Phison Electronics Corp. ($8299)

Good evening, everybody. My name is Jeff Ohlweiler. I'm Head of Research at Macquarie, Taiwan. Very happy to be co-hosting Phison's First Quarter '26 Earnings Conference with CEO, K.S. Pua. Interesting times in the memory market. So very -- always very happy to hear K.S. talk about the NAND. So with that, KS, I'll turn it over to you.

Yes. Thanks, Jeff. Good afternoon, good morning, good evening, ladies and gentlemen. So let's have Phison our '26 CT1 earnings call. way, we changed our present slide here, okay? We try to make something to highlight in this chart. Now we try to deepen our revenue portfolio. We built the so-called AI ecosystem modules, which including the ESP module, adaptive solution, AI PC, networking, which we are shipping right now, AI servers and also the drive for the server OEM, ODM and also enterprise AI. And this is 38% of our CT1 revenue, okay? So believe in the coming years, AI ecosystem modules will be our biggest revenue cash cow, and we believe sooner or later, this will all be 50%. Embedded ODM, we have mainly the mobile ODM, PC ODM in the gaming module. Phison, we gained the share in the mobile controllers and also we gained the share in the PC ODM controller and also in the modules. Little bit surprise to me is industrial module, even though the supply is tight, but industrial module still very, you can see very stable, growing. And this can contribute more the gross margin to our business. This also reflect with the Phison heavy R&D investment, we win a lot of trust from the IPC makers, automotive maker and also in the space solution. Controller-wise, it's around 10%, not because of declining actually Y-o-Y, we're still increasing by unit Q-o-Q around flat just because the revenue growth too much by our AI ecosystem modules and embedded modules. Retail, as we already highlight just only like below 10%. And we can see in CQ2 potentially retail modules still declining. With this kind of our portfolio, we are glad to see Phison is migrated from the consumer embedded now we are in their AI ecosystem partners. And we name this as Phison 3.0. We are going to present you later in the more information. Financial result, revenue-wise is TWD 40 billion and the gross profit is TWD 25 billion, okay? This CQ1 every index all 100% all-time high, every index, okay? So revenue-wise, all-time high. Gross margin 61.3% also all time high. We also be more conservative. We still have some inventory around 1.5% of gross margin. We play conservative and some material [indiscernible] with just write-off to make sure the company has a much better visibility in the future. [Indiscernible] Earnings-wise, the EPS is TWD 68.8 was again all-time high. And in this [indiscernible] we have around 10 coming from the investment gain, okay? We have a JV in China. We have -- this is coming from investment. But our main business is still doing great, okay? By inventory write-down, we still spend like minus 2.3 something, okay, be conservative, okay? [foreign language]. Income Statement, I think we need to highlight is, of course, gross margin already we shared to you. Q-o-Q, we increased in revenue profit. One thing we like to highlight is our operating expense, and this is mainly R&D expense. CQ1, the number increased that much just because we have to keep investing to the new node. We migrate to the 4-nanometer. We have some [indiscernible] costs. We just write off the [indiscernible] cost. And we have a lot of AI storage system development and R&D expense, R&D talent recruitment and to have more incentive to engineers. This is just because we like to have a heavy R&D investment to make sure we can create more value in the coming future to improve our earnings. So I mean this is value creators. The value creators mainly coming from heavy R&D investment. So I need to emphasize again, don't put Phison compared with other module house. We are highly commitment to keep invest with the R&D. This to make sure we got a good return, not only in gross margin, in the earnings, in the net amount and also influence power in the industrial. So this is Phison's DNA. Heavy investment, we get a good future. So don't keep asking Phison compare with the module house, compared with others and also don't keep asking about the inventory issue, okay? Inventory good, we still can create the value because we name ourselves is value creators. And nonoperating gain is contribute around just because of the investment and some JV returns. [foreign language] In the -- our balance sheet, everyone may concern about inventory. Inventory growth by Q-o-Q is 200%. Again, I need to emphasize not because we like to buy just because we foresee in the coming August to December, we may not able to get good enough of wafer fresh component. So we have to -- since we design win into our system partner, AI partner, automotive partner, PG partner, we need to make sure we have a continued supply in the CQ4. So there wise, we need to keep collecting component for our future use. And again, you may ask about inventory cost. I just emphasize again, we have a confidence to manage this inventory no matter the so-called low cost or the market price. we are able to use our inventory to create good enough return for our shareholders and for employees. So we have some TI and non-TI comparison. That's not much different. Phison last year, August or September, we issued the stock option to our staff. So this creates some cost. So you can see the difference between TI and non-TI is a small gap. We're not issued that much. So the differentiation is not that much. Our FO, the revenue is TWD 20 billion. Again, it's an all-time high. Again, we're still facing the fulfillment to our customers now around 30% to 35%. We're still not able to make the 100% fulfillment. We still go to ask our suppliers to give us more upside in components. We also do all our best to gain more design win in the AI systems in a lot of new applications. So we still need to get more supply for our -- this second half business. So this chapter, we'd like to share with you how Phison we name ourselves from the Phison 2.0 transferred to the Phison 3.0. And we try to name ourselves become the NAND first value creators. So again, we don't need to spend time to explain why shortage, how shortage, how long the shortage, I think this already -- we agree this is a fact. Since this effect from Phison, our revenue portfolio, you know, we add more to the AI ecosystem. So what is our product line in this AI ecosystem, we have a retirement driver. We have an eMMC for server drive. We have a lot of AI software applications. We have adaptive solution. We have enterprise SSD. Later, we also like to disclose with you, we are now starting to build AI data platform, Phison's proprietary AI data platform for the on-premise solutions. This is all about the AI ecosystem, mainly for cloud, for server, for hyperscale, for new cloud. So let's go one by one. This category is for drive, okay? We already got 2 design wins and new happened in the CQ1. And for OEM, we have 3 design wins already shipping, start shipping. And Unfortunately, the fulfillment still below 35%. And in hyperscale, we have 3 design wins. And according to the forecast, the NP was starting from this T3 and T4. So we -- again, we need to ask for more NAND based supply to us to make sure we are able to ship. And for the AI platform, this is mainly for networking. We are already shipping and we keep collecting more material for our second half upside demand. This category is mainly main drive. Main driver is high capacity drive up to the 122 terabyte enterprise SSD. We got the 2 OEM shipment. And in the Phison, our top 10 customers today, we have 6 named as AI ecosystem customers. And hyperscale, we have [indiscernible] the operators, we have 2 design wins and we're shipping SFI already from February. And in the AIO systems, we need this cloud, 7 total players, we are there, 100% we cover, 3 are new, and we ship every month. And this also -- and some of them already inside the Phison top 10 customer list. And the infra software platform, we also start to engage with the software platform to make sure AI adopt is able to go smooth to the market. And AI enterprise customers, we got 2 design wins and 1 new. And the last density, we shipped SFI in CQ1, not only in the Western country, but also in the Asian country. And Gen 6 controller, we have a silicon ready first cut. We are going to move to MP and the first Gen 6 enterprise SSD sample will release by this August, and we are going to show this in the FMS. [indiscernible], we are going to make some demo. So we are the earlier player in the Gen 6 enterprise SSD suppliers. In the industrial IoT, we shipped our EMC into the really startup big guy in the robot systems. We also put our UFS industrial part into the [indiscernible] systems, and this is going to very soon. This is just to name that Phison, we are very focused to keep develop the new products to get the new high-tech customers to bring the value to the company, shareholders and employees. The one thing is about space SSD. Phison invested since 7 years ago. Again, we got so many design wins shipments. We have a regular shipment monthly. Of course, revenue is not that big enough. Space is very niche, but this is to show Phison, we are capable and we have a good supply chain, not only technology, but also supply chain and service. And the most important thing is we win the trust of the space ecosystems. One more thing is about during the Chinese New Year, they have Open crew in China getting popular. But at the end, the user realized they're facing privacy issue and also the expense issue. So Phison, we work with our CPU partners we bring in the on-premise desktop, laptop, which is able to compute the open cloud on-premise without using the cloud. And this is proven. So in Computex, we have a lot of our partners is going to show this product. And we believe this will be the trend. And we have confidence Phison's adaptive solution will be the standard product in the coming future in every on-premise PC solution. So what the user suffer is about the cost, the expense. With Phison solution, we provide the on-premise and with the hybrid cloud, we can reduce 70-plus percent of the soon cost. The soon cost can help users more willing to use AI with a hybrid solution. So Phison solution is all the new platform with the CPU, which they have IGP or NPU, they don't need to use the high capacity of DRAM. With Phison adaptive SSD, the hardware itself, no change. Hardware, everything is a similar hardware, just put Phison Adaptive edge with our software, then this convert to the AIC. Actually, overall cost, right, because you reduce a lot of DRAM and DRAM is so expensive, okay? So by [indiscernible] test, you can see this is going to the market. One thing we agree a lot of our shareholders, the fund managers, the sovereignty fund, you care about ESG. So we made a study about adaptive, how can adaptive matching the United Nations Sustainable Development Goals. So we go to study, we found adaptive matching 3 of the SDG. SDG5, we have 5. So SDG4 is the quality of education. The AI is so GPU so expensive. A lot of poor country, the students, they may not able to touch AI just because their country may not able to make the fulfillment to deliver the GPU. But with Phison Adaptive solution, we are able to make education popular in the poor country. Today, the students, they are still able to access to these AI systems. And the clean energy, SDG7, SDG13, which is a good healthy to the [indiscernible] issue. Phison data solution actually is a distribution compute. It's not asking one country provide the heavy power supply to supply the data center. This is good to match the SDG7 and SDG13. The one is SDG9 is the innovation to reduce the inequities of the several countries. And we believe AI has to be equal to every human. Everyone they have right to use AI, but again, too expensive. So we wish to work with our ecosystem partners, the CPU partners, the GPU partners, the PC partners, software partner ISV to deliver the affordable AI platform to worldwide to help everyone they are able to access to the AI systems. And in this Phison 3.0, is Phison's product portfolio, we have a different definition here. Our main business starting from controller. Again, Phison is a company we are not just a single module house. All the Phison products from Phison are 100% designed in-house. Controllers, every controller IP, except the CPU, we license the most of the IP circuits are in-house. So Phison also doing ASIC, we also provide the design [indiscernible] service to some hyperscale customers and also to the gaming console and also to the PC OEM and also to the NAND industrial customers. So we have our in-house ASIC design service capability. We also provide the full turnkey with our firmware. Of course, with the full system PCB layout simulation. Other than the controllers in the system level, we have an innovation, adaptive [indiscernible] solution. We provide enterprise SSD, the [indiscernible] drive the software application program, retirement, EMC to fulfill the whole AI ecosystem. On top of this, we provide the service with a full customization, high resilience, fast, flexible response and the supply chain. We are able to make the supply chain, and we have a much healthy financial sectors can able to support to the industry from design, from concept to design to product to shipping as a system. So this is Phison 3.0. So we have confidence with this kind of a heavy R&D investment, we are capable to fulfill this industrial who need the storage, who need the AI ecosystems, and we can play the role. At the end, the return is we are able to get a good revenue, the better profit and at the end, there is the beauty EPS. Okay. This is a new platform. It's the first time we disclosed to the public and first to our shareholders, the fund managers. Okay. This [indiscernible] is infrastructure platform is adaptive concept. With the GPU partner, Phison provides adaptive catch to enable using the limit set of a GPU card, we are able to exercise fine-tuning and also the good performance in the inference with our heavy catch solution. We're also working with the CPU server company as a hyper connection with our P -- by the way, Pascari SSD is a Phison enterprise brand. Recently, we get a lot of awards. We also win a lot of recognition in the worldwide market. This Pascari SSD is a component, but we work with the CPU partners. With the server partners, we build our Pascal into storage server. This storage server is a customized provide to the proprietary applications, mainly for the AI adaptive AI ecosystem and also for health care industry. On top of infrastructure platform, Phison will also provide the hyperconverged infrastructure. It's a software level. This 100% in-house software development. This is the AI and the software interface which to handle the hardware itself. Then on top of this HCI, Phison will provide the API and AI gateway. We have different components to enable the AI application. We have a different module to help improve the application and performance, okay? So this is 100% all from Phison in-house. We are providing the full system product and service. We start to build also the ecosystem ISV partners to bring application. This already they're posting their application on our infrastructure. So Phison is our future business, we will have the Infra as a service. We have the Platform as a Service, then we partner with the Software as a Service to provide the full solution to the industrial. So hopefully, soon or later, with Phison heavy commitment investment, we can deliver our new AI storage, AI adaptive and also the storage system to the market. Let me [indiscernible] to explain more. [foreign language] so this to show you, even though our revenue increased that much, we still insist to put around 20% of the expense into R&D. Again, this is commitment. So I keep repeating, don't compare Phison with other controller house and don't compare Phison with module house. They're not able to invest that much into this heavy R&D investment. So this is a chart to show you what is Phison's our value creators. Today, Phison in Taiwan, we have R&D around 3,500 engineers. Last year, R&D expense is $13 billion plus. And I can tell you this year, definitely, our expense may go to the $20 billion plus, maybe go to $23 billion plus. Why? You can see we are going to invest a lot new applications. So don't worry, Phison's made an investment. This investment will become the return in the future. And we proved this year. A few years ago, investment, now we get the returns, okay? Phison also built a big portfolio of a product manager, okay? This product manager mainly is to talk to the customer requirement, the product requirement, technical support. This is a good skill engineers we convert them to the project product managers. We also built a team called business development. It's mainly to engage with the CSP, hyperscale AI ecosystem partner, ODM partners, OEM partners. This organization helping Phison to gain to approach to engage more new business, more new applications. And global office headquartered in Taiwan. We have a big team in the U.S.A. A lot of hyperscale cloud -- new cloud AI system is coming from U.S.A. We have a good engagement. And we just start our Europe office. Why? Because Europe, a lot of system integrators, the data center players that keep approach us in Taiwan to as partly supply. So instead of this, we decided to build office, start in the Frankfurt, German, and we start to go to send the people from Taiwan today, we have local hire. And in Malaysia, we have an investment there, start to ship the SSD, eSSD and also the AI service. And hopefully, Malaysia can help Phison to cover the ASEAN country and also the Middle East industrial and the Middle East demand. China JV doing good. We can see the good return in coming future and also help us to gain the market share. We have an India JV, starting getting the mobile business, automotive and enterprise SSD business in India. So with this organization, we aim to AI ecosystem solutions. We try to gain more share, more return from the AI ecosystem. So Phison 3.0, we don't rely on much of our inventory, low cost. We rely on R&D investment. We rely on the new project. We rely on the more engagement with the big guys. Okay. This is -- I'll make it quick to show you how Phison use our adaptive server application, and we have a new team with [indiscernible] with AI [indiscernible] to build our in-house AI solution to support in-house team to improve the performance. I just show some results. Last year, August, I started to host the team to provide the service to internal every BU, every unit to use the AI. So in the first month of August, you see the workflow just only 3, but recently, workflow go to close to 1,000 per month. And monthly users already go to the 1,300 per month. Why is the return? This chart to show you, this is Phison's our investment in the human resource equipment. This is a return from the AI by early March already crossed over. And this is to show you the user count monthly like increasing, okay? The input token is 20x of output token. This means what? If you are a single user, you use Gemini or ChatGPT, you input small token, output big token because you just use as a user. But Phison, we use this to read document to solve internal problem, okay? Heavy input token get a small result. This means we're using this to improve our efficiency to reduce the human resource to read the document, okay? And what is our game? After a few months investment, by April, we can reduce the [indiscernible] 49 headcount, and this is mainly R&D headcount, okay? And R&D, the headcount fee is increasing. By the way, NVIDIA is coming to Taiwan to build their worldwide other than U.S. headquarters. They are going to hire engineers. So no matter what in coming years, R&D, the cost is going to have an inflection, okay? So we need to start to use AI to improve our efficiency. By the way, Phison is not going to lay off engineers. We just use more our current engineers to improve the efficiency, reduce the cycle time to get more product to improve our profit, okay? So this is our game after a few months investment. And this is some small highlight what we do. It mainly is engineering, okay. Actually, I don't know what this year, okay? But this got to show you every item we are able to save some headcount here, okay? So target. Right now, we are able to save a 49-month headcount, and we already can see the return. This is my hardware cost. This is my monthly investment. Now we start to see the good ROI, they go to the positive. The goal is in the coming 12 months, we are going to invest more GPU, more development team. We want to improve the manpower -- man headcount saving monthly to improve the efficiency, to shorten the cycle time to win more project in the future. At the end, we provide a better EPS to shareholders, okay? So that made some summary here. Again, AI future NAND demand, no need to argue the [indiscernible], okay, it's happening. Just the question is how can you -- how can we [indiscernible]. [foreign language] So far, NAND companies start to invest, but worry it's not going to oversupply, don't worry, okay? So I don't want to explain the time why it's not going to oversupply. Again, Phison, we start to build our AI ecosystem, as I explained just now. This is the thing to help Phison to gain more influence power, more profit in the future. Okay. This is a heavy R&D investment. Since we have a good profit, many third-party controller house module house, you can go to start the R&D investment. Even they have a good profit, they keep profit, they never invest that much. But after 2 years, we believe we can gain more business, more influence power, more product line, more design wins. And the rest, Phison is not just a single controller company. We are not a single module company. We are an ecosystem company. We are able to start to build from IP, chips, board level module, service. Now we provide a full ecosystem products. Okay. We issued ECB going to raise $800 million. Why? Just because you can see inventory go to the TWD 70 billion, and we still need to keep collecting more supply for CQ4. We believe CQ4 when is going to the market, the flash memory supply will be disapeared, okay, will be mainly shipped to the [indiscernible] ecosystem. But the time when that happen, we still need to ship our product to the customers. So we need to build inventory. [foreign language] and we have a breakdown in our inventory. You can see enterprise is a majority and the consumer now less than 3%. [indiscernible] Phison start to reduce a lot of allocation to the retail, okay? We do enterprise AI ecosystem partner products and also embedded and industrial, which can create added value to the company. So we open for the online questions.

Yes. Thank you, K.S. [operator instructions] I can start with a few questions. Can you talk about the ASP trend of NAND in first quarter and how you see it in the second quarter and throughout the rest of the year?

According to the NAND suppliers in component and modules keep increasing, keep increasing. And I can share with you by March, 1 day component, they increased 50% ASP. And by April, they increased 20%. So since the supply demand is a big gap and unbalanced, ASP definitely increased. But again, I wish ASP can keep flat or slightly increase because it is not healthy to the market.

Okay. I know in the past, when supply-demand got tight, it gets harder for you to get allocation from the NAND suppliers. Is that different this up cycle? Or are you pretty confident on your supply, not only this year, but for the next several years?

Yes. If -- when I said, how can I get supply, right? This is all my story, but then we have a question to the NAND supplier. Why are they willing to ship to Phison? Why? Why? Because Phison will prove we are the value creators. We create this value. The most important thing is the AI is going to the edge. No doubt, AI is going to the edge. And the PC laptop desktop, they need to use AI, but AI inference, you need a lot of DRAM. DRAM is a constraint and high price. Phison, we have this invention, innovation, right? We are going to license our solution to the NAND suppliers. We engage with 2 of our NAND vendors already. And since we license, we work with developers initially this business, then Phison has a better position to ask for more supply.

Okay. Great. Yes. And I guess, obviously, you had a big increase in your AI ecosystem revenues in the first quarter as you kind of talked about in fourth quarter. 38%. One is how are the margins there in general versus the other products? And two, what kind of -- where should that percent of sales go to over the next several quarters?

Actually, the overall, the gross margin, the highest part is in the AI ecosystem modules, highest okay? Because of the new products, the market is high, and we have good flexibility to supply, customers are happy. So we are enjoying a much better profit margin in the AI ecosystem modules.

Okay. Maybe one more question for me before I turn it over. I think Charlie raised his hand, so I'll call him after this last question. So you had 40% plus gross margin in the fourth quarter, 60% plus in the first quarter. I guess where can that go? What's going to be a normalized margin once prices kind of stabilize? And what do you expect in the next couple of quarters on the margin front?

Okay. Phison is going to issue the ECB, okay? So I already got our banker cannot have a guidance, cannot have a number, okay? So I better to follow what they ask. We -- I have a confidence to make sure we can keep increasing our revenue we can try to do our best to maintain the gross profit margin. Overall, we have confidence to increase our gross margin. When first price going stable, then we have -- I always ask myself, what is the value of Phison. If I just build a module, you can expect the margin go to single digit. But Phison, we provide controllers, we provide the AI ecosystem service, and we already start to have a software applications business. We have this investment since 2 years ago because we understand the day is coming, but we can have taken this as our compensation to our gross margin rate. So this that we are willing to invest to R&D just because it create something good value to us in return in the coming years.

Okay. Great. Charlie, you want to unmute yourself and ask a question?

Sure. K.S. First of all, congratulations, and you totally impressed us and also beat my numbers a lot. So some questions were already asked by Jeff. But I think I have a step back, right, you keep talking about NAND or AI storage is no longer a cyclical industry. But do you think that your business model can be less cyclical in the future? Because I feel like second half, you just talked about, right, when the NAND or module prices start to stabilize, there could be some margin pressure. Is that the right way to think about this?

Yes. If Phison at the last few years, we still treat ourselves as a controller house or as a module house, we enjoy every year the profit, then we enjoy the life. Then the answer to you is I'm optimistic in the future for our future business. But you can see for that many years, Phison keep heavy investing, and I'm working very hard, right? We believe before talking about Phison, why don't we use some example in the history? TSMC, when I was student 30 years ago, how the TSMC business margin, but they keep heavy investing R&D every year, every month, every day. Now they are the king. So if I'm telling you I have a confidence in future gross margin, gross margin rate, but with more R&D investment, then it means I'm just flooding, okay? This is to show you we are -- we deliver what we talk, okay? I agree when the price going higher when price going higher, then the gross margin rate definitely is challenging. This is a simple mathematics, but we need to create the value. So we're working hard to build the new ecosystems. We're working hard to provide the so-called adaptive for this platform. This is the new products. So today, if we go to challenge NVIDIA, 10 years ago, they are in the mining in the GPU for gaming, right? You ask how about you? I'm working hard, I do need that. Now he proves I use the same wording. We're working hard. If you believe us, the support. If you still have a question, my advice is [indiscernible] because I try my best to tell you I'm working hard, working very hard. And the number we are putting into that is happening, right? But just explaining, time will tell, okay? So this is the answer for myself, and this is commitment from myself. We are going to deliver what we talk.

Great. I think that's very, very helpful. And my second question is really about your progress in eSSD. I think you showed several design wins at the major DSP OEM. Again, congratulations for those project wins. But I'm curious about how Phison is going to work with NAND flash supplier because from my kind of humble opinion, I feel like the NAND stack, they still are the most important part, right? If they can supply NAND, you can get a business, right? So I'm not sure how Phison can work with those NAND flash OEM to penetrate this eSSD market. Or another way to ask this question is why not kind of NAND flash fab, right, to do this [indiscernible] by their own.

Okay. Actually, most of eSSD, every solution to the CSP to users are highly customized, to be honest, they don't have a standard part. Of course, they have a standard part by every customer, they need to have a service and customize the solutions, okay? And AI is changing so fast. In the last 40 years, semiconductor [indiscernible] by Intel. Intel every year give you the 5 years road map. Everyone knows what's going to happen in 5 years. You can prepare. But -- in the AI NVIDIA every year, new generation, new platform, you know what happen next year. So Phison's advantage is we are flexible. We are rapid. We are good in the engineering solid and the things are customization. You go to every NAND company, ask them their control team resources, definitely they are telling you they are very tight. Demand is too strong, too much design, they cannot cover. So Phison is a third party able to provide from IP, ASIC design service, firmware, board level systems, software, fully customized. So this is why the reason we are able to win that many projects from the hyperscalers, our capability. And the NAND company, no matter they ship the drive, they ship the server, they ship the flash, eventually, they are selling the flash, right? If Phison happen to sell more flash into the system, then why not? They are. They are more heavy, so [indiscernible] to our own position and values.

Okay. So just a very last one, thanks Jeff and K.S. for your patience. So your 1Q inventory kind of doubling from 4Q, right? I'm not sure how much of those is from bit shipment increase, how much of those are kind of inventory price increase? And how much of those kind of go to your 1Q gross margin if there's any reevaluation. And by the way, Kate, thanks for being very reasonable to our research. I appreciate.

Okay. First of all, I don't think I'm going to our inventory. But I'm just telling you, I have confidence this inventory, we still have a good enough of a cost structure. Second, we still get good enough of course, not enough. It's good supply from our supplier further enough, but we can use this component to create much higher value to the product. So you can see Phison, our position, right? You go to this chart Phison is not going to sell just only SSD, okay? We are going to sell a solution. Like NVIDIA is not selling you a GPU. He's not rather selling you a GPU but, he sell you the full servers with a software bundle, okay? So this is Phison's approach. So in this case, I wouldn't care much about my component cost. I care much about can I get enough components to sell the full systems. Because these full systems, we are able to gain more gross margin rate. So if you say in my position, I still myself as controllers as module players. Yes, you are right. But we already transformed ourselves.

Thanks, Charlie. Simon, how about you. Do you want to mute and ask your question?

Yes. Congratulations. Great, great results. So number one, very quickly, the Q1 revenue up very strongly, but any rough idea of ASP change contribution out of the 80% quarter-on-quarter revenue increase in Q1?

Definitely, it's the ASP change. By module-wise, enterprise SSD volume increased a lot. Of course, the ASP increased more than a lot, okay? And we also win more units in the PC OEM shipment. We have now become the key player in the third-party or we have become the biggest third-party module supplier to the PC OEM and ODMs. So -- at this moment, we have no interest to win the unit share because in one sense, supply is constrained. We try to use constraint limited of fresh resources create a much higher value products. So the answer is, yes, ASP is improving, but ASP improving, we are not improved in the retail business. So this is a difference [indiscernible]. Many module house, CT1 good earnings, but you can go to see the distribution still is consumer module. No problem this is for inventory, but consumer module is like means we allocate more resources into these 2 -- these 3 categories, AI ecosystem module, embedded and industrial. And this is the future.

Yes. Great. Very quick follow-up question here. Here, the table showing enterprise module, which means eSSD, right? Is your own branded eSSD or It is just a box?

Yes. Every enterprise SSD from Phison, we name as Pasari, okay? We ship to CSP, hyperscale, cloud infra networking and also SI and Pascari. But one thing I want to share with you, Pascal already recognized, 100% recognized in the industry. When they name Pasari, they think this is good in the industrial, it's a Tier 1. So we are going to enable the ODM business. We are going to brand our drive to our close partner who can help us to gain more share in the future.

Yes. That's a great point. Pascari means eSSD that is already used by U.S. big companies.

Yes, means a [indiscernible] trust approved by the big guys.

In that case, you have to compete with the directly major NAND makers, which will supply eSSD.

No, not really. First of all, NAND supply constraint means many suppliers not able to fulfill the customers, right? Phison mainly take their customization stress, not the [indiscernible], okay? In U.S., they have a lot of AI-related company, they're looking for customization. The NAND guys say, hey, only Phison [indiscernible].

Okay. Sorry, very quickly, your April revenue, TWD 20 billion, while already similar to the previous year's quarterly revenue or half of the Q1 revenue is up. So if we multiply by 3 second quarter revenue, TWD 60 billion. So you think TWD 20 billion is kind of the inflection point to see the ongoing like TWD 20 billion monthly revenue at least going forward?

Again, this is a little bit complicated, okay? First of all, you know my inventory here, right? And some part I have to carry until CQ4 because I did not win already and I [indiscernible] in CQ4, I cannot get supply. So means I may not able to ship my inventory by CQ2, CQ3. So we need to make sure we are capable to fulfill the design win business. We are in no hurry and no rush to make their revenue ramp up. But the answer is asking about TWD 20 billion is going to be a bottom line, most likely, yes. Higher, definitely, yes, but we have to manage the inventory heavy linearly until end of the year.

Yes. So your point is based on your great franchise with the NAND chip suppliers. Meanwhile, you have TWD 72 billion inventory. So overall, the TWD 20 billion monthly revenue is not one-off. It could be sort of the starting point to see the monthly revenue at least. Then the very important thing is today, you mentioned the [indiscernible] cash memory that is also emphasized by U.S. big tech companies. So would you spend maybe a few minutes what Phison can do with your solution for the cash [indiscernible] key value memory area, how it works?

Okay, Simon, I can't disclose because this is covered by a lot of NDA. Phison, we -- Phison value, if I provide simple [indiscernible] 64 as a [indiscernible] by NAND company, I cannot survive because I'm not going to compete with them, right? So the standard [indiscernible] will come in from the NAND company. But Phison using our controller firmware system, we do a lot of customization to improve something. But unfortunately, I cannot disclose them much.

Okay. One last thing. [indiscernible], your competitor is really emphasized with whether they are Q1 result. So do you think the [indiscernible] is really necessary to turn on the AI server.

Okay. Simon, I think I said my principle from now on, I'm not going to make comment on my competitors, but I just ask you a question. You can go to ask them. Second half, no matter what controller demand is declining revenue on controller revenue is a big question. To keep revenue, they better to build modules. Modules, what is the most easier to entry,is drive. But the same question just from Charlie to me. You have a CQ1 good revenue because you have a larger CQ3 inventory, right, price x. How about CQ 3, you buy market price, you ship market price. You want to get your revenue, what is your gross margin rate? Simple question.

Okay. So then you think the good drive demand will be continuously stronger every quarter, that part?

Is a strong demand, but you have to make sure you can get the NAND supply. Second, you make sure the gross margin, again, what you asking me, yes, we have a good drive. When price going up, the gross margin rate definitely declining, right? So hedge because we will start the new business. So my competitors, they're willing to gain revenue, they cannot get flash.

Yes. One last thing. Payout ratio is still 60% something even with your record high quarterly EPS number, what's the -- would you recap your payout...

Payout policy is by first half, right? So we will not decide yet. So this decide. But you see Phison now we start to raise $800 million, right? -- we need cash, but decision will make by end of June depends on the market situation. So not decide yet. But we still wish we can follow the principle of 55%. We wish.

How much? Sorry?

55%

Sebastian, do you want to unmute yourself and ask your question?

Yes. Thanks, J. I'll be quick. I know time is running out of time. Just 2 questions from me. The first is, I know you wish that your expectation -- not expect, sorry, your wish or hope is that the price does not go up too much from here, to stabilize. But there is -- I sense a contradict in your message because you're basically you're indicating that by Q4 or Q1 next year when Vera Rubin is up and running, the NAND flash industry is going to experience even more severe supply-demand situation, which means the glut ratio are going to get larger. And well, economy 101 tell us that when that happens, usually the pricing is hard to stabilize from there. So just curious about, I mean, try to strike a balance between your wish versus the reality of the industry.

Okay. In this world, every nation, they have a government if supply demand is a big gap and impact to the national security impact to the GDP development, then definitely government is going to do something, right? But I'm not from the government office, so I'm no comment on this. But I wish the price keep flat or slightly increase because the memory company already got 80% gross margin. But we need to make sure the industrial can grow healthy, everything can enjoy -- everybody can enjoy the AI, then government need to do something. This is my comment. But I also agree, supply demand in the second half, especially end of the year will be a big gap. It's a big gap. So what to do? My answer is I don't know. But if wish, please don't increase that much anymore.

But based on the conversation you have with the 6 major flash suppliers right now, what's your sense on their attitude toward the Q3 pricing?

No. No guidance. They decide they want to ship it tomorrow, they decide by today.

No, they can because if they decide now earlier, then maybe a few weeks later, they will regret.

Yes. True, very true.

Okay. My second question is on your JV or collaboration investment in China. It seems like the Hosin has applied for IPO in Hong Kong Stock Exchange, I think at the beginning of the year. I'm not sure about when would that happen, but it seems like that's something in the pipeline. And you look at some of the other IPO like Dahua or some of the NAND storage module supplier, solution suppliers in China, whether or not -- whether they're listed in Asia or [indiscernible] , they have -- they all lower profit will lower revenue scale, but they have a much higher market cap than Phison. So how do you think about this -- the subsidiary that we have going to be listed in China and they have a higher similar valuation versus the other peers in China and how are we going to -- how are they going to benefit us from like investment gains or et cetera?

Okay. First of all, I'm not from Hosin. I'm not getting into the details about IPO. But for sure, they wish they want to go IPO as soon as they can. And Phison do our best to help them to go IPO. So hopefully, by second half, hopefully. And on the book, you can see Phison, we have a 22% plus share ownership. Of course, with no IPO after a year, Phison is able to exercise some share to get the return. So I believe this is a really good number of returns. Second, I just read this today, the market cap is twice 2x of Phison. So I'm asking, is this my problem or your problem? If you give me the 50x 80x of PE, I think we should be good. But unfortunately, we are in the different market, so no comment. Phison, we are doing really every field of storage. Dapu is only in the enterprise. Dapu in the history from the group, I didn't see they're making any earnings but Phison every will deliver the earnings. So you got to compare apple-to-apple, right? Of course, it's a different market, but I still believe the value of Phison is much below what the market given. So that's why I keep working hard. I want to deliver a much better business model to our shareholders, our market. We are not just in a single SSD provider. We have become the full system solution suppliers. So let's see. I'm just -- recently, I keep talking to all the fund manager, we see time will tell who can create the value.

Right. So basically, if you do nothing, just keep your shares there, I think the valuation you calculate your holding, then that make the Phison yourself, the valuation even more undervalued -- or if you take some profit and you can get some cash to buy more NAND or to more R&D.

After they go IPO and no doubt, Phison policy, we have to exercise gradually, right? This is policy, okay? And we need to get the return to invest back to Phison R&D to make sure we are leading in the industry.

Right. So that would probably help ease some of the cash burden or pressure that you have, be it on R&D or be it on procurement?

Yes. That is true.

Okay, maybe there's one last question before we finish. I know in the chat box, there's 2 questions. I think Donnie's question on inventory and supply, I think we answered that. So last question comes from Bruce. So SanDisk shipped a lot of TLC to CSPs in Q1. Why is Phison still shipping mostly QLC now?

I don't know why you're asking me if Phison shipped only QLC. We ship also TLC. We also ship TLC, okay? We ship both TLC and QLC to the CSP to hyperscale. It depends on what customers asking customization, okay?

Okay. And then last follow-up question for Bruce. Phison's PCIe Gen 6 plan list behind Microns, Will this affect getting into NVIDIA's CMX Gen 3.5 supplier list? Also, NVIDIA updated its CPU spec in March to Vera CPU top Gen 6. Does this matter for Phison?

No matter if ahead the gets ahead micron. I'm not the NAND manufacturers. How can I build the silicon to NVIDIA. This is not my business, right? So we know who we are. Our controller is mainly doing customization. Of course, we engage with the NAND company, convince them to use our controller. We just sell them the controllers. But we use our silicon to build the modules, customize the products to increase the value of the full product systems, then we can have a more premium. This is our value, okay?

Okay. Great. I think all the questions we have. So over to any final comments...

I want to about Phison inventory strategy. Okay. Phison inventory strategy is simple. If I get the design win in the business, I need to prepare the material therefore. I wouldn't buy any component, which I'm not going to use. I'm not trading guys. I buy only what I need to use. And I have a TWD 70-plus billion revenue already. I run out my cash already. I will spend my money to buy users products. So every strategy is I get design in, I get design win, I need to keep inventories. Okay.

Okay. Great. Should we pass over to you for any final comments?

Okay. So thank you for your time. And CQ1, I know some of you may feel surprised, but I do all my best to surprise you against CQ2. Okay? Thank you.

Thank you very much. Have a good day and nice Bye. Thank you. Bye.