Phison Electronics Corp. (8299) Q4 FY2025 Earnings Call Transcript & Summary

Hi. Good day, everyone. Thank you for joining us today for Phison's Fourth Quarter Results Conference Call. My name is Astoria Chen, and I am Senior Analyst from Sinopac CLST. Today, we are very honored to have K.S., the CEO of Phison, with us today. In this call, K.S. will first provide some updates on Phison's fourth quarter results, business highlights and some NAND market outlook. And after that, we will open the floor for the questions. [Operator Instructions] And now I would like to turn over K.S. for comments. Thank you, K.S.

Yes. Thank you. Good afternoon, good morning, ladies and gentlemen. Let's discuss today's 2025 CQ4 and '25 earnings call. This is our 4Q breakdown of our revenue. I'd like to share a few minutes here. Controller itself, actually, the amount of revenue increasing, but the ratio declining just because the revenue base increased too much. Consumer-wise, you may a little bit surprised why the CQ4, the ratio increased. Just because at CQ3, we have many retail customers, they worry the CQ4 market may turn down. They place order. They don't want to push in, they push out. So eventually, they pull in by CQ4 with a price raising. So that's why this increased quite a big significant number. But from CQ1, this number was slightly going to a single digit because now we are mainly focused to the nonconsumer business. Enterprise, CQ4 is -- was 10%. And this is -- actually at Phison, we did a lot of design that I will share with you. A lot of design wins starting from last year's CQ3, CQ4. In this CQ1, the ratio of enterprise SSD will be over 30% of Phison revenue. In 2026, I believe the biggest portion of revenue coming from enterprise. We made so many design wins. We also accumulate a lot of component for enterprise business. And go to the embedded ODM, which mainly is mobile and PC. The supply is so tight, we gained almost every brand design win and design-in and China mobile. So this also played a very big portion of our revenue. Industrial-wise, it's very stable, around 13-something percent. [Foreign Language] So the gross profit in the 4Q is TWD 9.5 billion is all-time high. And the revenue-wise TWD 22 billion, also all-time high. Gross margin, 41.6% is good. Some investors may question, "Hey, why Phison gross margin only 41%, why not like other module house 50-something?" I want to share with you, Phison business is not trading, we are design-in and design win and long-term supply. A lot of orders we shipped in the CQ4, mainly we get the order CQ2 and CQ3, which is a design-in, design win business. If my business is trading, I'm easier. I can buy last month's $10, I can ship today $30, but we wouldn't do trading business. So the CQ4 with 41% of gross margin, we believe CQ1, we are going to improve because the orders shipped in the CQ1 mainly collect the order from CQ4. [Foreign Language] So the EPS is TWD 21.7 because later we'll share with you, we also have increased our CapEx -- our R&D expense in the R&D activity and also the new [ mass tape-out ]. And this earnings per share, we -- I think to Phison is really -- we are proud and comfortable. But again, in CQ1 this year, we can see the slightly improved on this because the shipment in CQ1, the order coming from CQ4. [Foreign Language] So income statement, I think I'd like to share with you it's mainly our R&D expense in CQ4, it's TWD 5.2 billion. I think it's close to 40% growth Q-o-Q. Just we have a better profit. We need to have more compensation to our staff and also increase a few must step up and also increase some test equipment. So this is the reason the expense increase. But Phison is different with other company where we make good money, we make investment. This is to create our better future, okay? [Foreign Language] This is '25, our income statement. Revenue is all-time high. R&D expenses go to the TWD 13 billion, still increased, but I need to give a highlight, 2026 R&D expense definitely increased because we have more new design in the advanced design, the 4-nanometer and some other new technology development. But overall, we believe this investment will bring us, Phison, the better return in the future. So this is what's the difference between Phison and other company. In the balance sheet, cash flow, we're still doing good. Inventory-wise, we have around TWD 35 billion inventory by end CQ4. This inventory, to be honest, is not low-cost inventory, it's a very low-cost inventory because we recommended this for many, many months. I don't want to keep highlighting low cost, but since analysts question about low cost, right? So I want to highlight, we have a good enough low cost, but Phison's value is not only coming from low cost, we're coming from our design, our products and our innovation. Okay. We also shared the NAND TIF. What's the difference? I think the gap is slightly small just because of the -- we issued the stock option to our staff. And this we need to depreciate by monthly. So this increased some overhead. So we just highlight to everyone here. No other different, only mainly the stock option expense. [Foreign Language] February working days is smallest in the year, but we hit the TWD 12 billion revenue. And definitely, March, we can see the other big growth because we can't stop it. [Foreign Language] Okay. Some business highlights. Client controller use supplies, Phison's control shipment growth 490% Y-o-Y. Revenue will grow [ 450% ]. This means what? We win the share. We gain the share. [Foreign Language] You may agree that NAND flash is getting tight supply, means the shipment of SSD is going to decline, but our controller still growing, means we win the market share. But one thing I want to highlight, '26 coming quarters, the controller shipment definitely obviously is going to decline. [Foreign Language] But Phison, we're okay. Why? Because we have a control business. We also have our module business, which can compensate our revenue, we grow from the modules, and we can grow from our gross profit. So in the client SSD, we win the share. We win the gross margin. We also win the business. So we are very comfortable about this performance. Going to the mobile. Phison is the biggest mobile controller supplier at the year 2025, and this is our shipment growth. Again, if you keep reading the report '26, the mobile phone may decline more than 200 million set. [Foreign Language] But Phison 2026, the mobile controllers by forecast, we still increase because we win the design win, we win the share. Also, our module shipment, you can see is unbelievable. But of course, shipment, 10x growth Y-o-Y. Revenue, 12x growth. Why? Because of price and we win the share. That analyst may ask, "Oh, you consume too many your inventory." Don't worry, don't worry, we still can use for many, many, many months. Don't worry, okay? So in mobile, we are the biggest controller supplier. We also become the very niche customized module supplier to the industrial, to the BMC, to a lot of automotive, okay? This is helping Phison to gain the better -- much better the gross margin profit. Okay. Then we're going to talk about our enterprise. '25 CQ4 is a small business to us, but from now on, enterprise will be Phison biggest, our biggest business. So due to the AI, due to the every CSP, near cloud, hyperscale server makers, they're looking for a lot of SSD. Phison, we win many, many business, okay? So this later, I would like to break down to you. Phison now we combine boot drive, main drive, customer drive, AI drive, eMMC, Retimer, we have almost every storage need in the AI ecosystems, and we are proud of that. We're also putting our Pascari into the Tier 1 NAS customers. Due to the NAND shortage, a lot of Tier 1, Tier 2, Tier 3, tier, no matter what tier, they came to Phison to ask for cooperation. Because of this, we win so many design windows. So my people, they are already working hard. That's why we need to pay more bonus to them. So this slide is very important for today's meeting. I'd like to share to you one by one. This is mainly we call the boot drive. NAND makers, now they focus mainly to the main drive, they walk away from boot drive. Phison now become the important supplier in the boot drive. Here, I want to break down. We win the 2 Tier 1 CSP, big CSP, the big name. The shipment starting -- one already start to ship, the other one starts from coming May, means after 2 months. It's a big CSP. The Tier 1 OEM, who are selling the servers, we win their boot drive, okay? And the shipment starting from second half. Today, they are auditing Phison in -- my Phison headquarters. Hyperscale, we got 2 new design wins, U.S. -- mainly U.S. customers. AI platform, you know who is AI platform. So we got one design win. We are there, and we try to gain more design wins. A lot of our project customers is ongoing. And talking about the main storage, we also got the Tier 1 OEM who are making the server. We got 2 design wins. One -- the other one is coming, okay? Due to the [ SSD ] shortage, we are getting more Tier 1. Today, the Tier 1, they are executive here. In the meeting, they are really open-minded. They say, hey, they never look to Tier 2. They don't know who is Phison. But a few months ago, due to shortage, they have to, but they doubt Phison can make it or not. So they visit here, stay a few days. We opened the lab. We worked with them. They are surprised. So we win not only one project, we win all the potential supply chain projects. So not only one model, we almost win every model because we have a good enough engineers, the supply chain, the product mix and also we have a very good inventories to supply. So we also win the hyperscale 2. By the way, this 2 is big, okay? By the way, it's very famous right now. And the AI storage 7. Every storage supply to the AMD, NVIDIA ecosystems, we almost win everyone, okay? We ship the main drive to them. The infrastructure software is mainly provide software. We got 2 new design-in. Hopefully, shipment happen by CQ4. Enterprise AI customers, 2 design wins, okay? This also is a big guy, okay, mainly supply the brand AI server to the worldwide market. And we also win the big [ QLC ] qualified, and we're shipping 1 exabyte of QLC enterprise SSD from February from last month. And 1 exabyte have to ship until May. So this is our record, 1 exabyte enterprise SSD, [ 122 terabyte ] we shipped to the Tier 1 CSP. So if you don't believe Phison can gain the revenue, the top line, the bottom line of enterprise, now we show you here. This is all our design wins and more are coming because the solution is ready. We have so many product mix, and we have enough R&D resources. By the way, we have the good supply from our NAND suppliers. [Foreign Language] This is something we'd like to share with you. If you go to the retail, the PChome or Amazon or to the retailer, the buying of SSD declining because price is going too high. But in the industry, they have to because every equipment they have to buy. No matter if the price go up 10x, 20x, 30x, they still have to buy. So Phison now we put more our supply chain go to the embedded design business. This is mainly in the automotive. I think we got so many names here. I don't want to spend time here. I just show you almost every platform, every China OEM facing the shortage of storage. So we have a good enough. Again, I want to repeat, analyst saying Phison low-cost inventory. Let me remind you, we have one component. We keep over 30 million piece. The cost from $2, now go to the $25, okay? This -- we keep this only supply to automotive. So 30 million piece can ship for years, not months, okay? So a lot of automotive, they came to visit to Phison to ask Phison to supply to them. So not only the low density, we also got the UFS, we got the BGA, we got a lot of design win with the U.S., Europe, Japan and China automotive makers. So consumer products portable SSD, we got one project with a South Korean OEM partner, and they win the award, okay? It's a Phison product. It's the first USB Gen 4 native controllers. In the micro SD card, SD card was a legacy, but we're not anymore in the retail. We are mainly in the gaming, in the automotive. We win the project in the EV card. We also -- is going to get more project for robot, okay? This is all about design-in activities. The customer, they trust us, okay? And we also have a game winner Tier 1 Japanese customers. Okay. This -- we back to the Retimer driver. A few key highlights here. Phison is the biggest 5.0 driver supply in the world, okay? Phison 6.0 driver, we started to ship. We started to ship to automotive, to server, okay, mainly to automotive. We got so many inquiry of this PCIe driver 6, okay? The go to the Retimer due to the inference getting popular. Recently, we got a big project for -- based on the B300 platform. It's a few hundred thousand pieces of Retimer. Unfortunately, we don't have inventory. So we bet TSMC to supply us. Now we start to shipping the Retimer to 100,000 piece per order. So this, we win the business. By the way, due to a lot of CSP, the server OEM, they are facing the shortage of the storage. They come to -- call help to Phison. Phison supplied them the boot drive, supplied them the main drive. We also bundled Retimer. We wish they take our Retimer. Due to that, we gain a share. [Foreign Language] Okay. I go to adaptive. We keep talking about adaptive. You know DRAM shortage. DRAM price last week saying the CQ2 price go up the other 50%, okay? Okay. AI need DRAM. No DRAM, no AI. Phison, we use our adaptive solution to enable the AI, and this is proven. I don't want to spend time to explain here anymore. This is happening, okay? So a lot of PC and device server, they want to compute to run the AI high model, big model. They need a lot of DRAM and DRAM is expensive, okay? With Phison solution, lower the DRAM, lower DRAM with our solution, lower the price, the whole system can run the AI, okay? [Foreign Language] Okay. Phison adaptive, we already engaged with every CPU companies, every GPU companies. We also start to work with the mobile company. We are engaged with the NAND makers. We also engaged with the many PC OEMs. So this is to show you CES, we have some joint demo. We have some products on the show. And this is a model is going to the market, okay? So Computex, this June, you can see Phison AI solution everywhere. Every PC, every AI device, definitely, they will bundle with the AI Phison adaptive solution because we can make this cost down and make this popular. [Foreign Language] So Phison, we are no more in consumer. We are no more in trading. So AI is happening. AI inference is coming. So what -- trigger what kind of an industry? AI inference trigger, Phison, we win a lot of boot drive. As I mentioned, we have a CSP, we have an OEM, we have hyperscale. We also win a lot of customer eSSD, okay? [ They were new ] show you, okay. CQ1, don't feel surprised. We win the Retimer driver because we bundle. eMMC low-capacity shortage, we keep 30 million piece on hand to supply to automotive, to supply to the OEM. And go to the edge device, as I mentioned, the AI PC for -- under the -- with the Intel AMD CPU, where adaptive is happening by Computex. So this trigger unlimited demand of storage. So that's why, again, Phison now, we are now fighting hard to get more cash to buy more inventory. So today's Phison, we are in comprehensive storage solution in AI ecosystem, which we supply the controllers, we supply the storage module, we supply enterprise SSD, we supply adaptive solution, we supply our Retimer and also our customized AI service. We're also helping some associations to develop spatial data storage systems. We help to develop the system. So CQ2 earnings call, we are going to report to you, we are building the storage systems for dedicated applications. So Phison is totally different. We are now in the storage era, we got everything. [Foreign Language] So the R&D expense still keep around 20%. We're not going to hire that many engineers. We control our R&D spend. We try to use AI to improve our R&D efficiency. Okay. This chart, I think I need to spend time here again due to analyst saying the low-cost inventory, blah, blah, blah. Okay. We start from this part, okay? CQ2, we buy inventory. At the same day, this inventory is a high cost in the day. But go to the -- after 2 quarters, this become low cost. So analyst say, "Oh, you're happy because you got low cost." We keep buying the CQ1's inventory, oh, this is high cost. Then the question is after 1 quarter, is that price keep slight or keep flat or increase, you have to ask yourself. Every 2, 3 months, price increase 50%. So I need to keep inventory for my supply chain. So we believe this will still price increase, okay? Let's assume this is gross margin X, this is Y, this is Z. So what's the difference? Why definitely bigger than Z because you say it's a low cost, and this is happening, right? Then the question, "Oh, Z will be lower than Y." You may right, you may wrong. I don't know. But the question is, this is 10 years old students' mathematics, okay? Analysts can easily -- don't be too shallow, okay? Read this. No matter what, the Z lower than Y. So what? We win. We gain the gross profit. At the end, the EPS coming from gross profit, not coming from percentage. So why you worry about low-cost inventory? Inventory can consume years. But even I buy inventory today, CQ3, the price, we believe, still may keep sky high, but we have a value to go to enterprise, go to the AI adaptive. This will help Phison gain more gross profit, gain more EPS. So the conclusion is here. If nothing happened, Phison show our gross margin 27% plus, minus 3% in the past. CQ4, due to the shortage, okay, low cost, we have a 40% of gross margin. How about next? I don't know if I can go 50% or 60%. Let's see. Let's wait time will tell. But one thing for sure is revenue increase, gross profit increase, at the end, EPS increased a lot. And I have confidence, in this period, the gross margin definitely were bigger than our regular. This I have confidence. So don't be that shallow, use a simple mathematics and the low-cost inventory. We have our own value not only low cost, we got so many activity R&D, we win everything. [Foreign Language] Okay, last summary. In the last 30 years, all the semiconductor did by Intel. Intel tell you the 5 years road map, 5 years, what you want to do. All the ecosystem follow Intel, okay? Today, AI, NVIDIA, every year, they change the model. All the ecosystem, to be honest, they don't know what to do because it changed too fast. Phison's value, thanks to NVIDIA, we are flexible. We have resources. We're aggressive. We work hard. We can follow the momentum of the AI. This is Phison's advantage. So in coming years, due to Phison, our spatial culture, we invest a lot of R&D. We try to collect cash. We make money. We're aggressive. We made a fast decision. Phison can grow in this AI era. [Foreign Language] Okay. Let me finish some Q&A here. Dividend, we decide second half TWD 17. Why? Okay, the ratio is 52%. The whole year is 55%, 56%, just because we need cash. We need to keep inventory. We need to buy inventory. We need to make the service to the ecosystem. So this year, we're a little bit conservative in the dividend. I wish you understand, but the cash keep on Phison's hand will help Phison to grow more business. [Foreign Language] We just approved this morning, we have engaged with the bank to raise TWD 400 million syndicate loan. Why we need? Because we need to keep our cash flow and we need to keep our inventory. [Foreign Language] Okay. This page, I think, shows you a big difference. This is Phison's inventory. Controller, 16%; industrial components, 14%; enterprise, 35%; embedded ODM for PC and mobile, 30%; retail, 3%. Means what? Means Phison allocate all my resources, my name first go to mainly enterprise and embedded ODM. So you can see in the coming years, Phison's growth were coming from enterprise and embedded. [Foreign Language] And ESG, we still have very good performance here. So I'd like to share with you, we keep doing our best to make Phison not only profitable but manageable, and I wish every shareholder comfortable, okay? So this is my report here. Okay, yes.

Yes. Thank you, K.S., for the promising update. We are now opening the floor for the Q&A session. [Operator Instructions] While we are waiting for questions, I will start with some questions from me. My first question is about the LTA. So as NAND supply is getting tighter, have we started to negotiate with our clients for LTA or discuss the LTA with NAND makers for better supply? If yes, could you share maybe more details? And if no, if there's any LTA possible? Or how do we secure our wafer supply going forward?

Phison keep very close relationship with the 6 NAND suppliers and the 2 DRAM suppliers. At Phison, we need DRAM because enterprise SSD. Phison, we have an LTA with the 6 NAND suppliers. We have LTA. And some NAND supplier asking for prepayment, this is ongoing. It's not fixed yet, but we believe sooner or later, this will be fixed. My customers, Tier 1 customers from just I mentioned boot drive, hyperscale, CSP, OEM, they also ask LTA from Phison. So Phison, we do our best to commit the back to back. We got the LTA from supplier, then we commit to our client, okay? But for small, medium-sized customers, we are not able to commit LTA, but we do our best to accumulate more enough of inventory to support to them. LTA is tough to negotiate right now. And when talking about LTA, forget about price, forget about price, okay? You just win LTA, then you survive.

Very clear. Maybe a follow-up question is about the supply part. I'm just wondering -- as we know, you have a very good relationship with our NAND makers. What is our strategy on securing maybe more NAND in the future? And I remember previously, you said your allocation or securement is better. And compared to maybe a few months ago, maybe could you give me -- give us more details about the maybe improvement on the procurement?

Okay. In the many years in the memory market, everybody is saying relationship. I don't think today, relationship is workable. Today is a valuation creation. How can you create a value to tell the supplier that ship to you is much better than the other one, okay? So this is a page Phison keeps showing to the NAND suppliers. DRAM is shortage. No DRAM, no AI. Phison used DRAM with the flash, we enable AI ecosystem. They're happy to see this happen. Because of this, we are able to gain more supplies. We need to show them...

Very helpful. Next questions were from Donnie, Nomura.

K.S., can you hear me?

Yes.

Thank you, K.S. for the comprehensive presentation. And my first question is regarding to your enterprise SSD sales contribution. And you just mentioned that in the first quarter, it will be increasing to 30% of the total sales potentially. Just curious, wondering if you have the full year target in terms of your enterprise SSD revenue contribution. And along with the rising enterprise SSD sales contribution, and you just mentioned about that you are no longer the trading -- NAND trading company, but more like a design win company. So how would that affect your gross margin structurally into the coming quarters? This is my first question.

Okay. eSSD selling CQ1 is very promising. I think CQ2 definitely is going to increase because we secure good enough of NAND supplies. Second half, of course, the inquiry, you can't believe now the amount, but we're still talking to suppliers. So no matter what enterprise SSD will be Phison this year, major revenue and profit contributors, okay? Then talking about the Phison never trade component, okay, we never, we never, we just was in consumer. I just want to explain what I'm talking about, I can easily create my gross margin from trading. I buy $10, I trade $30, no need any cost, right? But when the cost going to $30, the market go to $20, you trade you minus $10. Phison is different. We are designing. We take component, we build the products. So when market price going up significantly, my products cannot go that fast because it's a design, but when market price drop, I still can keep profit. So trading module house, they will suffer soon when the price stable. But Phison still can gain because we create the value on top of the component as a product.

May I ask a follow-up on the LTAs. And I think it's important to secure the supply throughout this year. So wondering if you can give us some more idea about what kind of LTAs we are discussing with the NAND makers. And can we say that we are comfortable to secure much more NAND supply for this cycle versus previous cycles? And also, wondering if you can comment on your view on the NAND price trend in the coming quarters. Are you still seeing like, for example, like strong double-digit Q-on-Q growth for the next couple of quarters?

Yes. In this period, when I talk to all my NAND suppliers, I always appreciate, thank you. But I need more. No matter how many they can give me, I still need more, but I just appreciate what they support to us. So how to get the more -- to us more supply, I need to show my value. So this page, we are in this portfolio. So if these customers need more, I cannot fulfill, they have to help me to go to the supplier to ask a supplier to ship to me, okay? So this is called leverage, okay? And we also try to take adaptive to attract or exchange to our NAND suppliers to ask for more, the allocation. But overall, everyone go to suppliers, they always say insufficient, they need more. But unfortunately, they are also not able to fulfill what you want. But gradually, gradually, by monthly, by quarterly, Phison keep increasing our supply on top of the LTA.

How about the NAND's price trend you are estimating now for the coming quarters?

By -- before Chinese New Year, I'm saying over China, the system, they slowed down the production, then the demand may slightly soft, but the component price raised 50% yesterday with supplies, okay? So now I don't know how to tell you next month, month after, I have no idea. But one thing for sure, I'm telling you, supply is very, very, very tight.

Understood. So 50% yesterday is like, so which means the baseline of second quarter is like the price will be 50% higher in first quarter roughly. Is that the base case?

Yes.

Okay. Great. And second question because GTC is at the corner. So you just mentioned -- actually, just in this page, right, you have mentioned about the record-breaking new design wins. So we have seen that your products being used in the boot drive in the GR system. So can you give us some more color on what kind of new product we may be able to penetrate into the platform or GPU company in this...

Donnie, sorry. Under NDA, we can't say anything. We just wait until GTC happen, okay?

Okay. But it will be a different product, right? It's just no longer just foot drive. Maybe, for example, as you just mentioned, maybe like main drive or other things?

Phison's strength is we are good in customize.

Next question from Simon Woo, Bank of America.

Congratulations on great results. Yes. So the -- maybe for the long term, any thoughts on the HBF, High Bandwidth Flash.

Okay. HBF, you better go to consult to the Korean and U.S. NAND makers. But from my point of view, I think I explained this a few times. First of all, flash memory has a life cycle, okay? You pack the flash together with GPU when end of life of flash, they make GPU gone. Second, they have a so-called temperature difference, CMOS is 125 degrees, flash is operating 80 degrees. So the temperature, how to manage is a product or you have to lower your performance. But HBF definitely will happen in some applications. But I doubt HBF will go to the general purpose GPU, I doubt. Okay?

Okay. Sir, very clear. So you are now working on the controller for HBF for now.

Okay. Phison, let me clear -- give you Phison's restatement. Phison definitely can develop HBF controllers. I don't see any difficulty. But if we don't have the real customers, I better not to invest right now because my engineers are busy for this project on hand. So we are waiting when the real customers come to us, then we can take it like 12 to 16 months to make the design that...

Yes. Very clear, sir. By the way, you mentioned that 50% price hike for your product, I mean recently or sorry, what do you mean, 50%?

Suppliers raise the price overnight.

Suppliers means what NAND chip maker, you mean?

Yes.

Suddenly 50%, that means you have to pay a higher price for your NAND chip sourcing?

Yes.

It's no good. It's no good.

Yes. [indiscernible] or just buy, just not buy.

Sorry, sorry.

I mean you have a choice, you take it or just not to buy.

Okay. So let's say, if you take such a high price level, your cost -- inventory cost should be up and then your margin could be squeezed unless you raise the price for your product?

I always believe I'm smart, right?

Yes. Everybody knows this.

Yes. So on this page, I mean, I will try to explain this page. Okay.

Yes, that's a good page. Yes.

Okay.

So you are saying NAND chip price up, your product price up, your margin was good?

In percentage, maybe not that good, but net amount is good.

Sorry, very complicated. Even you said it's primary school math, but -- so basically -- so the conclusion here, once the NAND chip price rises, you can raise your product price immediately, right?

Simon, shortage [indiscernible] shortage, right?

For your product as well?

Yes.

And then you can raise the price?

I have to, why I'm taking minus.

Okay. Yes, yes.

Then, I talk to my customers don't [indiscernible] to me, [indiscernible] to my suppliers, not because of me.

So for Q4 great results or -- I mean, the second half 2025 great result is broadly based on the NAND's price hike?

[indiscernible] with some Design-in business [indiscernible] and maybe [indiscernible] will be two factors. One is that you can NIM low cost, but the one is that we win many new [indiscernible].

Okay, yes. Sorry for asking your -- some competitor, but your competitor also said they are selling the boot drive for the U.S. big customer. So would you say which one is better, how you lead the market? Or do you think it's a really big market for boot drive area?

Simon, you know what, you ask me, my answer is this that you compare peanut with potato. You asked the peanut question to me on potato, so I don't know how to answer you. But let me tell you, okay, don't worry, don't worry. I don't want to overuse what we do, and we have NDA. But the answer for me is peanut compared with potato. The size of the potato depends.

Yes. So the -- how about boot drive market size, why it can be bigger and bigger? Any reason? It's a very...

Not because of bigger or bigger, just a NAND company walk away from boot drive.

Sorry, sorry, you are saying NAND chip makers...

NAND chip company -- NAND chip maker before they provide boot drive and main drive, right? They made boot drive EOL, End of Life. They focus to the main drive. So who supplied the boot drive, Phison? All my competitors. But can I ask a question? My competitors has a good enough of a NAND flash inventory?

No.

No. Good question. No, means market is $30, they have to buy $30, right? And my cost is $5. So I take peanut asking two potato.

I see. What's the average of the NAND content for the 1 unit of boot drive?

Depends on 480 gigabyte, [ 960 gigabyte, 1.9 terabyte ] doesn't matter, just do they have inventory or do they have LTA. If they don't have, how can they make sure they can gain -- I heard the rumor my competitors going to China module house, buying spot market flash.

Yes. But..

And how many percentage margin they can make it?

Yes. But just, let's say, today, very famous GPU already available in the market, next generation coming a little bit from maybe second half of this year. So would you suggest what's the implied NAND content for the boot drive for mainstream GPU for now and then the...

Boot drive?

Yes, the NAND content.

We follow the users asking. We follow the user. This is all my user. They ask me doing this or doing that, okay? I can't disclose. You see my competitor put the NIM here, I didn't. I respect...

Yes. Okay. Almost lastly, sir, so today, NAND's price very strong, product price was strong. You don't expect a little bit softening price trend or price decline towards the end of this year.

I take very good sleep this year. I don't worry, no nightmare. This year good. Next year, let's worry next year. This year, I'm busy to take a good sleeping, good night -- good nightmare, right?

Okay. Lastly, sir, payout ratio, a little bit over 50%. That's your -- even for the long-term policy or you want to raise 60%, 70%?

Long-term policy, 55%.

55%. And then the -- separately, the reason why you are issuing the -- I mean, you are borrowing the money, $0.5 billion, $400 million because you spend the cash for the shareholder return, but you are borrowing the money for your working capital for inventory increase. So borrowing cost, I don't know, maybe 3%, plus/minus or...

Simon, if I got a rich father, I don't need to worry about this, right? [indiscernible] I know, but I pay 3% a year, I win back 200% a year. Why not?

Okay. All clear, sir. I think we should meet soon, sir.

Chat box, they got few questions in the chat box. Shall I go?

Sure, sure. Please go. Please go ahead.

How do you see the outlook for your controller business going forward? This year, mobile will increase. Client SSD most likely declining, but I think it's a small number declining. So we're good. But the pure controller house will be difficult anyway. Second -- current inventory level and how they are trending. By end February, I got the report, we now have over [ 50 billion ] [Foreign Language ] What's your view on the company gross margin trend over the next 2 quarters? We never gave forecast, but for sure, CQ1, CQ2 is strong, very strong. And CQ3, CQ4, I don't see it turn to weak, maybe lower because the price itself going that much, but go to the net dollar amount will be good. [Foreign Language] How you require prepayment -- why you require prepayment? Because I need money. I got 50-plus billion inventory today. I need to keep buying more. I need to time to -- cycle time to process. Customer pay me 60 days, how can I run the business? [Foreign Language] Okay, next. NAND's stock management, this is increased, stable, growing away faster than we can buy. NAND stock by dollar amount increased a lot, but by SFI, okay, I said by SFI, we keep threat of SFI. Okay, I view this way. [Foreign Language] I think quite reasonable, quite reasonable, maybe more than this. Then I think you can wait until March. March may surprise you also. [Foreign Language] Answer is yes. Q3 question is yes. Q4, some senior traders already expecting EPS down by [indiscernible]. Ask to the God. This I can't answer, but I do my best. I want to know the roaming controller IC earlier why Phison [indiscernible] PS8317. Phison now is a pioneer makers. We are in advance. So we have a Gen 6. Our Gen 6 enterprise controller is ready, now developing the firmware, hopefully, by August, we delivered the enterprise SSD market samples. Gen 7 is ongoing. This mainly designed for the AI systems. As I mentioned, right, Intel lead for 30 years, telling you what happened in 5 years, but NVIDIA didn't. So Gen 6 is coming very soon, Gen 7 then after two more years. So we have to invest. CMS, TLC provides. Okay, and we have issue. I'm not going to answer [indiscernible] As you know how long currently take Phison to ship new purchase. This is very complicated, very complicated, okay? Because needs packaging, testing, assembly, allocation. So -- but overall, we try to make the spend smooth. Please mute, please. Hello? CIT, how much price you take in client assets, mobile offset smartphone volume decline? This is not for me, okay. This is from analysts, famous analysts. Smartphone, most likely 200 million set; PC 5% to 10%. But PC if with aiDAPTIV+, it reduces the DRAM, I think PC is declining may be slightly small, okay? This in chat box.

Yes. I think we have finished the questions from chat box. And next question is from online investors Michael from KGI.

Congratulations on your outstanding performance in 4Q. My first question is about our opportunity with NVIDIA's ICMS. Since that led to improve inference efficiency, NVIDIA is looking to increase NAND's input and output. So we have seen some products like Kioxia's XL-FLASH or Samsung's Z-NAND has gained attention. At the same time, controllers are becoming more important, whether next year's controller bundle with iCMS or that bundle with XL-FLASH or Z-NAND's may use PCIe Gen 6. And...

I think you mixed all the questions together. I'll just highlight, okay, XL-NAND, Z-NAND is not for iCMS, it's mainly for the high-performance drive, low capacity. iCMS asking for high-capacity inference is different application.

Got it. So I wonder -- I'm curious that since it seems like our MP schedule for Gen 6 enterprise SSD is ahead of some original vendors. So I'm curious if our success with Gen 6 enterprise SSD could help us gain some market share in iCMS?

Okay. First of all, again, under NDA, we can't talk that much. But in general answer, Phison, we have a Gen 6 enterprise controller ready silicon battery. Samples can deliver by July, August time-frame. And this market, OEM server, there's only Gen 6, only AI. So Phison developed M2A Desso.

Next question is from Donnie, Nomura. Hi Donnie? Maybe we will start from questions from chat box.

Sorry, can you hear me?.

Please, please. Yes, very clear.

Sorry, K.S. just one follow-up from me is like have you considered -- I cannot remember, but have you considered to sign long-term contract with NAND makers in the previous cycles? So this is the first cycle you are considering to do that?

No, no, no. We have LTA for many, many years, but this time I'm talking about prepayment.

Oh, prepayment, yes, prepayment.

Prepayment at 2008 to Hynix, a few times to Toshiba, Kioxia. So definitely, we have experience.

Okay. But since then, there was no prepayment anymore until this time.

Some under discussing, but not in rush.

Okay. But it may be an option potentially?

If all the conditions good, why not?

There are 2 questions in the chat box. Maybe we can start from the chat box.

Okay.

So the first question is, is there a trend of eSSD growth in eSSD accelerating beyond that of QLC due to AI inference?

Yes. Answer is yes because the QLC remains so strong, that's why it's a big undersupply. Then you see TLC growth accelerating beyond QLC. Yes, iCMS is a TLC. So both TLC and QLC tight. And next on inventory, is inventory turnover [indiscernible] the coming? Demand is strong. We keep buying inventory. Of course, you ask me, I want to slow down the inventory turnover because we can last for more quarters. But now it's not able to manage by me, customers really need a part. So now we start to ignore to manage the inventory shipment. Customers need, we just ship. Why? Because we also need cash to buy new inventory. So now we are not going to control that much in the inventory. Okay. And then the answer is inventory turnover may go faster.

And maybe we are back to the online investors, Michael from KGI.

Michael, you're on mute. You have to unmute yourself. No? I think I must be...

Yes, maybe we will turn over to Donnie.

Donnie, you have a question?

Oh, no, I don't.

Okay. So I think...

And last question will -- yes.

Okay, please, please.

Sorry, from Simon Woo, yes.

Yes. Quickly, the enterprise solution revenue contribution was 10%, right?

In Q4?

Yes. So any color the ratio will be up to mid-teen high teens, 20%, 30% for the next few years, the trend, sir?

In Q1 over 30%.

Sorry?

This month, CQ1, this quarter is over 30%.

Oh, so already 3x up versus December quarter. Which part was the key contributor, aiDAPTIV or?

We dispatch, dispatch, dispatch.

Yes, so the key contributor is already...

It's all here. It's happening.

But design win means kind of the initial...

Design-in means ongoing.

Design win means actual sales recognition immediately?

Yes.

Okay. And then the -- your inventory shows, already was 35%, inventory value is enterprise solution, right? So once you achieve such a strong growth for enterprise solution, how are you going to increase further enterprise solution portion with a limited inventories then?

That's why I need to bring my value to the NAND suppliers. And this, all Tier 1 is all my customers, where I got design-in, design win, they will help me to get a NAND. They have a [indiscernible] all right.

So to do this, you should get the more of QLC NAND for the enterprise solution from the NAND [indiscernible]

I need both. I need TLC, QLC.

So as you answered, so long-term -- no, no, I say prepayment basis, your NAND sourcing. So prepayment is still what, for 3 quarters for the rest of this year? Or what do you mean the prepayment for how long, 1 year, 2 years?

Prepayment is not triggered yet, still under negotiating, not yet happened.

So usually, the prepayment means, okay, you pay $0.5 billion, for example, and then you get the chips onto the...

Simon, this is all confidential. I can't disclose here, okay? We have a very strict NDA.

I see. Okay. So last time, you said the prepayment happened, what 2018?

We have a prepayment with Hynix 2007, 2008. We have a prepayment to ship 2012, '16, '20, '23.

I see. So latest one is when the cloud was very strong 2017, '18 then. Yes, very clear. So this time, prepayment trigger point, obviously enterprise solution or AI.

Yes.

Very clear. Wow, good job.

[ Eric ] asking what inventory? inventory? No, the [indiscernible ] 4Q NT$34 billion. And [ Eric Chen ] [indiscernible] mentioned you see no end of supply shortage until this month. Yes, endless, endless. I don't know how many years. So let's pray for that, not too long, please. Okay. So any other questions? Astoria, if no questions, we can end this call.

Yes. We do not have any questions online -- sorry, I see another question from the chat box, maybe the last one. The investor want to know -- yes, they want to know how long it currently takes Phison to ship newly purchased inventory and what are your thoughts on the capital expenditures by NAND flash makers?

Some new purchase inventory generally we start to ship in March. Why? Because shortage, okay? Means what means some high-cost inventory start to ship, but we're still able to make margin on this. So don't worry that much. Yes. How about 100 million IOPS? Yes, you [ export ], I'm telling you ongoing, not easier, but we will make it on time. Again, this is end year, I cannot share that much.

We have answered all the questions online. And thank you, K.S. for your time, and thank you, everybody, for joining us today. We will conclude the call.

Thank you. My last ask, I wish analysts do some better homework. Don't give a very shallow analysis to the market. [indiscernible] investor. This is really not right, okay? So make some study, you need call, you can call me, I can share with you. We have to be professional, okay? Thank you.

Thank you.