Alchip Technologies Ltd

TWSE:3661

Earnings Call Transcript 2022-Q1

[Daniel Wang, executive]

Okay. I guess it's about time to start today's meeting. First of all, welcome to our first quarter 2012 Institutional Investor conference meeting. This meeting will be hosted by our CEO, Johnny Shen, and me, Daniel. And we will start this meeting from the company's first quarter results, and an operational update and then the business outlook for this year. After all this, there will be a Q&A session for you to ask questions. [Operator Instructions] Thank you.

And again, as usual, this page is safe harbor disclaimer. And yes, again, this meeting will be English. If you need the Chinese presentation slides, please go to [Foreign Language] to download the Chinese version. [Operator Instructions] And this audio and the video content of this meeting will upload to the [ market presentation post ] system right after this meeting. So if you miss something, you can also go to the website to download this meeting video.

Okay. I would like to ask our CEO, Johnny Shen, to start this meeting.

[Johnny Shen, executive]

Okay, good afternoon, ladies and gentlemen. This is Johnny Shen, President and CEO of Alchip Technologies. Thank you for joining our investor conference meeting. We appreciate the opportunity to share our Q1 results and provide guidance for future business. In case some of you are not too familiar with Alchip, allow me to provide a brief company update as usual. Our company was founded in 2003, we went public in 2014. Our current headcount is 500 people. 3/4 of our employees are engineers. Since we founded the company, we've been successfully taped out more than 480 designs. Revenue for last year, $240 million and -- sorry, 2 years before, so [ 2014 ]. Last year, it's $370 million. For the past 3 years, our revenue grow 50% year-over-year. The momentum are still sustained for this year. In terms of business, more than 80% of our revenue is contributed by HPC and AI area. Among all the major competitors, we are pretty much the only company focused on leading-edge technology. Just recall what TSMC stated on their conference meeting, we also see the high business demand from HPC area. And we are one of the VCA member can provide worldwide TSMC service to our customer.

Next page. We can say we have a fairly acceptable quarter even though our Q1 revenue is kind of flat from quarter-to-quarter, and year-to-year standpoint. But our bottom line numbers, including operating income, net income and EPS are at a quarterly record high for the company. Our net income number is USD 16 million and EPS is NTD 6.32. The main cause for relatively flat revenue is due to capacity limitation. Our major product lines are in a transition period from free chip BGA type of design to 2.5D advanced packaging the shortage of COAs and ABF substrate limits on our near-term mass production revenue. For the past months, Alchip worked very closely to related suppliers. Fortunately, we got a reasonable commitment from them to ensure the future production. So even though the short-term revenue may suffer a bit, but we have confidence to meet or beat the annual forecast stated during the previous conference meeting.

Another significant highlight for our Q1 is business demand. We have received the most worldwide business inquiry this quarter. To our own surprise, many demand are 5-nanometer with some very -- with many 5-nanometer design win in CPU, AI and crypto area. We expect healthy NRE growth till to the end of next year. During the bad experience of our worldwide capacity shortage, many of our existing customers has placed committed production order more aggressively. Starting from later this year or early next year, we expect to see more diversified mass production growth in additional to our current #1 customers. Lastly, a quick update for current Shanghai lockdown due to the COVID-19 and Omicron outbreak. Fortunately, most of our design engineers are now located in Shanghai. Our employees in Shanghai is manning management function. We get used to rely on Internet communication with the customer, suppliers and employees. Therefore, Shanghai work from home requirement create no impact on our current business. However, the city-wide lockdown for about a month still create a certain amount of panic and hassle. Hopefully, this situation will come to the end very soon. Thank you.

[Daniel Wang, executive]

Okay, this page is our first quarterly income statement. As usual, the first quarter revenue is $93.5 million which is 4.7% quarter-on-quarter increase and 0.3% year-on-year decrease. For the operating -- for the gross profit, for the first quarter gross profit is $36 million, translating into a percentage, I think it is this gross margin is around 38%, which is among the highest quarter of our company's history. So as a result, the operating income for the first quarter is $19.6 million, which is 28% quarter-on-quarter growth and a 10.8% year-on-year growth. For the net income part, the net income for the first quarter is $15 million, which is 26.1% quarter-on-quarter growth and 17.2% year-on-year growth. Translating into EPS based on the concurrent FX and outstanding shares, our first quarter EPS is NTD 6.32.

And for the breakdown by application for the first quarter, you may see Alchip is still HPC-centric. The revenue coming from HPC accounted for 83% of our total revenue in the first quarter while the niche market network, consumer accounted for 7%, 4%, 6% of our total revenue, respectively. So since the first quarter is the only quarter for this year, you may see -- sorry, yes, the 2022, the 2022 breakdown is the same with the first quarter.

For the revenue breakdown by process node, actually Alchip remains the leader for the technology node of the physical design in the turnkey services. For the first quarter this year, the 7-nanometer or even more advanced technology node, including 6-nanometer and the 5-nanometer, the revenue coming from those nodes accounting for 60% of our total revenue. And revenue from 16 and the 12-nanometer accounted for 27% of our total revenue and the rest are constructed by 28-nanometer and the legacy nodes. So again, for this year, the breakdown is the same. It's identical with the first quarter I just mentioned.

And for the revenue breakdown by region, the first quarter showed some change from the fourth quarter last year. In the first quarter, U.S. market per your request, isolate. I show the U.S. market revenue contribution as an independent item. In the past, we -- the U.S. revenue is -- the U.S. revenue was hidden in others. So starting from this quarter, since the revenue from the United States became more and more important, so I isolate this as a single item for our breakdown. So for the first quarter this year, revenue from Japan accounts for 20% of our total revenue, while China revenue accounted for 27% and the U.S. revenue accounted for 29%. And then the other region to make up the rest, the 24% of our total revenue.

And then for the first quarter review, I think the revenue for the first quarter came as expected and as our guidance released in last institutional investor meeting. I think due to the constraints of ABF substrate and of course, the COAs the 2.5D/3D packaging limitation, the quarter-on-quarter growth is not promising, but it is within our expectation and the guidance. The design demands was very strong in the first quarter, especially for HPC-related applications. Actually, we won several leading-edge technology node projects from China -- from both China and U.S. customers. For the profit margin, the profit margin in the first quarter is high. That's because the higher sales exposure to the design to the NRE. The first quarter gross margin is $38.6 million., The main reason is a very strong NRE sales. The NRE revenue accounted for more than 60% of the total revenue in the first quarter. And the design wins, we have multiple HPC projects from China customers in the leading-edge technology node for various applications such as GPU/CPU and the AI chip, the AI projects.

So for our 2022 business outlook, I think many of you may know that the shipment to U.S. service customer is the major growth driver for this year. The production for this AI chip already started from fourth quarter last year. And we expect the revenue of this -- the revenue contribution from this project to pile up starting in the middle of second quarter. Currently, the limitations and the constraints are still on the supply side. We mentioned many times that the COAs packaging capacity and the capacity allocation and the ABF substrate supply is the most challenging thing for us to grow our 2022 or even 2023 total revenue. We expect revenue distribution to be like 40% to 60% for this year. Again, the shipment of the AI chip to U.S. customers to speed up starting in the middle of second quarter, we expect revenue distribution for the whole year will be like second half heavy kind of pattern. And for the quarterly revenue pattern, we expect sequential growth pattern from second quarter to fourth quarter, which means we believe we can deliver quarter-on-quarter growth for second quarter, third quarter and the fourth quarter this year. And supply chain management is the key to our 2022 and actually also for 2023.

The COAs and the substrate capacity are critical factors for our growth in these 2 years, and the current capacity allocation are far short from customers' orders, which means if we can have some breakthrough for the substrate and the COAs -- substrate and the packaging supply, we may post upside potential on our targets or expectations. And we do expect a certain level of breakthrough for the supply side by the end of 2022 and more accurately the first quarter this year. Since we have been working very hard with the suppliers, and we do get some results and the commitment from the suppliers for the future capacity.

And I guess that's the business outlook for today, and we will go into the Q&A session later on. Thank you.

[Daniel Wang, executive]

[Operator Instructions] Chi Ho, please.

[Chi Wong, analyst]

I have 2 questions. The first one, as we start to engage customer for 5-nano project, can you share with us the gross margin profile, let's say, compare this with 7 nano? Definitely, the net contract value would go up a lot. And also I believe the profit, but I just wonder how about the margin profile.

[Daniel Wang, executive]

So Chi Ho I think the margin depends on not only the technology node, but also the design itself. And the schedule. Many, many other reasons will be the deciding factors to the gross margin. But overall, I think the revenue we make or the profit we make per headcount for 5-nanometer is definitely higher than 7-nanometer or 16-nanometer. But for the gross margin front, as you may know we -- based on our accounting principle that we capitalize the mask IP. So overall, roughly, roughly, if you consider if you assume the mask and the IP COGS, the gross margin, the percentage for 5-nanometer may not be higher than 7-nanometer. But based on the current status, we really think that 5-nanometer project, 5-nanometer project are good business, are good profit business for us, especially for the NRE.

[Johnny Shen, executive]

Okay, yes. Chi ho let me step on there. Could be honestly, in Shanghai or even in the United States, for 5-nanometer, we have a very, very limited competitor. Not too many companies can do 5 nanometer. As you know, the mask itself plus IP, 20 to 30 million. So no customer, like I mentioned before, no customer willing to take a big risk. So -- and also based on current situation, our capacity is almost full. So it doesn't make any sense for us to take a 5-nanometer if the project margin even lower than 7. So the position is very strong at this moment. So right now, we already have many 5 nanometers. So far so good in terms of profit margin.

[Chi Wong, analyst]

Sounds good. Second question, as you know, there's some players are trying to get into the leading-edge foundry, right? I just wonder -- and for us, we are close with TSMC. I just wondered if the company or some of our customers will be considering to use some other foundries for the leading edge.

[Johnny Shen, executive]

Yes. I think for most leading-edge technology, like 5-nanometer, 3 -- 5, 4, 3, yes, honestly, customer has almost no choice. Only TSMC, honestly. But for BB mainstream, like 12-nanometer or even talk about 7, they think about using other foundry, they did. But unfortunately, the experiences is not so good. So I think majority, we can say more than 99% of our customer for 7 and 5, 7 or below, they still stick with the TSMC.

[Chi Wong, analyst]

I see. So basically, we can say that we are not in a rush, right, to diversify our foundry partners.

[Johnny Shen, executive]

No, no. And TSMC, right now, everything is altogether, if you have a wafer, you need to prepare the 2.5D package. And also need to prepare the substrate. Using other additional suppliers, I think it will create additional work for us. It doesn't make too much sense at this moment due to the shortage at this moment.

[Chi Wong, analyst]

I see. Okay, all right. Good. Okay. Congratulations.

[Johnny Shen, executive]

Okay, thanks Chi Ho.

[Daniel Wang, executive]

And Charlie, please.

[Charlie Chan, analyst]

Sure. And Johnny hope you and your colleagues can get through this turbulence in Shanghai.

[Johnny Shen, executive]

Surviving, surviving.

[Charlie Chan, analyst]

Yes, take care. Yes, so my first question is about your no CPU opportunity. So it will be great that you can really repeat Phytium's success. But my concern is that how about the ecosystem, right? I mean Phytium, when we see that PC, it go with Kylin iOS, right? So it's a kind of a total solution. And you have a very stiff buyer, like governments or -- so you want to support that kind of local PC. So for your coming nanometer 3 or 5 local CPU customers, are they really mature for the ecosystem besides the secure design?

[Johnny Shen, executive]

Okay. Let me try to answer first. We have about 3 to 4. Certainly, we have a 3 to 4 new opportunity on -- focused on the 5-nanometer CPU unto a type of design. And no surprise, the core team are coming from fuel area. For example, the high ceiling count, also the Alibaba and some of the Phytium people. So in terms of design experience, I don't think that's too much issue and funding is also very straightforward, very fruitful. Software, they still use the Linux kind of approach, and some of them can use [ Xining ] as well. [ Xining ] is not belong to Phytium. [ Xining ] is another company. I think the PC -- the China PC maker right now make [ Xining ] compliance. I don't think that now will be the issue. And people consider about the GPU has a lot of drink because high variation and bigger market, but CPU-reconsider is already proven market they used to provide a lot of volume from high ceiling coming also from Phytium. So that's why more and more company focused on this area.

[Charlie Chan, analyst]

Okay. So is it fair to say that those are new customers, their target market remains to be kind of government-related or topic related instead of consumer PC markets? And my other question is that Phytium, I know the company already privatized, right, but I think the company CEO still have a great relationship with government or a great war growth, right? But why not 3 to 4 new China CPU customers address the consumer PC market?

[Johnny Shen, executive]

The 3 companies, the 3 5-nanometer opportunity we took, yes, it's the focus on totally different area. The 3 different areas, which is HiSilicon and Phytium focused before. Number one is institutional-related. Number two, the high-performance computing, data center-related application. Number three, the PC and laptop. Three, we can say is Unicom kind of CPU new start-up is focused on 3 different areas.

[Charlie Chan, analyst]

Yes, so that's great to know because I'm just wondering whether those -- because you have resources now very tight, right? So I just wanted to make sure whether you can get a similar volume or turnkey revenue, right, versus 2 years ago when you do the CPU for Phytium. Are you confident that same kind of contribution would happen and those new CP customers?

[Johnny Shen, executive]

Yes, we're still optimistic for CPU-related forecast, yes. And yes, because GPU story, I think recently facing some challenge about most of the people in China still believe the CPU market will grow and continuously grow. Not only for laptop, notebook, but also desktop. I think the successful story from Apple create a very good example for the local PC supplier so it drives a lot of a chip maker because the inquiry from the PC maker. They want to make an own base type of desktop.

[Charlie Chan, analyst]

So you know that even Apple start to support Windows system, right? Are you aware of any of those new customers will support either Chrome, Android or Windows iOS or they are required to use the Linux?

[Johnny Shen, executive]

They use Linux. I don't think they will again to make a Windows compliance. I think they need to -- they have a lot of work to do. But eventually, they do have this kind of plan.

[Charlie Chan, analyst]

Okay. And my second question is about the Japan business development, right? Yes. So I appreciate the further breakdown by region. I am surprised that the Japan is still 20% of revenue. Can you kind of tell us what are those applications and whether you think the Japan market can grow as well. For example, I'm in particular interested about 2 projects, right? First of all, where the supercomputer project will come better gain from Japan customer. And secondly, you're a very, very long-term partner, Sony. Are they still doing ASIC for the consumer product like TV and who are helping them to design those ASIC for TV or PC right now?

[Johnny Shen, executive]

Okay. Daniel, do you want to go first? Or I can go first?

[Daniel Wang, executive]

Sure, sure. For the breakdown, ow I'll answer the breakdown. For the first quarter this year, the reason for a relatively higher percentage exposure for Japan market is because we took 2 cryptocurrency project from Japan. And just as you mentioned, actually, not only Sony, we keep on doing projects with Sony. Sony is our very, very long-term customers. And the previous high performance computing customers, maybe you have memory PC. Actually PC was back and we are starting to receive projects from PC as well. So for Japan market, of course, because of the currency project, the first quarter revenue is pretty good. In the long run, I think the difference between Japan from other regions in Japan, most of the end customers or the customers are relatively mature. So the potential shipment volume could be quite stable compared to other regions. Like in China, there are too many startups. We don't even know which one can deliver very good production volume. But in Japan, usually when we do good project, later on, the production contribution is expectable. So it's kind of different. And in Japan, we won't say this market will deliver very good growth outlook. But for the customers, actually, they are mostly good customers to us. Johnny, would you want to...

[Johnny Shen, executive]

Yes. Let me try to add to that. Japan, we're seeing business in 3 different categories. Number one, just like you mentioned, Charlie, is Sony. Sony TV-related business, we still consider from a long-term relationship, I think we have to take. Yes, as I mentioned before, the company established the first 10 years, Sony is our #1 customer. We have a very, very tight relationship. Whatever the project provided by Sony, yes, we have to take. So Sony TV and ISP related business every year still contribute a certain amount of revenue. Number two category is a supercomputer, even though the volume is not so big, but we can learn a lot from Japan supercomputer business. They always get whatever the project we are working with the customer always receive the high ranking #1 in terms of Green 500 or #1 in terms of top 500. They will give us a very good position and reputation in order to win other regions. So Japan still have many supercomputer makers. Once a while, not every year, but every other year, each of the company will come to us to do the supercomputer type of design.

Number three category is kind of a niche. For example, the -- as you know, using Pachinko business as an example, yes, we are working with the Y Company for 7 years ago, we produced a 28-nanometer design for them. Even until now, they still produce very reasonable about the revenue for us. Daniel also mentioned about because of the metaverse, Japan started to focus on some kind of cryptocurrency. It's not becoming, it's not [indiscernible] It's not like a coin. It's another coin they are interested a lot. So we take this opportunity to prove the most leading-edge technology, design turnaround time. And for cryptocurrency, I think for us, the investment are much less because the design turnaround time are very, very quick. And also the chip is even insensitive because multiple engine can go on and off using software. Another highlight for Japan, we started to focus on this region because of a resource reason. As you know, worldwide resource finding sometimes it's even worse than the wafer and substrate capacity. Suddenly, Japan becomes very competitive. Before Japan resources we can consider is the most expensive one. But right now, if you look at the senior level, Japan cost is very competitive and stable. Stable is a key. China, they expect high rates every year and Taiwan market becomes cost become very, very intense. So we are -- starting from last year, actually 2 years ago, we already start to build Japan resource. We also mentioned on the conference meeting right now, Japan headcount is also at a historical high. And we have Japan resource can support multiple region, can support U.S. and also Europe or even Mainland China.

[Charlie Chan, analyst]

I see. So Daniel financially, right? So can you give us a guidance of gross margin trend because this quarter seems to be pretty high, right? At a normalized gross margin? And also can you update the OpEx number for 2022?

[Daniel Wang, executive]

Okay. For the rest of this year, the second quarter, third quarter and the fourth quarter, we do expect gross margin to go down because the production exposure is increasing, starting from the middle of second quarter. So for the whole year blended, we expect a year-on-year decline, but not significantly slightly mild decline from a year-on-year basis. And for the operating expense, I think operating expense is not changed. Based on our previous guidance, our operating expense will be ranging from $72 million to $74 million for the whole year. Thank you, Charlie. Okay, and next is Bill Huang, please.

[Bill Huang, analyst]

Congratulations on the results it's quite solid. My first question will be on your revenue mix on the regional basis. because for first quarter, we have been seeing a quite diversified region versus what we have been seeing in the past 4, 5 years. And I'd just like to see what will be the revenue mix based on different regions for this year and next year. Looks like going forward because I just want to get a sense as to which countries are actually seeing a better growth. So you had mentioned quite a bit like from U.S. and Japan earlier. I'd just like to get a thought on that.

[Johnny Shen, executive]

Okay. For the geographic breakdown, I think this year is -- this year will likely post a significant change from last year because we have very big production revenue from U.S. this year. We expect the U.S. sales exposure to go over 40% this year. And for China, China last year accounts for more than 70% of our total revenue. For this year, we think the China situation is like. It's more NRE heavy year because we don't have to see significant production revenue from any single customer this year. So we expect the China revenue to account for about around 40% this year. But the majority of them will be NRE. And the rest, the 10% to 20% will make up by Japan and other regions like Israel or some European and the Taiwan customers this year. And for next year, we do expect that U.S. will remain the main region for our -- the major region for our total revenue exposure. But for China, we also expect there are several projects to go into mass production phase next year. So I think right now, I cannot give you a very clear picture of the breakdown last year, especially there is still a swing factor and that's [ Phytium ]. So in my mind, I will say last year, we may see increase percentage exposure to U.S. market. And for China, I think, relatively maybe the same range.

[Bill Huang, analyst]

My second question will be on your R&D expansion, because could you give us a an update on the R&D staff that we have so far and what the expansion plan that we have for this year and next?

[Daniel Wang, executive]

We mentioned in our first slide, now we have around 500 people. And we will soon have 30, 40 new engineers to join in next month in China region. And all in all, we're still targeting to increase our total employee number from 500 to 600 by the end of this year. The majority of the newcomers, the new colleagues will be engineered for design and of course, for the -- and for the production.

[Bill Huang, analyst]

Sorry, my last question will be on your revenue mix for the NRE also for ASIC. What will it be the mix like for this year? Next year versus last year based on your estimation?

[Daniel Wang, executive]

Last year, NRE accounts for about 45% to 50% of our total revenue. For this year, this number will go down to 40% to 45%. And the other 50% to 55% is the production revenue. For next year, we believe NRE percentage will still go down because of the production revenue we expected from U.S. and China will go up quite considerably. So I don't have the number. We -- I didn't do the numbers forecast right now. But I will -- the number in my mind is, I think for last year, the NRE exposure would be about like close to 40%, 35% to 40%. Am I answering your question?

[Bill Huang, analyst]

Yes, it's all in clear.

[Daniel Wang, executive]

Okay. Next question from [ Stuart, Alliance ]. Thank you.

[Unknown Analyst]

Yes. Just -- sorry, I apologize. I missed the first portion of the conversation. So if my question is redundant, I apologize. Concerns Phytium, April last year, you halted operations with China's Phytium, since it was blacklisted by the United States. I'm wondering -- I know you've been working hard to alleviate that situation. And I'm curious to know if it's possible that will be alleviated this year. And more to the point, though, is if you were able to do business with Phytium, would you be able to do all of that business? Or has Phytium been able to find an alternative supplier or customer -- well, they're the customer, but an alternative supplier, let's put it that way, for some of that business?

[Daniel Wang, executive]

For your question, we do have some breakthrough for the CCAR application for Phytium's budget. But we have agreement between among Alchip, TSMC and Phytium. We cannot discuss the progress into detail right now. And I think for the whole thing, TSMC is the key. So the principle for the Phytium thing is every party follow the regulation and the law. If everything is lawfully good to do, we can do it.

[Johnny Shen, executive]

[ Stuart ], to your -- to answer your second part of your question, yes, this is kind of flow and regulation is not only for Phytium, it's also for all other companies who will be put on the entity list, as long as we follow the rule applied from BIS applied classification numbers. And proven the technology dependency is less than 25%, I think we can -- all the customer who are in their list can be our customers as well. I don't think that's a problem.

[Unknown Analyst]

But specifically, the business you have with Phytium, is Phytium able to substitute someone else to supply that business instead of Alchip? That's the essence of my question.

[Johnny Shen, executive]

No. I think that will be very difficult. That's almost impossible. On that, if they decide to using more measuring technology and go to other foundries, otherwise, I think they will have no other choices.

[Daniel Wang, executive]

Okay, Chi Ho do you have other question.

[Chi Wong, analyst]

Yes. Actually, could you give us some guidance regarding this year's OpEx? Operating expense.

[Daniel Wang, executive]

I guess I just said, the full year OpEx will be ranging from $72 million to $74 million.

[Chi Wong, analyst]

Okay, so there's not much change from the last time Yes. And also, I'm not sure if you can share with us Q2 revenue outlook since we are already halfway of the quarter.

[Daniel Wang, executive]

Okay. In our last institutional investors meeting, we said that on that time, the consensus is about $480 million to $500 million for the whole year. And we were very confident we can meet in the outside expectation. But now -- for now, I think the expectation is still at about $500 million for the whole year. We were still very confident we can meet or even beat the market consensus. We think $500 million for this year is not a difficult target to achieve.

[Chi Wong, analyst]

How about this year, but how about Q2? And any clarity that you can share with us on the call?

[Daniel Wang, executive]

For sure, I said I -- we will post the quarter-on-quarter growth for the second quarter. And I don't know the outside -- what is the outside expectation. Somebody told me 30%, somebody told me 40% quarter-on-quarter. I would say this way that the substrate and the COAs packaging are still the issues for the second quarter sales performance. But all in all, I think the expectations for 30% is relatively, I would say, reasonable, but I cannot guarantee a number for you because there are still some uncertainties. But for the whole year, I have higher confidence level for the numbers. But for the second quarter it is kind of -- if I give you a range, the range, the meaning of the range is, it doesn't mean a lot, right? So I think that's the answer. I try my best to give a guidance to the as investors.

[Chi Wong, analyst]

As you say now, yes, okay all right.

[Johnny Shen, executive]

Chi Ho, let me try to add to that. So for mass production, yes, just like Daniel mentioned before, we have been facing some uncertainties. But to tell you news, we already commit to our end customer for the yearly delivery. So whatever we cannot deliver on Q2, it will happen in Q3 and Q4, the number already committed, which is we already get a buy-in from suppliers as well. So I don't worry about the overall the year-end number as for the near term depends on the yield and capacity allocation but based on current trends, our [indiscernible] are doing very well. So Q2, in short, like just Daniel mentioned about 30% growth. And overall, I think the mass production, we're going to have a great year. If it happens, not happen happened in Q2 some of the volume we shipped to Q3 and Q4.

[Chi Wong, analyst]

I try to squeeze a last question in the past, you mentioned that the company I would also consider some [indiscernible] like business. Is this something we are still going forward?

[Daniel Wang, executive]

I think Johnny, I think CEO is referring like the PD2.

[Johnny Shen, executive]

Yes. Go ahead, Daniel. Yes.

[Chi Wong, analyst]

Fair enough.

[Daniel Wang, executive]

Actually, everything is ongoing. We PD2, which means partial turnkey business, we already have some projects who are PD2, which means we do less effort on a physical part. Yes, we do have projects.

[Johnny Shen, executive]

Yes. Right now, Chi Ho the reason we are kind of focused on PD2 because they -- we do have a few advantages. First of all, as you know, our resource shortage is very precious. So we don't want to spend too much resource for production business, because we have a very tight relationship to supplier for Alchip, we are representing more than 30 customers. So the pricing and capacity we receive are much better than the customer -- individual customer -- so that's why a lot of our company are willing to do the only -- the production on type of business with us. Yes, for us, as long as the gross margin are reasonable, I think we are not against to take this kind of business.

[Daniel Wang, executive]

Charlie, please.

[Charlie Chan, analyst]

Actually, just some industry cross check. So you mentioned several times about the COAs and 3D issue I'm surprised that TSMC already break through 3-nanometer, how come advanced packaging to keep having this issue? Can you share your observation, whether this is temporary or is it something really structural and will continue to be the risk for the next year?

[Daniel Wang, executive]

Okay. What I'm going to say only represents my own opinion. Things involved to TSMC's kind of risky. So TSMC is very, very good in doing wafer business. But for packaging, actually, I think the packaging business is driven by demand by their customer. So for the COAs packaging, we -- to be honestly, the year rates kind of struggle, but it is not only because TSMC, it has so many factors like the urine of the substrate and the design difficulty, something like that. So from our point of view, we think that in the future, there are some possibilities. First of all, TSMC has some breakthrough for their cohorts yield. Secondly, maybe there are other players, there are other places, other than TSMC, who can provide the 2.5D or 3D packaging to us or to other customers. And we are still looking for the possibility and hopefully, this kind of capacity issue will be resolved starting from maybe the end of this year or the early next year. As I know, there are many other -- there are some other players trying to do so. And I believe these kind of actions will be welcomed by TSMC because the core business of TSMC is still wafer business. More 2.5D packaging capacity is actually a good thing for TSMC during their wafer business. So that's my thinking.

[Johnny Shen, executive]

Let me add to that. Like I mentioned earlier in this meeting, right now, the 2.5D the kind of advanced packaging using COAs are totally different compared to free chip BGA, number for layer are totally different and size also are totally different. So that's why the yield, we cannot, using the same year rate for free chip to the COAs. I don't -- I believe TSMC is already doing a wonderful job. But that's why [ OS ] not to me only couple of [ OS ] try to do this kind of have the 2.5, 3D package. I was told the situation are even worse. So that's why package related yield go down. It's a surprise to everybody because we only compare with the free chip type of design. But it's a COAs, I think that happened quite usual. I do the cross check to the mostly the edge technology player like a company and also on company in U.S. I think they also suffer this kind of the package year loss. I think that's quite normal. People will get used to it. Yes, then you're also right because TSMC, the MEM business is a wafer. We also discussed with NAND it was especially the OS COW part TSMC is the preferred to doing by themselves. But OS portion, if we can find an outside supplier taking care of the substrate and take care of the final assembly, I may do against this kind of approach. More and more different angle cooperation between us and to the major suppliers.

[Charlie Chan, analyst]

Okay. So who take the EO risk? You said TSMC or Alchip or customers, right?

[Johnny Shen, executive]

It depends on the business model, beginning of the project because the yield is not so stable and for your project, I think the customer itself has to take most of the year loss.

[Charlie Chan, analyst]

How about Alchip?

[Johnny Shen, executive]

Our margin is not so thick. So I -- we cannot take this kind of year related, especially on the final test. All our customer -- major customer is buying to this story, they agree. Yes, we don't have [indiscernible].

[Charlie Chan, analyst]

Okay. And finally, because I remember you still have some exposure to AI speaker and some smartphone market. I think it should be Xiaomi. You know that investors are very, very confident about the consumer part. Do you see any kind of forecast cuts or postpone of the consumer related projects?

[Johnny Shen, executive]

Daniel?

[Daniel Wang, executive]

I think for the smart speaker peer, that's the first thing. The no matter it is a smart speaker project or it's a handset ISP project. the shipment as an order revenue contribution is not comparable with the [ FCC ] to lose major hyperscalers, that's for sure. The smart speaker project actually still are going. And I haven't heard feedback from sales about the ISP project for a while. But in the same time, we do have a new project related to the image signal processor. And because this customer is quite high profile is a joint venture by a China company and storming. So based on our information, the new project will apply to apply to associate with maybe Sony CMOS imaging sensor. So maybe in the future, we will see some high-end models we're building these AI type ISP chip into the cell phone. But so far, any impact from the weaknesses, weakness of handset market we don't have too much feeling from that. No problem. And next question is from Michail, please.

[Michail Paraskevopoulos, analyst]

Daniel, hope all is well. My question is that if I calculate the expectation of your second quarter and using the first half second half contribution is [ $4 million and $6 million ] your revenue is actually having some upside versus the previously mentioned or the consensus of around USD 500 million. So I'm just wondering, are there any upside in terms of like ABF you got in this year? And how much is likely to contribute to your last year revenue? Or you're actually having some breakthrough also in the demand side and would like to hear you mention more color about it.

[Daniel Wang, executive]

Okay, for the demand side, there is no problem. Actually, I mentioned that the demand right now is much, much, much more than supply. So as long as there are extra supply from the substrate customer -- all the customer on it to see it. And for the upside -- for this year, I -- in the situation right aside, we may have some extra, which means not in our forecast. We may have some extra supply support from new vendors. But we are still discussed the schedule. We are still discussing the schedule, and I cannot 100% guarantee you that we will have used from subsea supply, but most likely fourth quarter we may have some room for it. And -- but since it is already the first quarter, I think the upside to our original plan is not to not too much -- but for next year, I think it is a very good news to us that this new capacity could bring in more than $100 million upside potential for our growth.

[Michail Paraskevopoulos, analyst]

Sorry, more than $100 million is all in fourth quarter or it's actually fourth quarter and also...

[Daniel Wang, executive]

No, for 2023.

[Michail Paraskevopoulos, analyst]

Okay. Understood. And since I think we're heading to the mid of this year. Just wondering, would you share some of the color about next year in terms of the growth potential also on the like capacity in ABF you got or capacity in the main foundry you got and the growth driver for next year?

[Daniel Wang, executive]

I would say this way for 2023, I haven't done the forecast now until now. But I do have a picture that I deeply believe last year will still be a record-breaking year for revenue since first of all, the shipment to U.S. hyperscale customers will increase and increase a lot. And there are production, there are some production revenue to keep to kick in from China customers next year and most of them are from leading-edge technology nodes like 7-nanometer, 6-nanometer or 5-nanometer. So all in all, the foundation, the $500 million, the $500 million or $570 million foundation in 2023, will not change. On top of that, we have more orders from U.S., and we have multiple more projects into production, and some of them are high-volume projects. So last year will be -- will still be a very promising year for Alchip. And I guess, Johnny give some color for next year.

[Johnny Shen, executive]

Sure. Yes, like I mentioned early in the meeting, because of a bad experience of the capacity shortage other than this particular U.S. customer, many customer already placed committed the PO to us in order to ensure the capacity wafer on substrate and also on cohorts. So I'll be very optimistic for next year because we see the NRE trend. And before thinking about the mainstream for us is 7 nanometer. Suddenly we see 5-nanometer opportunity, more and more final media opportunity. As you know, one 5-nanometer design, it will take about a year to complete. So most of our revenue -- major revenue will be recognized in next year and also because of the high demand for the MB forecast. So next year, I think I'm very, very optimistic for the next year.

[Daniel Wang, executive]

Next question from Haas Liu.

[Haas Liu, analyst]

Just have 1 question with regards to the more industry practice. I just wonder to what extent we should be concerned that the rising macro risk on our customers' commitments on both NRE as well as the turnkey projects. So basically, I just want to know in a more bearish case or more situation, like what flexibility that our customer -- our clients have in scaling down NRE or even mass production.

[Daniel Wang, executive]

Yes. I think for your question, from our point of view, I think for the micro part the risk is very, very low. Let me say this way. You may notice that for every TSMC's earnings call, for MediaTek's earnings call, other company -- important companies earnings call, HPC remains very high-growth sector for more than, I think, 4 quarters or 6 quarters. So for the -- within the HPC industry, I would say, currently, it's kind of like infrastructure to the future Internet or the metaverse. So almost every hyperscale client enterprises are investing a lot in to build up the infrastructure. And the ASIC or less HPC type of is the bare bone of the infrastructure. So we don't see to -- I won't say I will say this way, we see almost 0 risk for the demand side from the PC industry. especially when the situation right now is preparing is neatly shortage right now. So actually, every customer is fighting for design resource and the supply. And the next question is from [ Brian O ].

[Unknown Analyst]

My first question is on the [ country ] supply. Can you just elaborate a bit more on your ratios with your existing suppliers to this the next year how much more supply are they going to give you? And also for the new supplier, are you concerned that maybe certain yield [ done or you materially be a new project for them ]?

[Daniel Wang, executive]

Okay. For the ABF substrate supply, I would say previous our long-term and current supplier, the major supplier is [indiscernible] [ PCP ]. And we also have [indiscernible] and [indiscernible]. In addition to low suppliers, we do add new suppliers for our substrate. And because of the NDA and because of many reasons, we cannot disclose the detail of the supply status Actually, for the year rate perspective, the new suppliers, we do have good confidence on that because they have very good track record. And I will say from the schedule point of view or from the yield point of view and for the commitment point of view, I think the capacity we can get for next year is pretty satisfied.

[Unknown Analyst]

Does that mean you think you will be substrate constraint by next year or this isn't really an issue?

[Daniel Wang, executive]

I won't say constrained because we still have a lot of time prior to next year, we already placed orders and the deposit to ask our suppliers to reserve some -- to reserve capacities for us. Well, we have outside, yes, we will. And -- but if you are asking if we can -- if this -- if the capacity we got fulfilled total demand of our customers. Now the demand is still much higher than the supply.

[Johnny Shen, executive]

Okay. Let me add to add to that a little bit. So basically, we are working with this substrate supplier very closely. They see Alchip differently compared to most of the customer. Of course, they are not shorter for customer. But they -- from their side, they also want to diversify. Yes, choosing Alchip, I think it will be the very easy way because we are representing more than 30 customers. We make a business commitment. We can help them to diversify the business. Also, just like Daniel mentioned, we even prepaid for the future capacity Yes. So yes, it's not possible to cover all our customer need and potential need. But we can say the capacity we will see next year already can meet our next year growing target. Yes, it's already very, very, very s*** for us.

[Unknown Analyst]

And my last question is for this year, what would be the breakdown in terms of end application for your Chinese customers?

[Daniel Wang, executive]

You mean what break it out.

[Unknown Analyst]

The application type of projects you will be working on.

[Daniel Wang, executive]

Okay. I will say at relatively well and the majority is still from HPC-related like CPU, GPU, GPGPU, or DPU MPU something like that. But we also received projects. We also won projects from, like I said, the imaging signal processor. And -- maybe we will win some projects from the automobile kind of type of projects. Yes.

[Johnny Shen, executive]

Yes. HPC still -- even in China or U.S. HPC contributed the majority of -- in terms of application.

[Unknown Analyst]

And just as a stress testing, if any other customers they had to face similar constraints as Phytium? What do you think the impact is on your business? Or how would I no longer rely on your technology.

[Johnny Shen, executive]

Well, that's a million dollar question, but so far so good. We -- hopefully, it won't happen, but just like I mentioned before, even if it happens, we know that SOP, we follow the rule or follow the regulation, helping our customer to resume production if it happens.

[Daniel Wang, executive]

I think next question is from Haas Liu. And since we are getting late this is the last question, I think. Haas Liu, please. Haas Liu? Okay. So let's say, we have 1 more question, opportunity left for you to ask. You are so welcome to ask questions.

[Unknown Analyst]

[ Stuart Winchester ] here. I know you commented earlier about the situation in China. Just from you because of your long-term relationship and business dealings there, perhaps you just describe on some sort of scale as to how concerned you are with what's happening in China and the ability to do business there relative to any time before -- and you can describe it in terms -- I'll help you with this answer with a scale of 1 to 10, with 10 being just very difficult and 1 being very easy.

[Johnny Shen, executive]

Danny, you want to answer?

[Unknown Analyst]

The [indiscernible] question.

[Johnny Shen, executive]

You mean during the...

[Unknown Analyst]

No, no, just what you see now versus what you've seen in the past, just on a relative scale.

[Johnny Shen, executive]

Okay. You mean during the -- because of the lockdown, or because of...

[Unknown Analyst]

Yes. Well, that's one of -- it's a far-reaching question. It's not just the lockdown. It's just -- you're doing business in China. How do you see it right now relative to other challenges that you've had during the time you've been doing business over the many, many years?

[Johnny Shen, executive]

Okay. Well, that's a big question. But honestly -- that's a good question. So in terms of trade war, in terms of geopolitical concern, we can now -- the part and I know the fighting between U.S. and China will continue to sustain. And -- we create a lot of difficulty for us. For example, Phytium and Google facing some challenges before. But thinking about the bright side because of this compression and it creates more and more opportunity for us. So funding in China in the past is not the issue. We see more and more start-up company open and focus on leading edge technology. So in terms of NRE, I don't think the will go down, and we will see more and more opportunity. In order to diversify our risk, that's why we are focused, U.S. especially production-related business more in U.S. and at least for the short term. So other than this #1 customer, we also find out a couple of high production business in U.S. And we are not giving up the China production because they will -- most of our customers -- a lot of customers, they will give us a strong forecast. But maybe later when the customer hitting high volume, they were facing another challenge. So we need to diversify overall entire situation. But overall, U.S. for mass production, more for stable mass production and China for leading edge opportunity. I think that now will be the current focus for us. In terms of lockdown, we already anticipate this kind of program. Two years ago, the lockdown area even more, 5 subsidiary or lockdown, but this year only in Shanghai. And we're doing a big investor on the cloud computing. So even during the lockdown work from home, the impact for us is very insignificant. Yes, the major -- the problem for us is business side and supplier side, usually, the face-to-face kind of meeting change will be getting less. But in terms of project delivery, and winning the repeat customer, I don't think that's an issue.

[Daniel Wang, executive]

Okay, thank you all for joining us today. Thank you for your support, and we see you next quarter.

[Johnny Shen, executive]

Thank you very much. Thank you for supporting us.