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Alchip Technologies Ltd
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[Audio Gap]
Spent a lot of money for 7-nanometer, 5-nanometer and also packaging related R&D investment.
Yes, we are one of the TSMC VCA member value chain aggregator. We are owning a few VCA, can do the service worldwide for TSMC.
Yes, next page, please. Yes, Alchip is doing the ASIC business since we found the company. Yes, ASIC market is very big and unique. I don't think I need to expand into detail anymore. Currently, companies focus HPC and AI area. We consider the entry barrier for HPC and AI are higher than most of our applications. We think the designs are huge and complicated, the technology.
Yes, currently, HPC and AI using 16-nanometer or 7-nanometer solution. Eventually, they will use 5 or 3 or even below.
For the first half of this year, HPC and AI occupied more than 70% of our total revenue. We truly believe HPC and AI application will continuously grow and sustain even with very reasonable margins.
Next page. Okay. Yes, let me give you a very quick recap for the first half. First half, I think we have a record-breaking first half in all numbers, revenue, net income and EPS. Compared to last year, we have a significant growth. Revenue is $105 million, 65% Y-o-Y. Both design and production post a very strong momentum. Yes, we have -- we tape-out 7-nanometer build design last quarter. The HPC demand from China customers is getting stronger. Yes, we did receive more order. Every way we receive additional order from China customer.
First half gross margins 34.1%. I think the revenue, the gross margin still maintained to a very reasonable number. Even the production revenue grow up quite a bit. For the Q2, our revenue is a record high -- quarterly record high, $55 million, up to 88 -- 8.8% Q-o-Q. The company is doing the very detailed the revenue recognition, and we have a record-breaking Y-o-Y, Q-o-Q revenue and even the M-o-M, each of the months was showing the steady growth.
Operating income reached $8.7 million, compared to last year, increased quite a bit. The revenue weight between NRE and mass production, I think pretty much half and half, similar to the first half. Yes, one is -- another drawback is to be conservative so we can write off $400,000 from 1 of our investment. I think later on, Daniel can explain into detail.
So that's a quick recap for the first half. The rest of the section, detailed number and table, I will let Daniel to expand. And later on, I'll come back for the future outlook.
For this page, this is the second quarter result and the first half numbers. For the second quarter, the total revenue, as you already know, the total revenue is a single quarter record high. The revenue is $54.9 million in the second quarter.
The gross margin, as Johnny mentioned, compared to the second quarter last year, the gross margin is relatively lower, but that's because of the product mix for last year, the second quarter's NRE percentage accounts for more than close to 60% of our total revenue. For this year, the second quarter, the NRE revenue accounts for about 45% to 50% our total revenue. So as a result, the operating income for the second quarter alone is $8.7 million and the net income is $6.4 million.
By breaking that into detail, for the nonoperating income, you may see that our net operating income for this quarter is minus USD 180,000. That's because we write-off one of our bond portfolio, the Virgin Airline. And the total position is about $400,000. According to the news and according to [ private banker ], Virgin Australia now is taken over by Bain Capital. So if there, the future outlook now looks better right now. So if the bond price goes up or if there is any debt restructuring plan, the write-off amount will reverse to our operating income in the future.
For the first half, the revenue is $105 million, up 65% year-on-year, and then the operating income is $15.7 million, up 165% year-on-year. So now in terms of EPS, the first half EPS is TWD 6.01.
For the revenue breakdown, you can see that the HPC and the networking, actually, most of the networking are still within the HPC field. So still accounts for the majority part of our total revenue. In the second quarter, HPC accounts for 66% of our total revenue. And the networking accounts for 14%. So the niche market, the niche market, our product is mainly the Pachinko mentioned. In second quarter, it account for 14% of our total revenue.
So in first half of this year, HPC total accounts for 72% of our total revenue and networking is 9% and the niche market is 13%. The consumer has been given a decrease -- that has been decreasing to 6% for the first half this year.
And for the technology breakdown, you may see it's getting more and more obvious that the 7-nanometer technology node has already become our mainstream technology. For the second quarter, due to some DMP design revenue recognition, of course, there are some 7-nanometer tape-outs. So the 7-nanometer revenue [ assembled ] accounts for 38% of our total revenue in the second quarter. So if you combine the 7-nanometer, the 15-nanometer and the 28 nanometer, these 3 technology nodes combined accounted for more than 90% of our total revenue for both second quarter and for the first half this year.
For the regional breakdown, in second quarter, you see the Japan from 14% to 21% because we realized a DMP milestone. And of course, the Pachinko shipment keeps on doing very well. For China, accounts for 51%, mainly contributed by the HPC products. And for the others, you may see the others keep on growing. I would say, North America is the major -- this is a major region for this item to grow.
So in the first half, we think our regional mix is quite reasonable. China accounts for 56% and Japan accounts for 18% and Taiwan accounts for 5%, while the other region accounts for total of 21% of our revenue.
And for the industry and the company outlook. Again, I guess many of you have already read it from the report or you already have a conversation with me that the China HPC IC demand is still strong. The China IC localization trend keeps on going with increasing demand from the HPC customers. Our biggest and the second largest customer, we see picking up momentum from their demand. And therefore, we expect the HPC-related IC projects, coupled with the 7-nanometer shipment to start in the fourth quarter, will drive our second quarter revenue. So all in all, for this year, HPC for the process project, they are the major growth driver for the whole year.
And in addition to existing customers, we see many, many opportunities from new customers. We -- as Johnny mentioned, we almost received RFQ every week. So we are now in close discussion with our potential customers to see -- to pick up the projects. And of course, we have our priorities for those projects. And we don't see the demand to be weak in the near future.
And therefore, AI demand in North America, it still remains good. But given the coronavirus pandemic, the business development pace is kind of slow. So we are trying to -- we are trying very hard to get more business opportunities and to speed up the pace of our business.
And the good news is we expect our first 7-nanometer project from new customers in North America region to tape-out in the second half this year. And as confirmed, we won a 5-nanometer design for 1 big North American customer.
And that's the quick briefing about our second quarter. So now we would like to enter into the second Q&A session. So please use the raise hand function. And again, I can unmute you or you can unmute yourself but please, because it's an online conference meeting, so please use the raised hand.
Okay. Szeho, please.
Two questions from my side. The first one, regarding your overseas ASIC customers, I think a very strong NRE momentum. But could you share with us the volume prospect for those customers?
Okay. For the volume, I would say, for the quarterly guidance, I have told that we will have slightly to mild quarter-on-quarter growth for the first quarter to third quarter. Now this guidance remains unchanged. We -- our third quarter total revenue will still post reasonable growth.
The mass production demand is quite strong, especially for the server. So I would say, the momentum in the quarter is still maintained. For the fourth quarter, we may see a relatively significant quarter growth in the fourth quarter because our second largest customer will start its shipment, the 7-nanometer positive shipment in the fourth quarter. Total momentum is good.
Right. Okay. But you're going to raise your full year guidance because it looks very conservative, right, based on the first half momentum and that we just extrapolate that [ easily ] achieve your full year target?
Okay. Yes. Yes, I actually would like to, but they still have some dependency. Actually, the most challenges at 7-nanometer is capacity. As long as we can get -- continuously receive reasonable capacity from TSMC, we love to increase guidance drastically. But right now, I think that's the biggest uncertainty and so bad for us.
Luckily, even with the 16-nanometer demand, we still augment our guidance, the number of guidance. Recently, TSMC gradually gives us some capacity on 7-nanometer. I think that's good news. Once we confirm received, I think I will work with Daniel, maybe we can increase the guidance accordingly.
Yes. Yes. Of course, I understand that $200 million yearly revenue, now it seems very conservative. And according to our guidance, we are very confident that we will...
Overachieve.
Yes, we will overachieve the $200 million. But how high we can achieve, I would say, okay, 10% is a reasonable guess, but it has dependency. So I'll work with Johnny to set up a new guidance for investors.
Okay. Great. And for the 5-nano design, could you give us more color what type of products are you working on? And when we should see the NRE kicking start?
Okay, Johnny?
Okay. So 5-nanometer, as you know, whoever doing the 5-nanometer are very, very big company. We are under strictly NDA to not disclose their projects back and also schedule and those kind of things. I apologize for that. For this North America 5-nanometer design won, we have to keep for ourselves for a while. But just to share another good news with you, I think we are working with -- we are about to win another 5-nanometer. So this customer is relatively open. Yes, once we won, we can share more about that design, too. So 5-nanometer, I think, in terms of NRE compared to 7, we're seeing the significant amount increase.
You mean the project value, right?
Right.
Okay. Great. And for the second 5-nano project you're talking about, is it a Chinese customer or also [indiscernible]?
No, no, no. It's in EU region. European customer.
Okay. Okay. And what type of product, can share?
I think it's HPC and AI also. Yes, China customer, I think our current 7-nanometer customer all has [ allowed might ] go to 5, for sure, not this year.
Okay. But next year, any chance?
Yes. Next year, I think they have to kick off. They have to kick off.
But do we have enough engineering in place? Yes, because it seems like that's one of our bottleneck, right?
Yes, you mentioned about the 2 biggest challenges for the company, capacity and capacity. One is TSMC wafer capacity, the other is our design capacity. Yes, we try to increase our capacity as much as we can. But right now, I think the design is successful, I think, supporting customer well is the #1 priority. Increasing design efficiency and trying to utilize our design capacity. I think that's the thing we are doing almost every day.
And also beauty contest, whatever the project coming sales bring in, we have to select wisely right now because our capacity is kind of limited. You're right.
Okay. Charlie, please.
Congratulations for very strong results and execution as well. So I guess you are now getting some good problem, right? I mean customers knocking your door, but you may not be able to service all of them. So my question, you said, where can they go? I mean do you see any other industry peers, competitors that can get these projects? And if that the case, does that mean that your industry peers will also grow and then learn from those HPC projects in the future? Can you comment on these fronts?
Yes, to answer your question, yes, capacity, we are facing a very challenging limitation. I agree with you. I don't think customers are waiting for us. If we cannot take it, they have to find other solutions. And at this moment, our priority will be the same. Serving the existing customer is the #1 priority and serving the big man, whoever has a bright future, sustainable business is our second priority.
And other than that, I think if a customer wants to -- we do not have enough capacity for that, in usual case, we will refer -- we consider it's a more reliable partner or a competitor for them.
Yes. The ASIC market grow quite a bit. I don't think -- for sure, I think our competitor or other partners will receive some business flow over from us. That's the reality.
Okay. Next question, I guess, for new investors are overly confident about your customer concentration. I guess now your top customer may account for maybe 40%, even 50% of your revenue.
So I guess 2 part of questions. So first of all, how does company confer to investors that those local CPU or supercomputer projects wouldn't break that rule of the U.S. export regulation? And second question is more long term, right, when that China CPU customer becomes larger and larger, whether they want to build their own design team and become TSMC's direct accounts or vice versa, TSMC, we want to open to them to service this account directly and skip the design service. Can you address those concerns?
So Daniel, do you want to go first?
Okay. Sure. For customer concentration, of course, you know that FEITIAN is now our biggest customer and is the most important customer, accounts for like around 40% of our total revenue. This customer, we expect in the second half or next year, their revenue contribution will still be strong. But our second largest customers, as long as the 7-nanometer start to begin the shipment, we believe the percentage for the second largest customer will quickly pick up.
So if you consider the first one and the second one, I think the percentage-wise, we don't worry about too much the concentration to FEITIAN. And you may also think that for the AI customers, as I mentioned many, many times, that we believe the 7-nanometer will be the major battlefield for the AI application. We have multiple AI application customers. And their 7-nanometer projects most likely will start to ship in the second half of next year as long as [ lows ] AI customers shipment begin. I think our customer mix will be more balanced in terms of the growing pace for [indiscernible].
Okay. And I guess, does it -- yes, Johnny, please go ahead.
All right. I think Daniel is right. I see a stronger and stronger forecast from this particular customer. But we're also doing the calculation starting from next year, even these customers' demand increase, but the weight overall percentage concentration will decrease starting from next year.
Yes, in the other words, just like Daniel mentioned about other account production pick up, I think it's also very significant. Yes, another few customers in China and also a few customers in other regions I think pick up quite a bit. So next year, you can see the concentration for a specific customer will decrease, even their revenue increase.
So to answer your second question is U.S. export control and also TSMC are concerned. I think this one -- this company focused on the data center and also the CPU is a pure consumer-related product. We've been converted over and over again. It's very clean. But everybody knows the trade war tension keeps increasing. To be honest, that's better for the company. Both from our point of view, also from a customer point of view, also from TSMC point of view, the current core operation scheme is much better.
Yes, we draw less attention. Trade war, I think the balance FEITIAN plate goes through Alchip to do the physical design, and then we place the order to TSMC. This kind of relationship, I think for sure, we will sustain. Yes, I don't think customer at this stage will try to approach TSMC directly.
Okay. Fair enough. And then last question, and I will get back to the queue. So Johnny, we've never seen that the ASIC defensors business model can growth so fast, right? So long term, what was the kind of the revenue scale you can envision based on the current trends? And what would be kind of a key risk for you to get there? So I know this year company is shooting for maybe slightly over USD 200 million, but let's talk about what needs to happen for you to get to like USD 1 billion revenue scale? And what would be the key risk?
Okay. Yes, I think right now, when we talk to customers, we're always thinking about the win-win situation. To be honestly, the customer is also doing the very detailed calculation. They're only doing 1 or 2 chip a year. If they want to build up a very strong team and acquire very expensive EDA tool and also try to sustain all the employees, and it's very costly. And we always tell -- they also agree and also intensive design capability and outcome, our company tape-out 20 to 30 design every year compared to a customer doing by themselves like owning [Technical Difficulty] capability and also knowledge accumulation is totally unmatched.
So as long as our margins are reasonable, customer in a safe zone, I believe our business will sustain and grow. Yes, because HPC and AI, unlike a consumer, most of our customers are highly profitable. So even with certain margin to Alchip, they still have maintained significant growth on their side. So obviously, whoever doing HPC and AI are giant company, social media company or the very big company in China. I think our -- even with our margin, they still thinking about the value we provide is justified.
So if we can keep accumulate the customer, maintaining the existing customer, so that's why I say #1 priority is existing customer. If we can continuously adding more customer, so revenue growth, I think, is expected. And HPC and AI demand, we can say is getting higher and higher, hopefully. I'm not saying shooting $1 billion very soon, we can say we are year-over-year, we have a reasonable growth.
Haas from Credit Suisse.
Congratulations on the good results. I just have a couple of questions. And the first once is regarding your existing customer in China for the CPU business. Recently, they have the product launch event and mentioned that they have the go to long-term 40-nanometer products by the end of this year. Will those projects outside TSMC still be your business with this customer? Or do you think there's any risk that you could lose share in this customer?
Okay. Yes, Haas, I think you're doing your homework -- you're doing a very good homework. Yes. This customer has recently had a big announcement on their future roadmaps. 14-nanometer, yes, it's not belong to TSMC. Yes, as you know, due to the trade war tension, most of our China customers thinking about their local supplier chain.
So I think they all consider, most of them, they have to consider the local foundry. So for this particular customer, we have a very tight relationship for more than 10 years based on they been approached us many times. Based on our suggestion, in terms of PPA or even in terms of costs, using TSMC solution is the best, they understand. And if due to any reason, they have to go to other foundry, yes, for sure, that will be also our business.
Yes, we will recommend the best solution for our customer. So far, we always consider TSMC in terms of PPA and price. If they insist, go to other foundry for other -- due to certain reason, I think serving the customer is our #1 priority. Yes, I hope that answers your question.
Okay. Haas, I would say in this way that I know FEITIAN announced enrollment. For the 14-nanometer, they announced the 4 projects for 14-nanometer. 2 of them are for notebook and PC and 2 of them are for embedded use -- embedded application.
For embedded application, that's for, I would say, that is also a new area for FEITIAN. And due to some reasons, we may not consider to take this project. But for the 14-nanometer within the PC mobile category, we believe because of the technology, because maybe of the [ year rate ] and because maybe of the chip efficiency, their product line in TSMC will still be their major product line. And there will also be the next-generation ship to tape-out in TSMC for 16-nanometer and the 7-nanometer.
So we don't worry too much about the current chip announced by our customer. But in the future, as long as mix technology picks up, I think of course, we have the ability and we have good relationship with our customers. And of course, we have opportunity to get involved in this business.
Yes. That's very clear. So with China foundries' limited access in the [ advanced nodes ], you don't think, at this point of time, you don't seem too much concerned that they will -- FEITIAN will ship mainstream server and PC business to other countries. And even in the future that SMIC can pick up the advanced capacity, you still have the capability to design in that foundry and working on other projects as well, right?
Yes. We have the ability. And okay, our stance, we are not in a good position to comment on the foundries. I can just tell you that TSMC is a very respectable company. Their support, their flexibility, all of those categories are the best in the industry. So of course, TSMC still will be our major foundry in the future.
Okay. That's very clear. So my follow-up question on the China customer would be your new opportunity. Could you discuss more in detail on the new customer opportunity in addition to the current CPU customer in China? Which applications and which nodes? Could you also share what is the time frame for those new products?
Johnny, you go first.
Okay. Yes, this is a particular customer. I think they are doing the data center and HPC-related application. Yes, for sure, it's 100%. It's very clean. But due to the trade war tension, they try to keep a low profile. Yes. So please bear with us. I know the volume will increase. We are under NDA. We don't -- we cannot disclose too much about this customer. But I think the number picked up quite a bit. And so Daniel and I had to share the existence of this customer because that will be -- that become our #2, very quick.
If 7-nanometer capacity is not the issue, then starting from next year, I think they are quite closer to FEITIAN. But unfortunately, I cannot share too much about this customer.
Okay. And Haas, for your question. I will say okay, you may pay a little bit of attention to the trend that in addition to HPC, the processor of the CPUs and the networking ASIC, you may think about what China wants the most. First of all, the CPU and maybe the storage IP and of course, the DRAM. Those ICs are -- accounts for the majority part of the IC consumption, and there is another missing part, the GPU. I would say, maybe in the near future, there are some design opportunity for us to get into the GPU supply chain.
.
Okay. Yes, that's very clear. And my follow-up question is on like the NRE content, the value you get from a 5-nanometer project versus 7-nanometer projects. Could you quantify it or just like a percentage increase for 5-nanometer versus 7-nanometer?
Okay. To be honest, at this moment, the VCA member hasn't doing any formats tape-out for 5-nanometer yet. TSMC are also working on the program with us on the 5-nanometer NRE. We don't know the precise number, but based on the trend from 16 to 7, from 28 to 16, initially, 5-nanometer will be very expensive. I'm not surprised, will be 2x compared to 7-nanometer.
Okay. Then when it turns into like mainstream, though, how much content gain would you -- you can get compared with the historical experience?
TSMC, we are doing the NRE reduction every year. So the precise number, I'm not -- it's not appropriate to share at this stage.
Okay, I can offer you a range, but the range is very wide. I would say 7-nanometer, the total NRE contract would be around $20 million to $40 million.
Not including the IP and also how many layer of a mask customers need to use.
Okay. $20 million to $40 million per project run?
7-nanometer, yes.
No, no, 5-nanometer.
Okay. Yes. Just a few more follow-ups. On the margin outlook, could you share more detail on the NRE versus turnkey trend for the full year in the second half? And for your full year gross margin outlook, could you also provide an update, since it seems that you will have multiple NRE of 7-nanometer reaching milestone and you may recognize more NRE revenue while the server shipment is also going to rev in fourth quarter. So I was just wondering if you're updating any margins on guidance.
Okay. For margins, the guidance remains the same. This year, most likely, our gross margin will be in the mid- to low 30s. And you can see the first quarter and the second quarter. And for the third quarter, the NRE percentage will be a little bit higher. So we expect the third quarter gross margin will be higher compared to the second quarter.
For the fourth quarter, as mentioned, the 7-nanometer shipment begins and production revenue percentage will account for even higher. So all in all, I will say the gross margin percentage will peak in the third quarter. And then for fourth quarter will be a little bit lower, but for all in all, the mix, the gross margin for the whole year will be in the middle 30s.
Yes, That's very clear. My last question would be on the investment write-off. Could you share more detail on that?
[ I just think investment... ]
Investment, the bond write-off.
Okay. The bond is Virgin Australia. The portfolio lacks the private banking provided to us. As you know, because of the coronavirus, all the airline companies are now in bad shape. So for Virgin Australia, we -- actually, we did invest in a very conservative approach. So for this bond -- usually, we bought a bond -- we bought a bond for $1 million each, but for this bond, we only bought for $450,000. So in a conservative purpose, we write down all the amount we hope on Virgin Australia. So yes, that's the detail.
So Chi, Please.
So which private banking? No, no. I'm just kidding. So my question is actually about your supercomputer projects. I know company win several awards for your customer, those top 500 supercomputer competition. So I'm not sure how we can predict those supercomputing revenue stream because it seems like it comes like every 1 or 2 years or 2 to 3 years. But coming to the 3 years, do you expect more supercomputer projects to come? And which region do you see more demand?
Okay. So this company receiving the Green500 award, it's called Preferred Networks. The reason I can mention about the company name, because we have a press release with them a month ago. Yes, they are doing the HPC and also AI with some very talented people. Preferred Network right now is the #1 Japan AI company.
To be honestly, I don't think the volume, even they are receiving number one, I don't think the volume will be too big, and because of the chip size and also the Japan market. Currently, we are working with this customer on the next generation 7-nanometer. But because of this winning, a lot of customer in U.S. and also in Europe and also in China approach us because the press release, they know we can do.
So I think the winning this Green500 or top 500 does bring us a lot of new opportunity. Right now, we have more chance to select the right customer, I think feeding our goal. Preferred Networks [Technical Difficulty] if we have a chance to go through that detail, I think that's a very unique design.
Okay. So Johnny, I think you mentioned you want to prioritize the existing customer. So for a Preferred Networks, since you are more open to talk about this customer publicly, when do you think 7-nanometer can start to kick in, contribute your NRE?
Yes. In fact, 7-nanometer already start. We plan to tape-out sometimes next year.
Okay. And then follow up on this question. I know your China opportunity is much bigger. As you just described, its revenue size could be very huge next year. How about those Japan customers turnkey or mass production revenue? Why you cannot be -- speak of those China customers?
I think because of market demand, we frequently see some opportunity on supercomputer in Japan. But based on the track record, the volume is not so significant. But Japan, we have other approaches. I think later, if we have a chance, we can -- I can expand into detail for you. Yes, last time we announced one of the [ gen council ] win. I think that's a significant win from Japan.
And Japan, there's 2 areas, I think, it's produced a very reasonable market share and volume: One is the camera; the other is the multifunctional printer. So even they are not HPC and AI, but in fact, we do receive certain RFQ on these 2 areas. Hopefully, we can win.
Okay. And lastly, also on this supercomputer project. I know you -- in the past, you also did a some project for China customer, and next year, I would assume the second largest customer is also related to supercomputer. But from what we can see over the past 2 years, U.S., they kind of put those supercomputer as one of the items they will watch closely for the technology export. I think those of these including AI, [ civilian ] supercomputer, also quantum computer. It seems that supercomputer is in that list. Do you concern it could be a big risk for you into next year?
Yes, for sure, there's a risk, but I think the volume and also based on this trend, a majority of our revenue is from data center and also CPU type of design. And that will -- even for those application can give us revenue growth into a certain degree. The supercomputer, so far I think it's R&D. We did not see the tight restriction from supplier and also from -- for example, from TSMC.
Every time we receive the RFQ, we will sit down with major foundry, with the TSMC and make sure we can take those kind of projects. So they have -- they also have -- they also police our design win. So I don't think in the short time -- in the short period, there is a certain tension on that area. Yes, Daniel, do you have anything to add?
Yes. I mentioned many, many times that I would say, TSMC is the gatekeeper. And until now, we don't hear anything about concerning the projects for our customers.
So in the real business practice, would you ask your foundry partner or lawyer to consult the U.S. Department of Commerce per activity to have some clearance?
Actually, TSMC did that.
We will, we will.
Okay. Haas, are you asking -- trying to ask questions? No. Okay. If anyone there wants to ask questions about our company -- okay, Szeho, please.
A follow-up. Actually, would the company consider to start building up their internal IP library?
Yes, let me try to answer your question. I think we have everything. Team size is not small. But again, my principle remains the same. We are only doing the IP [indiscernible]. Yes. As you know, a lot of leading-edge technology on the packaging side or even on the driver side, they don't -- it's very difficult to sourcing the IP from existing partners. We have to do it and customize for customers. So we're doing the IP is to enable the business. The company will not get into the pure IP business. We are highly rely on partner.
Yes, as I mentioned many times, the leading-edge technology requires tons of IP. There's no way for the company like us to prepare all IP for our customer. We need to rely on partners. We don't want to compete with the partners.
Okay. True. Yes. So you will be very selective even if you really want to build some IPs?
Right, right.
Okay. Charlie, please.
Yes. I want to follow Szeho's question. Yes, because we -- I think you guys also hear that there is some concern about your HBM2 implementation because there is something that EDA tool that they can supply now. So it has to be -- it depends on the design service capability to employment. So how confident are you on this HBM2, this kind of IT -- those kind of design service? And also -- so can you take this question first?
Okay. Yes, I know there's some saying about our HBM design capability. In talking to the customer, we never encounter this kind of problem. We have a few existing customer using HBM. One of them will be tape-out soon. And we have at least 4 to 5 pipeline customer who are using the HBM solution. And I consider all of them are satisfied with our solution and proposal.
So I think once the HBM design hitting volume, I think that we will ease all the concern from outside. So right now, I don't think any showstopper from our HBM2 solution.
China customer, Euro customer or U.S. customer, we all have our HBM2 customers there.
Okay. And another follow-up is about your AI ASIC. I still remember, over the past 3 years, there has been some delay not just at your company, but also your industry peers as well, because those AI ASIC need a lot of time to verify, to do those field tests. So do you think those AI system customers, they will also see this delay risk in the coming years or have they already figured it out? So going forward, those AI projects will be on track?
Okay. Yes. To be honest, we're doing a lot of AI, but in terms of production, AI does contribute just a little bit. And -- but even though AI story and AI trend is not gone, we see more and more demand even without volume, but we see more and more demand [Technical Difficulty] appear.
Starting from next year, I think the situation will be much better because one of our AI company in U.S. already in volume production, I think their volume is reasonable. Another Europe company recently, they just sell to the U.S. customer, I think their volume will be pick up next year. So hopefully, the AI contribution starting from next year will be -- will increase a lot, hopefully.
Okay, here is a question from [ Eunice Barritz ]. Could you please briefly comment on how you are constrained in terms of capacity and how you optimize the capacity allocation? Johnny, would you like to go first?
I believe the capacity is for the design capacity, right?
Yes.
Okay. Yes, like I mentioned before, our demand is much, much more than we can supply at this moment. Yes. So our priority remain the same. Serving the existing customer is the #1 priority. I don't think we have a problem to support our existing customer.
The new customer, when they come in, we have to do the beauty contest. Beauty contest angle, I think it's a straightforward. Either this customer has a future and business are sustainable or they can immediately give us a certain profit. So I think the selecting customer is very painful, but it's straightforward.
And in the other world -- in the other way, we increase third-party very aggressively. Like I mentioned before, by the end of this year, we'll have 500 people. We can support 20 projects in parallel by the end of this year and also increase the design efficiency. We have one platform, yes, can reduce a lot of unnecessary resource. I think that's a one -- one of the area we're doing -- we can say we're doing better than our competitors, design efficiency, and I think the detail of distribution, I think, is a long story. I'm not going to disclose it at this stage. So right now, capacity is growing. In the meantime, we have to select our customer wisely.
Okay, Eunice, in simple talk, I think your question will conclude into the engineering capacity, the engineering efficiency and the engineering flexibility. So for the capacity, we are doing aggressive expansion. As Johnny mentioned, we will hire new engineers and train them to do the design for us. And for the efficiency, we are trying to build out the platform, and we are trying to separate a high-level design and the low-level block design and to allocate the low level to the entry-level engineers and to allocate the more complicated or the leading things to senior engineers to improve the efficiency.
And for the flexibility, also, we are looking for and we already have some outsourcing partners. We can outsource or they can in-source to our companies to do the low level design -- block design for us to expand our total capacity.
Okay. That's -- I think the time is limited. This is -- this could be the last question. [Foreign Language]. You can ask a question now.
My first question is regarding to your second business company because I know you cannot mention the name, but I remember I asked about revenue contribution last time in the last conference. And I believe that, Daniel, you guided for the second big company will contribute around USD 8 million in fourth quarter. I'm wondering, are you still seeing this number? Or are you seeing a little bit more than $8 million in fourth quarter?
There will be upside, but it depends on the capacity support by TSMC.
Okay. Got it. And I just want to double-check that. You mentioned that this company will -- the revenue contribution will get like -- or get much -- will get like equivalent to FEITIAN in next year?
I won't say equivalent, but the percentage and the absolute contribution will pick up very quickly in the first half next year.
Okay, okay. Because your -- FEITIAN contributes about 40% of your total revenue. So just when will it reach around like 40% -- I mean like 20%, maybe?
Yes, 20%, we are pretty confident.
Got it. Okay. And I also want about ask about FEITIAN. Can you provide any updates on FEITIAN's 3 project? I know it has server, PC, and you mentioned about HPC last time. So can you provide any update on FEITIAN, especially in 7-nanometers, in server and HPC? When will the NRE kick in or when will the mass production kick in?
Actually, recently, we received great pressure from our customers. They don't like us to talk about too much about their budgets and especially the schedule, the kick-off schedule, the shipment schedule. We have been trying very hard to let investors understand the future trend for some specified projects and schedules. Now we -- it's difficult for us to go into detail. Yes, please understand.
Okay. I see. Also, another -- my last question is regarding to -- I'm just curious like who will be your third biggest customer in next year? Because -- would it be a Chinese customer or would it be a U.S. customer like [indiscernible], as you mentioned, that's this year, or Amazon?
Yes. Hopefully, it will be U.S. customer will be our #2 or #3, next year.
Okay. Is it going to be [indiscernible] because I know the company sees the chance next year will be very great regarding the PCIe Gen 5, right?
Yes. I think there are 2 particular customer you mentioned about it has a chance to contribute more to our company.
Yes, we don't have the numbers of forecast for next year, currently. So we can only say that we put high expectation on several customers. First one is the technological customer, China customer right now. We are pretty confident its contribution will pick up very quickly. And for the other customers, of course, for those AI companies, like the U.S. AI customer and the European AI customer, we do believe that in the second half next year, the shipment contribution will be very good. The expectation is high, but we cannot confirm the numbers right now.
Last question, really the last question. E. Soon, can you say your name and company first? E. Soon? E. S-O-O-N?
Sorry, I forgot to unmute. It is Elizabeth Soon from PineBridge. I'd like to ask very simple questions. I understand the founders' shareholding is actually quite low in the firm. Any options for the -- either the engineers or senior management, so there is less likelihood of them moving on to other competitors?
And secondly, if I hear correctly, because I was late to dial in, I understand your -- you had an investment, is it correct, in Virgin Australia that you have made a loss. What is the future investment rationale in terms of usage of funds? And do we expect investments beyond their own businesses?
Okay. We keep all the investment related question aside. I think -- or Daniel can comment on later. In terms of employee loyalty, I think that area is -- our company, we've been the most proud of in that area. I think our company is 17 years old, but we have engineer working with us for more than 15 years, I think, total about 50 people. And people working with us for more than 10 years, it's over 100. So in terms of loyalty, I don't that's our biggest concern. And they're all satisfied with our current performance and also they own -- all of them own piece of the company. So I think this trend will continually grow.
Yes, we do encounter some problem when we try to hire a new college grad. But I think in China, relatively, we are the only company, we can do 5-nanometer and 7-nanometer. I think it's not -- we don't encounter much problem to attract the younger. So I think employee loyalty and stability, I don't have too much concern.
Okay. For your question for the bond investment, actually, we have done the bond investment since year 2015. The portfolio in the beginning is about $20-something million for the whole portfolio. But we are a conservative company. We keep on shrinking our portfolio scale. So far, the total portfolio scale is about $10 million to $11 million.
And yes, most of the target companies are provided by the private bankers and of course, unfortunately, the airline company. The original thought is Virgin Australia is a very famous company. And it's the second largest airline company in Australia. So we think that this company is relatively safe, but because of the virus, I guess no airline company is safe right now. But fortunately, the position is not high.
And secondly, the Bain Capital has already taken over this company. We expect there will be a future reverse amount of the write-off.
Okay. But do we assume that there will be more investments from the $10 million or $11 million?
No. No. No.
I mean in other stocks, I mean. Not in Virgin, right? Other stocks?
Not stocks, bonds. We only invest in straight bond, straight corporate bonds. We don't have a plan to expand our portfolio.
And I guess that's the extent of the investor meeting for today and for the second quarter. So if you have any questions in the future, please, you are welcome to contact me. And if I have time, I'll be more than glad to answer questions or have a con call with you. Thank you. Thank you for joining today's meeting.
Okay. Thank you very much. Thank you very much. Thank you.