is only like a few 10 below 50. So we are well managed. And Taiwan office R&D start to use aiDAPTIV to improve their design efficiency. So in Taiwan, we don't see we are willing to keep increasing the R&D. But in Japan, China, Malaysia, I think Japan is okay. We don't need to increase. But for China market, especially for enterprise business, China, we need to expand because we need to take the share in China. Malaysia-wise, I think we are also going to increase because push by the U.S. customers, they wish we can move some more design to Malaysia. In Malaysia, we also can able to cover the business not only from U.S. but also from Middle East. And personally, I believe Malaysia team may go to breakeven either this year or next year. We also got some business there. So I do not much worry about increased head count in Malaysia. China, we have to. We also got some local partner to support us. So answer is in Taiwan, we control our headcount. We have not any interest to increase more R&D here. We try to use our AI to improve. By the way, we also have India JV. India is going to hire more engineers, but it's under JV, under Phison headcount. We are going to support them training the R&D in India doing the India business. So that's all. This year, I don't think we have plan to build other R&D center.

So in terms of your -- the whole head count in this year, how many percentage do you expect to increase for this year?

Taiwan, don't expect. I don't see Taiwan, we are going to increase Malaysia and China may double from 60 to 120.

Got it. Got it. So in terms of whole -- I mean, employees or headcount, how is that impact for this one?

Taiwan -- I don't see Taiwan going to increase. If it is like low 2 digit.

And next, we have David. David, we cannot hear you. Okay. Maybe we'll move to the next participant first. And Michael you can unmute your mic and ask question. I'm sorry, there seems to be some issues with the microphone.

David can unmute. David, try again, David. David? So since not yet, we have one on the chat portal, so let me answer here, okay. Talking about we have MoU with [indiscernible] what is a potential future opportunity? Actually, we see a lot of medical research company came to us to ask using AI improve the hospital efficiency, the clinic efficiency, also the medical new development, something like that. So we can see the edge AI is really go to the edge because the investment from them is only like TWD 3 million is affordable. And the software-wise is only TWD 1 million to TWD 2 million. So they can use AI to improve their research. So we can see more POC coming. David, you can unmute?

Or David, can you please send your question to the chat box and I will read it out? Maybe we can go to Michael first, KGI.

This is Michael from KGI. I have two questions. The first one is related to the demand momentum the company is seeing on the customer side. We hear that you have recently raised price. I wonder, does that mean you are seeing a real pickup in customer demand? If so, do you think that it is an organic recovery? Or are customers just restocking NAND ahead of expected price rebounding?

Okay. Demand-wise, I think the weaker happened by December and January after the Lunar New Year turned to very aggressive. And we can see from mobile, from PC, from industry, also from some enterprise application getting strong. And from AI edge, AI in China is crazy, they are trying to pull more. And the price increase is not pushing by us, it's by the NAND supplier, okay? NAND supplier already announced to increase 10%, 11%. So we believe the price will keep going up because the demand is good. Again, I want to share with you this year, the one demand which you may not figure out is the edge AI. If edge AI going to deploy in the market, then every 1 month, 2 months, 3 months, they have to buy the new SSD because AI output is data. So I think this is organic.

Got it. Got it. I have another question is related to your inventory. The company's inventory days are still at historically high levels. Right now, as you mentioned, the industry is mainly seeing supply cuts. But it seems that the market also expects the first quarter to be the Y-o-Y peak for logic IC. If logic isn't doing well, memory demand probably won't be so well either. Given this, do you believe that your inventory can be reduced to a much more healthier level?

No. Actually, I'm worried about second half. The NAND supply start to cut production from November, right? It means the output will impact happen by March to May, means supply in March, May will be declining. And second half, we believe the AI, edge AI demand, enterprise demand and other gaming demand may coming back. So we still try to secure some more supply now. Our perception is if we buy in the second half, the price will be much higher.

And now we have Simon from BofA.

The first question is February revenue, TWD 4.5 billion looks very strong, up 25% month-on-month. What was the key contributor? Is the price hike driven or just the volume increase?

Volume increase. The price impact is not happening that much. Price happen, mainly happen in the March, April and May. So February order actually, we get order from December, January.

I see. Very clear. So any rough idea for the month of March, April, what percentage of the price hike? The media reported 10% quoting your -- some comment.

It depends on the different capacity. For the low capacity, we see already 30% up. For the middle capacity, 64, 128, around 10%. Higher not yet, not yet. We believe may start to defer the price increase by April.

Yes. Yes. But -- so yes, if the NAND price recovers and then the demand recovers, don't you think the NAND makers will increase their fab utilization ratio and then again, maybe NAND chip will be more supplied?

I believe so. This may happen by CQ2, then the supply increase by CQ3.

In that case, again, NAND price will fall back again or...

Definitely, this is not happening in one night. And one exception, potential exception is CQ3, CQ4, edge AI deployment, okay? And this never happen in the market when -- they said if they have 1 million server, AI server go to the market with 1 million extra enterprise SSD, you can imagine how many is there.

Yes. Yes. And then very quickly, sir, you emphasized some edge AI. We fully understand the DRAM content increase along with maybe billion parameters in MPU or AP chips. But we wonder why the OEMs need to input more NAND chips per box for smartphone or PC along with the edge AI progress.

Okay. This is a little bit complicated if you -- what Phison is saying the aiDAPTIV, okay? aiDAPTIV is a solution to use the NAND flash as a complementary versus the HBM or VRAM. We believe the AI server to the edge, they need to have a fine-tuning function. You need fine-tuning either you buy a lot of DRAM or you use a Phison aiDAPTIV. DRAM price is much higher than the flash and also the dimension. You want to plug in the DRAM up to 1 terabyte, you have to imagine how big the area of motherboard to occupy. But go through Phison aiDAPTIV is simple, just a single M.2, U.2, we can cover unlimited of capacity and the price can lower a lot. So AI related to the NAND, they have 2 portion. One is the Phison aiDAPTIV. Second is if using aiDAPTIV to make the server price much lower than others' AI server means easier to sell more server to the market. More people use AI, create more data, they need more SSD.

Yes. How about the smartphone then, smartphone or PC, why we need more Phison solutions for the smartphone?

No, no. No. Smartphone storage and smartphone just storage, okay? Nothing to do with Phison. If they use AI, I don't think smartphone the AI because the smartphone go to the telecom, telecom data center can provide the AI service. So smartphone is since last 2 quarters, price is so cheap. The new design-in phone, they use a 256 configuration, okay? That means the total -- the average of the carrier of smartphone increasing, nothing to do with us. Same as PC. PC now what we get the focus is mainly 1 terabyte and 512 gigabyte because prices. But if go to second half, if price increase, they may consider back to the 512 on PC and 128 on the smartphone. This will be [indiscernible]. So Phison contribution on NAND is nothing to do with the PC, smartphone, but on the edge AI.

Yes. Lastly, sir, would you recap your revenue mix for the direct export to the U.S. versus China sales?

I don't -- first, I don't have this number in my hand. But I can see China business most likely go through our partner to some country and we have a subsidiary, right? So we believe our revenue distribution still in the U.S., mainly U.S., Southeast Asia and go to other countries, but China is mainly go through our subsidiaries.

Subsidiary. So in that case, you have to worry about the U.S. tariff on your product or...

I don't know if I need to concern because if the tariff everywhere, what's different? Add tariff for every country, so what's the difference?

So your product considered as made in Taiwan mostly.

We are 99% in Taiwan -- or 99.9% in Taiwan. Yes, yes. Okay. I see we have 2 questions in the chatbot, it's from David. Please could you help understand you have customer [ uptick ]? I think China is an early mover in on-prem so far. Explain how. Okay. China, today, they are crazy on the DeepSeek on-prem, but mainly is for inference. They're still not yet to ask the fine-tuning. But we already have a local partner, 2 local partners to educate to promote aiDAPTIV to the China market. So next week in the China FMS event, I'm going to have a speech, going to tell them we are ready for the on-prem fine-tuning, okay? So let's wait and see. We -- our partner also engaged with some local partner who provide the server, who provide the service, who are the system integrator. So we believe that second half, aiDAPTIV will be in China and very popular, okay? Our share in the enterprise SSD business outlook. Overall, we can see -- okay, the cloud investment in the AI slightly slowed down. I mean you will wait for Microsoft, you can see, right? But again, second half from edge AI enterprise SSD demand definitely increased. And we're also working with the field storage system supplier. We are designing the controller and SSD for them. So we believe second half, the enterprise SSD demand and the portion investment will slightly increase. And [ Shweta ] asking about China edge AI demand is strong to use closed-loop edge AI. So you know the so-called closed loop, actually closed loop defined by Phison, closed-loop AI. Yes, we are promoting our solution to them. But unfortunately, Phison don't have a good enough engineer to support this. So next, we are going to get more partner in China to help make our solution popular in China. GB10 position is adopted. No, GB10, GB10 is not. GB10 is using only a Project DIGIT, which is mainly for inference. As my understanding, they have 128-gigabyte DRAM in the system, which is fine-tuning may can only up to 13B or maybe less, maybe 8B, 8B. So with the GB10, Phison is going to make the POC on top of GB10 with aiDAPTIV. So let's see what happen after GTC, okay? One more question from [ Tay Wen, the Phison aiDAPTIV. ] Okay, aiDAPTIV is a solution which is good for any legacy PC platform, workstation platform, work platform, doing nothing changed. Nothing changed. Just adopt with the Phison aiDAPTIV, install our middleware software that immediately can use. So nothing changed on the hardware, okay? So it's a seamless and easy to use. The only our challenge today is we don't have enough engineers to develop the software. So we hope, we wish more software companies come to us to work with us deploy their software on our aiDAPTIV. We already signed up a few software company in Taiwan. They start to put their software on aiDAPTIV to serve the bank, to serve the medical service, to serve some office use, one to serve the financial report. So we hope more software company no matter from Taiwan, from China, from Malaysia, from U.S., from India to come to us, okay? How to project revenue contribution for aiDAPTIV enterprise SSDs in 2025? Again, we don't have the forecast on our financial report, but we believe enterprise this year will be our main revenue generator. aiDAPTIV will be our gross margin generator. When pricing recovers that much in H2, what will be gross margin from Q1 to Q4 this year? Again, we believe the gross margin definitely will significantly increase, but it's hard to say, right? Because we are going to increase our enterprise SSD revenue, which may a little bit lower margin, but aiDAPTIV, which is a much higher margin. So again, it's hard to say. But I think everything can be more clear and better visibility by end CQ2. So we can tell more at the end CQ2.

Okay, K.S., I think still some speakers would like to ask question by microphone. Is that okay?

Yes, it's good. We still have 10 minutes.

Okay, sure. Simon, please ask your questions.

Very quickly, some investors saying in China, there will be many memory chips. So do you expect a lot of NAND chips will be supplied by Chinese local chipmakers going forward?

Okay. I have no comment on DRAM, okay? I'm talking about only NAND. I have nothing worry about China NAND. Their market share is 8%. If they increase 50% this year, their market share may go to the 12%, but China occupy the consumption close to 40%. So if China local content insist to use only the China flash, can fulfill only like less than 1/3. So I'm not much worry about the China NAND supplier. By the way, if you go to the research in the market, the China NAND supplier, their component price is the highest in the market than any other Korea, U.S., Japanese supplier. So it means they have a very strong market to support their NAND flash, and this is helping them to have a much healthy financial report, and they have no interest to cut the price.

So you are saying the China's -- maybe YMTC's NAND can represent only 1/3 of the China demand?

Based on the number, based on the number, what I read from the books, yes. So I have not much worry because China is still asking for local content, right?

Yes. And then their local price was higher than international price.

Yes, their offer wafer price is higher than any other ones.

And then the China, a lot of the memory chip packaging, testing or finished goods done here in Taiwan. But do you see the China's big operation for packaging, testing for the NAND product there? Or...

I'm not in this field, so it's hard to comment.

I see. And then do you feel any impact from like the Japanese guys -- I mean, the Western Digital NAND split, et cetera?

I think Sandisk is now is running independently. Hard drive is a good gross margin, not NAND flash, right? So that's why Sandisk has now turned to very conservative and they announced the price. They have to.

But your NAND chip sourcing is more Kioxia and Micron not much?

No. No, no. We buy from every set supplier, yes. Now Korean supplier may around 35% of my total supplier.

35% from Korea, you mean?

Yes.

And then the rest maybe U.S.?

U.S. and China.

China guys. All right. Lastly, yes, so glad to hear around the 80% payout ratio. So would you remind us the annual total dividend? Second half, TWD 12. What was the first half, sorry, annual total?

I think TWD 25, TWD 25. But year 2024, total TWD 25, TWD 13 plus TWD 12.

Yes, yes. TWD 13 plus TWD 12 means TWD 25 out of total EPS of TWD 30 something?

TWD 38, TWD 38.

TWD 38, so such a high payout ratio. I mean how much, 80%?

Yes.

80% payout ratio. That's your kind of the ongoing policy, 80% payout ratio?

No, it's 64%, 64%. 25% by 38.9% is at 64%.

So that's you.

Yes. Phison, actually, we have confidence that we can run much better business in the coming years because we have other new business such as aiDAPTIV, we have medical, we have automotive. So we are also able to generate more cash flow. So we're also happy to increase. In the past, we mainly asking 55% dividend from the net profit. But we hope we can keep slightly increase the dividend to our shareholders. But again, this we need to follow the market. But coming years, at least coming 2 years, we are quite optimistic to our business.

So we have another speaker, Jason.

My question is, I know that Phison has maintained a very good profitability or gross margin in last quarters and even during the NAND price downtrend. So I think can you just provide us how you can maintain such a better gross margin compared with Phison's profitability in the past even during the price downtrend? And I think the major factor is because you already has a higher product mix in terms of the enterprise. So I just wonder that if price is reversed in the coming quarters, but you already have a higher contribution or better product mix from enterprise. So will this kind of gross margins cannot improve just like pricing in the future? I mean because you had a very relative stable margins because of the enterprise contributions. So if pricing is reversed up or improve, will your gross margin can only improve less than or increase less than the spot price or contract price?

Okay. If Phison today still mainly with the USB memory card business, it's okay, okay? Every year, that's why Phison we keep a high R&D investment. Invest about what? Invest on the new technology, new product for futures, okay? To that, we enjoy the gross margin just because 3 years ago, we started to develop something new for our customers, which they're able -- they're also happy to pay the premium to us. By the way, Phison has a very good configuration of our products high mix, okay? So we cover almost every NAND application, almost every. So I can share with you, we have some modules, which is a 75% gross margin. Of course, some consumer module may be single-digit margin. But with the new business model from aiDAPTIV AI server, we believe this will help us improve a lot of our gross margin rate because they recover the software licensing and software development is 100% gross margin. So in the future, Phison will keep investing more in the software development on top of aiDAPTIV because we can see this is a real trend and this is a real business demand. By the way, enterprise SSD will help us to improve our revenue, but the gross margin-wise is not that much attractive because it's a high dollar amount. So revenue will be from enterprise SSD, the gross margin mainly from aiDAPTIV and other configuration, industrial. So the answer conclusion is how we keep our gross margin because of heavy R&D investment. And we are going to keep continuous R&D investment to make sure in the future, we have all the new products that we can enjoy the higher premium from the market.

Got it, got it. So it means your gross margin is sustained by your new technology innovation instead of the product mix or from enterprise?

Yes.

So if you keep releasing the new product, you can keep your gross margin or even getting better?

Yes, very true.

Okay. We still have some questions on the chat room side. So the first one is from Mark. He asked, can the 2025 CQ2 revenue turn positive year-on-year this year?

Why? I don't know why last year, why is our CQ2 last year. CQ2, sorry, I'm -- okay, [ let me change topic, in H2 ], it's in CQ2 before. I think CQ2 is, I think we have confidence. Based on today's demand, I think we have confidence, okay?

Okay. We have another question. Do you still see the structure of rising gross margin to 30% or even higher in the midterm? What would be your target mix percentage of gross margin for aiDAPTIV in the next 3 to 5 years?

Of course, this is our goal, to improve our gross margin rate, definitely, okay? So that's why we keep investing, heavy investing into the R&D. But again, this is related to the whole market. But again, we are moving our products to the much high-premium market. So we wish and we do the best to make it happen.

Okay. One last question is how much does aiDAPTIV contribute to total revenue?

Still small, still small because more still under the POC. So I wish this GTC, we can show something to the market, then the Computex is the time to collect order. So by March GTC and the end of May Computex, we can see how strong the demand on aiDAPTIV.

Okay. I also have a question sent to me from the investor. So do we see any like rush orders in fear of the U.S. tariff concern? Do we think -- if so, do we think this will be sustainable into second half of this year?

From Taiwan, I mean, the rush order from U.S. to Taiwan, I didn't see yet.

Got it. Okay. So in the interest of time, I think we don't have any further questions now. So we will conclude the earnings call here. Thank you for all your questions and your participation today. If you have any additional questions or require further information, please don't hesitate to reach out to Phison's Investor Relations team and us at Morgan Stanley. Thank you for joining us, and have a great day ahead.

Thank you, everyone. Thank you.