Alchip Technologies Ltd

TWSE:3661

Earnings Call Transcript 2023-Q1

[Daniel Wang, executive]

Okay. Good afternoon. Ladies and gentlemen, dear analysts, our managers and investors, we are going to have our first quarter institutional investors meeting. And this meeting will be host by me, Daniel and our CEO, Johnny.

Okay. This page is routine safe harbor disclaimer. And several points. This meeting will be English. If you need Chinese presentation slide, please go to the MOPS to download the Chinese version. And of course, Johnny and I, we are -- Chinese is our mother tongue. So you want to ask questions in Chinese during the Q&A session, you are so welcome. [Operator Instructions] And this video and audio content will upload to MOPS. It may takes about 1 to 2 hours after the meeting. So if you want to watch the video record, please go to MOPS or to our website. Okay. First, let Johnny to go very quick about the company.

[Johnny Shen, executive]

Good afternoon, ladies and gentlemen. This is Johnny Shen, President and CEO of Alchip Technologies. Thank you for joining the investor conference meeting. We appreciate the opportunity to share our Q1 results and provide a future outlook. [indiscernible] some of you are not familiar with Alchip much, allow me to have company -- a brief company update.

Our company is founded in 2003, IPO in 2014. Our current market cap is approximately USD 3 billion. Head count, 600 employees. Last year revenue of $460 million. We've been successfully. We paid tape out more than 500 designs. And for FinFET, we have more than 55 tape out. Our current capacity is at 20 to 30 NTO per year. Majority of our revenue, 80% is coming from HPC application. Our market focus is HPC AI also recent adding, automotive. We are one of the VCA member for TSMC. And also, we are recently just joined TSMC 3DFabric. We are one out of the 7 Yahoo has 3 who joined 3DFabric for TSMC.

Okay. Quick update for Q1. Q1, we have another record-breaking quarter. Revenue is $188 million. Operating income at $20.9 million. Net income, $19.1 million. EPS, TWD 8.1. Although our revenue is at historical high. Our net income and EPS just slightly increased compared to previous quarters. The main reason is due to seasonal low NRE revenue in Q1 and also few projects delayed and postponed from China region, historical high MP revenue across lower NRE caused notable gross margin reduction. Fortunately, our NRE pick up pretty well this quarter, gross margin will be improved starting from Q2.

Our mass production revenue from HPC application remains very strong. With most of the capacity invitation results, we are expecting tremendous revenue growth from now till year 2025. Alchip continuously holds a great position in leading-edge technology business. We have successfully diversified our business concentration from China to other regions. In Q1, North American revenue contribution is over 60%. We have several design wins and many inquiries from top-tier customer there. Majority of our pipeline business are N5 or even N3 technologies.

A quick update for automotive business. Yes, we have a couple of design won plus pipeline business from many carmakers in China and U.S. region. The area we are focused is the ADAS L2 to L4 type of ASIC application, target technology N5 A or M3 AE. Note the design cycle for automotive projects will be longer than most of the -- than other applications, but also designed to generate very reasonable NRE during the design period and produce a fairly amount of MP revenue during the production. We truly believe the automotive application will be another revenue driver for us starting from May 2024.

Lastly, I would like to emphasize Alchip's neutral position and diversified business condition, again, similar to our foundry partner, Alchip will never make a product to compete with any customer. Therefore, China leading-edge technology business, we are taking more cautiously approach and working with the partner closely review customers' background and user and design spec before accepting the projects. We still believing in and support China business as long as they compare rule and regulations. In terms of head count, we implement more aggressively hiring plan to increase our engineering and supporting resource in Japan, Taiwan, U.S. and Southeast Asia. This effort will make -- will provide more sufficient and cost effective solution to me as our customers' requirements.

Overall, we have the confidence to say our business are very healthy. 2023 will be another outstanding year for the Alchip. Thank you.

[Daniel Wang, executive]

Okay. Then this page is for the first quarter numbers. [indiscernible] work for the investor meeting. For the first quarter, the total revenue is USD 188.1 million. It is 26.8% for the quarter and the 101.2% year-on-year. And the operating income for the first quarter is $20.9 million, which is 4.5% for the quarter and 7.0% year-on-year. And for the net income, it's $19.1 million for first quarter, translating into EPS of TWD 8.1. And this page for revenue breakdown by application. You can see the HPC remain our top contributor in the first quarter. In first quarter, HPC-related revenue contributed about 81% of our total revenue, while the niche market accounts for 7%, and the networking 1%, consumer-related products accounted for 10% of our total revenue in the first quarter.

And for the yearly breakdown, of course, we only have 1 quarter for this year. So the yearly numbers is identical with the first quarter numbers. For the revenue mix by process node in the first quarter, you can see the 7-nanometer or more advanced technology node revenue accounted for 83% of our total revenue in the first quarter. And the 16-, 12-nanometer related revenue accounted for 9%, and the [indiscernible] as the 28% was the more legacy technology nodes. And for the regional distribution, you can see quite significant change, quarterly or yearly. Of course, it is because the distribution of the infra chip to North American customers.

For the first quarter, revenue from North America accounted for 63% of our total revenue. And while the revenue from Asia Pacific, which includes China, Taiwan, accounted for 25% of our total revenue. In Japan accounted for 5% and the others including Middle East, Europe, other regions accounted for 7% of our total revenue. So from a yearly breakdown, you can see quite significant difference between 2021, 2022 and of course, first quarter this year, which I believe indicates, our focus has gradually shifted from China to North America.

And for the first quarter, business review, like I just mentioned, contributed by soaring AI chip shipment to North American customers. The first quarter revenue went 27% quarter-on-quarter and 101% year-on-year, respectively. And we don't see strong constraint from ABF substrate supply or CoWoS Capacity supply, we get really, really good support from our -- from vendors, our partners this year. So we don't see this -- we don't see similar situation, happened last year to happen again this year. This year, we believe the shipment will be much more smooth than last year. [indiscernible].

Okay. So for the profit margin, as our CEO just mentioned, the gross margin went down quite a bit in the first quarter to 21%. This is, first of all, the seasonal weakness for our NRE revenue. And in the past, if you follow our company, that the NRE revenue usually accounts for about 40-plus percent of our total revenue. But for the first quarter this year, the NRE revenue only accounted for less than 20% of the total revenue. That's the major reason for the gross margin. And the nonoperating income, you can see about $3-point-something million of contribution this quarter, mainly from the interest income and the FX gain. And of course, this year's business outlook, you may not see it from the MOPS website.

We believe for this year, the AI chip shipment to North American customers will still be the major growth driver to ourselves. The production of this product will likely to keep climb -- likely keep climbing up, even increasing demand from the customers. We understand that the market is saying that the demand for the data center will be sluggish this year given the macro -- given the impact from macro environment. But for our customers or for our sector or for this product, we don't see weakness for this year's scheduled shipment. And we still expect sequential growth in the second quarter, increasing sales for both NRE, which is design revenue and the production revenue.

And we believe our profit margin to rebound in second quarter -- starting in second quarter. The NRE sales will account for much higher percentage in the second quarter than in the first quarter. And we expect the first quarter gross margin will be the trough for all the quarters this year. And for our design pipeline and the design revenue demand, which is still strong in -- particularly North American market. The number of pipeline projects increased and the process node from -- the process node of the projects from North American market is moving towards N5. And even like Johnny mentioned earlier, we will have M3-related revenue contribution this year.

And for the HPC and the automotive applications, they are -- appears to be the major categories for our future growth for sure. And for our diverse location for both the customer, the revenue and our engineering -- most importantly, our engineering resource. We aggressively expand our Japan team, and we are relocating some engineering resource from China to Japan office. And the same thing in Taiwan, except we cannot -- by regulation, we can not shift our engineer -- our China engineers from China to Taiwan. And for Southeast Asia, particularly Singapore and Malaysia, we already have our plan, and we will soon build up design center, most likely in Malaysia, very soon. That's our diversification plan for our engineering resource. We are targeting to have 50% of our total engineering resource outside of China within 3 years, that's our target.

And I think this pretty much all the things for today's company part of the meeting, and we are going to enter the Q&A session. [Operator Instruction]

[Daniel Wang, executive]

Okay. Randy from Credit Suisse.

Okay. Probably some trouble happens, Randy.

And Szeho, please.

[Szeho Ng, analyst]

Two questions from me. First one regarding engineering resource diversification, will we speak of the process given the change in your particular environment?

[Johnny Shen, executive]

Yes. Let me take your question. Yes, for -- to be honest, I know the resource constraints become one of the concern for the company. I think, to be honestly, a lot of the U.S. -- a lot of customers, especially from U.S. hyperscaler customer requests, doing design out of the China. And we do have a very aggressive hiring brand in Taiwan, Japan or Southeast Asia. But in the meantime, we already have urgent supporting plan by sending engineer from China to work in Japan and Taiwan. We already confirm with all the customers, as long as the design not doing in China, we'll be set for that. So immediately, we will have 40 to 50 engineer who will be working in Japan within 2 months. That our ease, some of are concerned from our existing customer. And I do some calculation, that can be -- and most of the project can be supported well. By the end of this year, we're going to have 100. But within 2 months, we're going to have a 50 non-China engineer working in Japan.

[Szeho Ng, analyst]

I see, I see. Alright and second question on the gross margin side, right, definitely think Q1 will be the bottom. But can you give us more color on the gross margin improvement for the rest of the year?

[Daniel Wang, executive]

For the whole year, the last traditional investor meeting, we are shooting for high teens -- high 20s. We are still shooting for high 20s, even with the 21% gross margin in the first quarter.

[Szeho Ng, analyst]

Okay. All right. Great. And last one. Regarding the share placement plan, you guys have mentioned earlier, I think a lot long ago. Have we identified investors? Can we assume those investor more like a strategic investor rather than just a financial investors?

[Daniel Wang, executive]

Okay. Szeho, because by the regulation, we cannot disclose the potential investors. But I can assure you this is a strategic alliance. And we will have -- we have -- we will work with the investors in many, many different angles to win business. So that's what we can tell you for this moment. Technically, it is strategic investment by them and it is a strategic alliance by those, by all the parties.

And Randy, please.

[Randy Abrams, analyst]

Okay. Sorry for the technical issue trying to get the unmute going. The question I wanted to ask on your top U.S. customer. If you could give an update on the road map, some of the projects you've been bidding, visibility or time lines on that. But if you could just discuss the status for some of the future projects.

[Daniel Wang, executive]

Okay. To be honest with you, it is really a sensitive timing right now to comment on it because as you know, we have a pretty straight NDA with customers. But I can say for the current products, we have been working very well with our customers. And for the future business opportunity, I would say, many investors following our company for a while, on the new set, we are competing for a very important next generation project. For this moment, I can tell you we are even more confident than 1 month, 2 months ago. And we are currently -- we believe we are currently leading in the competition. And most likely, we will soon assume -- the vendor selection schedule will come out in the late second quarter or there might be some alteration for the whole story. And when everything becomes more clear, we will let investor know how it goes. But currently, we are pretty optimistic, how we meet future projects with this customer.

[Randy Abrams, analyst]

Okay. And could you frame just -- maybe 2 questions on the outlook for this year. I think the [indiscernible] Street has been around $800 million or so in that range, for $460 million last year. If you could give a framework how you feel comfort with that estimate? And within that, your top customer kind of rough contribution within that range.

[Daniel Wang, executive]

Okay. I think for the first quarter revenue number, if you are talking about the revenue numbers for the first quarter, we should be ahead of the expectation or my previous guidance. For the second quarter, we just announced the April revenue numbers. I believe our April revenue till we see the market expectation again and, of course, my guidance to the outsiders. And we are still very confident for the numbers you just mentioned, $800 million revenue this year. So for now, of course, we won't say we will be very aggressively to do some upward revision for this moment. No, but we are really ,really confident for the numbers we just mentioned.

[Randy Abrams, analyst]

Okay. And to just think about -- I know I'm jumping into next year. But given the good revenue momentum with your U.S. customer. Could you frame just a rough downside scenario if -- because you mentioned they could revisit or make some changes. So is there much dependent next year or risk, I would just say if it went the wrong way, if there's a way to think about the risk side? And then maybe frame the upside if it does come through, like what it could do to the business or concentration?

[Daniel Wang, executive]

Okay. I will say this way, the possibility for the downside risk for next year is getting smaller and smaller as we -- as I just mentioned, we are pretty optimistic for winning projects in the North American market, and this market's demand is really, really strong. So for this year, in addition to the customers, we already talk to the investors. There will be new customers, of course, hyperscalers and automotive new customers.

And I would say, the timing right now for ASIC providers like us is really, really good. So usually, when people, who are investors, ask me about next year's outlook. Okay, usually, we target 20% year-on-year growth every year. But for now, of course, for last year is -- if the $800 million target we can achieve this year. For next year, it definitely will challenge $1 billion revenue next year.

[Johnny Shen, executive]

Yes. Let me add more. Yes, just like Daniel mentioned, we are very optimistic, continuously support our #1 customer. In addition to this customer, in fact, we do have the mass production demand for other customers increased quite a bit. So overall, I think internally, we always target a over 20% year-over-year. So right now, target, I think we consider itself very reasonable.

[Randy Abrams, analyst]

And the last question, then I'll jump out of the queue. The -- actually 2 things that came up earlier, the China, I think in the prepared remarks, you discussed a bit of delay on China project. If you could talk maybe the factor for that, how much impact if you see it on track? And then a clarification on -- I think Szeho asked about the margin. Is the high 20s now that NRE comes off seasonality, is that where you see now kind of from second quarter into second half, that's kind of a reasonable range for gross margin?

[Daniel Wang, executive]

Okay. For the China market, I think -- I will talk a general feeling by me. We have been talking about the China market for now for quite a long time that the number of project, the demand for the project, the service is still good. But the technology node, the process node in migration slow stuff quickly because of many, many things, maybe the funding, the funding environment for those start-ups in China is much more difficult than in the past. And another reason is because of the geopolitical concerns, we try to focus some projects that is definitely not subject to some concerns or geopolitical disputes. So I think we are lucky that we have the opportunity this year to -- starting from last year to shift our focus. But I would say the demand in China market -- the design demand in China market is still strong.

[Johnny Shen, executive]

Okay. Let me try to add more. Since the last year, October 7, I think, again, I think the situation changed private in China, especially for the leading-edge technology. Before we have a lot of pipeline -- we have a lot of customers choosing 5-nanometer of pipeline project. They all change to 7 and 6, they consider 5-nanometer eventually will be easier to be slow down. Yes. For us, I think, just like Daniel mentioned before, the China business is still strong. .

It slowed down quite a bit since October 7 and Q1, but somehow starting from this quarter recovered quite a bit. Right now, I think it's an important decision for us, whether we should taking more China project or continuously focus on U.S. There's a drawback in doing trade-off within these 2 regions. So internally, we will decide continuously to support China existing customer. Their current project -- they have a pipeline for the next project, we will take it and focus more on automotive applications, which we consider will be more geopolitical insensitive.

And other than that, we are focused on U.S. business more. Yes. So to answer your question, I think China business is still -- starting from Q2, recovered quite bit, and we will focus existing and automotive across the U.S. customer.

[Daniel Wang, executive]

And for your gross margin questions. Of course, based on regulation, we cannot -- I cannot go into very detail about this. I would say this way, the most important factor influence -- our blended gross margin is the percentage between NRE and the production. Like I said, the first quarter, we believe it is a trough for our NRE revenue. So we expect the gross margin to recover to the reasonable range of our company. But for this year, since the production revenue grow significantly. So we see it is kind of difficult to go -- to let our gross margin to go over 30%, but we are still shooting for 20% -- high 20s, yes. That's the guidance for our gross margin.

And Charlie please.

[Charlie Chan, analyst]

So my first question is about your potential other major customers from the U.S., meaning other cloud service provider, for example, Google or Microsoft. Do you have any progress at these big customers?

[Daniel Wang, executive]

Okay. I'll go to the official feedback. And Shyang-Lin will provide more detail to you. And vis-a-vis [indiscernible], yes, we are in talk with almost all the hyperscalers in North America, including our existing customer Microsoft, Google, Meta, those kind of customers for new projects. Whether it is in -- no matter it is for data center or for the N devices. We have multiple engagement we them already.

[Johnny Shen, executive]

Yes. I think let me add more. Yes, in U.S., I think right now, we are doing quite well with strong support from the major supplier, supplier from foundry, supply from IP. We've been successfully getting to the door of the local giant company. I think after you talking, I think we consider the chemistry and also the track record by match. Yes, we are -- personally I'am kind of optimistic to win -- some of them may not happen immediately, but we just continuously working with a potential customer closely and provide a solution, provide a reasonable business model. I think sooner or later, we will be their service provider.

[Charlie Chan, analyst]

Okay. But I'm also concerned about your 2 things, right? One is a human resource to get additional giant customers. And secondly is the TSMC CoWoS capacity because we are aware that it's already in a short supply. And next year, it will be even in a big shortage. So how can you help your customer to get the sufficient CoWoS supply from TSMC because it's pretty strategic right now?

[Johnny Shen, executive]

Okay. Yes, resources are -- and we emphasis again. To be honestly, we want me to hire additional resource, 100 people, 200 people immediately outside of China, I can consider that's almost impossible. But fortunately, most of our China engineer treating this as an opportunity if any of them has a chance on the project base to work outside of China in Japan or in Singapore or Malaysia, they all consider that's a good opportunity. So in order -- if they don't want us to move the engineer -- immigrate engineer to other countries, I think it's very important -- is very -- is almost impossible. But project based for 1 year, half year, I think they are -- most of our engineers are so positive for this.

So I think for this year, after some detailed calculation, I think we can meet most of our customers' requirements. Okay. And as for the CoWoS capacity, I think this is a little bit challenging for us before we already get a full commitment from the supplier to support the CoWoS capacity. But because of additional order from customers. So we are quite in the CoWoS -- We try to get more CoWoS competitively from TSMC.

And yes, unfortunately, the CoWoS -- as you know, CoWoS is kind of application independent, we -- our project is binding with other technology node, like a 5-nanometer or 3-nanometer. And hopefully, we can get additional allocation from the supplier. But so far, we already get some. But to be honest, it's not 100% for our current customers' demand at this moment.

[Daniel Wang, executive]

Charlie, does it answer your question? Okay. Anyway, maybe some technical issue of Charlie. And [Bill Huang], Bill please.

[Unknown Analyst]

Yes. I have 2. One would be on your R&D capacity. You mentioned about that will be 50% in 3 years outside of China beside reallocation. Does that suggest that we're going to see a significant revenue in terms of the RD people, from the current number? And also, would these people be capable for some of the advanced foundry design?

[Johnny Shen, executive]

Yes. That's a very good question. The R&D -- the major R&D activity we said could be in the headquarter or mainly in Taipei and in Shanghai. And in terms of project execution, we have sent our engineers to work in -- work in the region outside of China. So in terms of capability, I think for this year, I don't have any concern because the majority of the project is supported by the existing engineers. And we may encounter some trending challenges once we start to do the more aggressive hiring in other areas, for example, in Malaysia. Yes, we see the results and adjust this hiring plan and shipping plan accordingly. Yes, the goal is by the end of next year, I would like to have 50-50 engineer between China and non-China.

[Unknown Analyst]

I see. So does that mean that we're going to see a significant jump in terms of R&D numbers? And does that imply that we're going to be getting more project in the future going forward, be capable of doing that?

[Johnny Shen, executive]

Yes.

[Daniel Wang, executive]

Yes, of course. Of course.

[Johnny Shen, executive]

Yes.

[Unknown Analyst]

Okay. Got it. Okay. Sorry -- my second question will be on the 3-nano. Because you previously announced that you have been taping out on the 3-nano earlier this year. I'd just like to get to see what kind of contribution are we expecting from this project? And how about going forward for this year and next year? How are you seeing 3-nano project contribution?

[Daniel Wang, executive]

Okay. I would say for this year, the contribution from 3-nanometer to be small. This year, I would say the majority will still be the 7-nanometer because of the product shipment to the North American customers. And we believe the 3-nanometer will see increasing revenue contribution, starting from 2024. But in 2024, we still don't believe the 3-nanometer revenue contribution to be the mainstream. So that's the current status.

[Johnny Shen, executive]

Yes, let me add some. Right now, our majority revenue contribution is from production obviously, 3-nanometer go to production in some time. So starting from this year, the contribution from 3-nanometer will be [indiscernible] only. Yes, we have a pipeline business. We have a couple of HPC business plus the automotive 3 AE. So the contribution from 3-nanometer will be [indiscernible].

[Unknown Analyst]

I see. Got it. So even including that tape out, we probably not going to see much of the mass production on the 3-nano.

[Johnny Shen, executive]

Right. I don't think the 3-nanometer tape out is hardly happen this year. Yes, we start to do the design work.

[Daniel Wang, executive]

I believe the tapeout you mentioned, it could be the test chip.

[Johnny Shen, executive]

Yes. That one has proven the 3D, IC and B2B kind of connection.

[Daniel Wang, executive]

Okay. Let me answer questions on the message. [indiscernible] asking about our revenue mix in the first quarter. Can you comment on how come HPC at 81% is lower for that quarter with the ramp-up in AI inference production? And what will be the likely NRE percentage in the second quarter and 2023?

Yes. [indiscernible] I think you are too harsh on us. The HPC percentage from 85% to 81%, not a very significant difference. And for the consumer part, the increase in parts from the consumer, we take out our consumer product, which is -- I can't remember the process now. It is quite an important project for us. And these type of -- and this project will be in production later this year. This is for the [ image signal ] processor for some consumer products, and we also expect the pretty good potential revenue from this project. And other consumer project customers in Japan also contribute, I would say, pretty good revenue to us in the first quarter. That's the major reason.

And therefore the likely NRE percentage. I don't want to guide specific for the quarterly numbers. I would say for this year, I will say the NRE percentage will account for about 30-something percent of our total revenue yearly. For the quarterly numbers, it is really difficult for me right now to commit or to guarantee the numbers for you.

And Jeffrey, Macquarie, please.

[Jeffrey Ohlweiler, analyst]

Yes. I guess my first one is, can you talk about the ramp-up of your Israeli customer? How is that going this year?

[Daniel Wang, executive]

Jeffrey, I don't get your...

[Jeffrey Ohlweiler, analyst]

Your AI customer from Middle East, how was that mass production ramp up this year?

[Daniel Wang, executive]

Okay. Okay. yes. I knew that -- I told the investors that say this is a project -- financing the project which our first time by a whole mass 5-nanometer project from a Israel customer. Unfortunately, that project -- due to some engineering issue of our customers, the project did a major update. They give there, not I would say, they, we redid their previous design to a new design. So the project is still at living but being into different phase.

[Jeffrey Ohlweiler, analyst]

Okay. And is there a 7-nanometer mass production ramp up?

[Daniel Wang, executive]

Sorry. I don't get.

[Jeffrey Ohlweiler, analyst]

Is that customer ramping up mass production of the 7-nanometer product?

[Daniel Wang, executive]

You say these customer, 7-nanometer?

[Jeffrey Ohlweiler, analyst]

Yes.

[Daniel Wang, executive]

No, no.

[Johnny Shen, executive]

They -- even the project delay a bit, but they still tackle the 5-nanometer technology I think design is ongoing. Yes, we have another 5-nanometer, probably Daniel will share with you before also from original from either of the company now is recently acquired by U.S. customer. That 5-nanometer design will be -- go to production very soon.

[Jeffrey Ohlweiler, analyst]

Okay. And then the next question, your overall design resources, how tight are you? I know the last couple of years, you had to turn away some potential projects because of the number of design engineers. But with [indiscernible] slow downed a bit this year, are you less stretched for resources on the engineering side? Or is that okay?

[Johnny Shen, executive]

You are right. Right now, the capacity we can say is not 100% to be honest with you, especially the resource in China. And because we kind of turned down many projects in China due to many reasons. Right now, I think after shipping some engineers -- sending some engineers to Japan, our capacity will be around 95% to 100%. Yes, by the end of this month.

[Jeffrey Ohlweiler, analyst]

Okay. Great. And last question. Can you talk more about some of the new North American projects? What -- obviously, you can't maybe say a customer names, but can you talk about what type of products they are? Are they AI-focused? Are they -- you mentioned auto. Anything else you can highlight?

[Daniel Wang, executive]

Various different projects, like, of course, AI is one of the majority application and data center-related service and accelerator, the video transcoding, many, many projects in different applications in North America right now.

[Johnny Shen, executive]

Yes. To make it simpler yes, because we're taking so many -- if we categorize in [indiscernible] application, AI training, inference, machine learning, data center. But for TSMC, the definition, we call all of them HPC, high-performance computing. So overall, in the U.S., 2 type of business, HPC and plus some consumer -- consumer product. We have some MOPS and also AI those kind of applications. Other than that, it's all HPC.

[Daniel Wang, executive]

And automotive.

[Johnny Shen, executive]

And automotive, yes.

[Daniel Wang, executive]

Okay. From the message box [indiscernible] ask about the [location] of moving engineers to Japan or other sites out of China, is there any working beside issue or local regulation on the percentage of the [indiscernible] workers at the new sites. How will this arrangement impact the cost structure? Are the clients willing to pay for the cost differences?

[Johnny Shen, executive]

Yes. I think that's a very good question. Actually, that's a very, very good question. A lot of people have this kind of concern. But after we apply the visa, I think the problem we can say is not so serious because we have a Japan office for more than 20 years since very beginning. And Japan operation -- Japan used to be our #1 revenue region for the first 10 years. So we have so many senior engineer, and operation very well and smooth. So we have a certain probability. After we apply, I guess, 20 people 70 people, I think we get a visa in a very short period.

So in terms of cost, there will be some additional costs. We do some calculation if we send senior engineer to Japan, the overhead will not be too high. The junior engineer, I think the overhead is up to about 20%. Yes. But overall, junior engineers, the cost is not so significant. And most of our U.S. customer are waiting to digest these costs. As you know, the cost in U.S. and also in other regions like India are much higher not engineer cost is the ratio is 1:3 between U.S. engineer and Japan engineer.

[Daniel Wang, executive]

Okay. [indiscernible] asks. Will Alchip be looking to hire internally and build out own team or work with external partners in Japan and Southeast Asia countries like Singapore and Malaysia?

[Johnny Shen, executive]

I think we plan to do both. Of course, on the organic growth, we will build up our own team in Southeast Asia, like Singapore and Malaysia, like I mentioned. And the external, we will look for engineering resource comments, also in South and East Asia countries, like Malaysia. And actually, we already build our relationship with the engineering resource providers there. But as you all know that we are focusing on the leading-edge technology nodes. So we can have -- we can be support by outside engineering resource for some low level block design charts, but for the system level integration, something like that we will still do it through our own team. Internally in Southeast Asia or in Japan or in Taiwan for those projects that cannot be done in China.

Okay. There's no more new questions in the message box. So for the questions -- is there any other questions?

Okay. A new message box from Horizon Capital. The first quarter '23 operating expense is well controlled. How do you see translate next few seasons for whole year?

Daniel just mentioned 2023 whole year NRE [indiscernible] is about 30% plus. Do we expect NRE revenue become fourth quarter higher than third quarter higher than second quarter?

Okay, for your first question, the operating expense, we are pretty proud that we control our expense really well. Which means my salary is not going up significantly. Just kidding.

But for the operating expense control, we have the -- have very good track record in previous years. I believe all the analysts, all the investors following us for years, they can understand that. And for this year, usually we do the project from the top down angle. So for this year, my guidance to the outsiders, we manage to control our full year operating expense under USD 84 million, USD 85 million for the whole year. And for the seasonal pattern because the salary adjustment begins in the second quarter. So you can see expense to grow in the second quarter but not significantly.

And for the NRE, yes -- I'm sorry that, as I just mentioned, I prefer to give the yearly guidance for the quarterly because for now, any given milestone could be a big number. So any slip or delay for a milestone from second quarter to third quarter might have quite significant impact for the percentage numbers. So I'm prepared to beat the yearly numbers rather than the quarterly numbers.

[Daniel Wang, executive]

The trend, the Q4 better than Q3, better in Q2, not only for NRE but also for mass production, that's our operating target. Each quarter gradually increase.

[Johnny Shen, executive]

Is there any questions. Okay. If not. Thank you for today's -- for joining today's meeting, and thank you for your continuously support for -- to Alchip. Thank you.

Thank you very much.

[Daniel Wang, executive]

Bye.

[Johnny Shen, executive]

Bye. Take care.