Alchip Technologies Ltd

TWSE:3661

Earnings Call Transcript 2022-Q2

[Unknown Executive]

Okay. It's 2:30. Ladies and gentlemen, analysts, portfolio managers, welcome to our second quarter institutional investor conference meeting. [Operator Instructions] And today's meeting will include the second quarter operation review, and of course, financials. And then, we will have the operation outlook for the second half this year and a little bit about the outlook in 2023.

Okay. Again, this is the Safe Harbor disclaimer. And this mainly will be English, and if you need Chinese presentation slides, please go to the marks [Foreign Language] to download the Chinese version. [Operator Instructions]

So the video and audio content of this meeting will upload to marks. It may takes about 2 to 3 hours for my colleagues to do so, so please be patient. You may download the video and audio from the marks around, like, 5:00 a.m, 6:00 a.m this morning. Thank you.

So in the beginning, I would like to invite our CEO, Johnny, to do the opening and a very short introduction, and his message to the investors.

[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 Q2 results and provide a guidance for future business.

In case some of you are not very familiar with the Alchip Technologies, allow me to provide a brief company update. Our company is founded in 2003, and IPO in Taiwan Stock Exchange 2014. Our current headcount is approximately 600 people, 3/4 of us are engineer. Since we found the company, we've been successfully tapeout more than 480 designs. Revenue number, 2020, we are achieving $240 million. Last year, $372 million.

Current capacity, we can support 30 plus design in parallel. So far, a majority of our revenue are coming from HPC and AI area. We are one of the TSMC BCM member, can distribute latest technology from TSMC to our end customer.

Yes, quick recap for the first half number. We can say we have a fairly acceptable Q2 and first half revenue. Even though our revenue is kind of flat from year-to-year standpoint, but the good news is that we do have a record-breaking number in all categories including revenue, net income and EPS. Revenue number is $195 million, net income of $30.5 million, EPS NTD 12.3.

Our HPC mass production demand remained very strong. The main cost of relatively flat revenue is due to capacity limitations. As I mentioned before, our major product lines are in a transition period from free chip BGA type of design to 2.5D advanced packaging. The longer assembly and final test turnaround plan, plus the shortage of cohorts interposer and ABF substrate, limits our near-term mass production revenue.

For the past several months, Alchip worked with partners very closely to improve the situation. For future production on the wafer and interposer side, we receive a reasonable commitment from our key partners. On the substrate side, we are seeing more stable support and commitment from multiple suppliers. Overall, we can -- we expect to have a substantial revenue growth from Q4 this year all the way to the middle of the year to the 2024.

Alchip continuously holds great position in leading-edge technology business. We have received the most worldwide business inquiry this year. Almost all of them are in leading-edge technology, 7 nanometer or below, many demand of 5 nanometer or even 4 nanometers. It's many design win this year, we expect healthy NIE revenue growth from Q4 through next year.

Another noticeable highlight is our automotive application penetration. As you may know, many electrical car makers start to develop their own ASIC. We have been approached by many carmakers recently. Some of the design will be kicked off very soon. We truly believe starting from year 2024, automotive application will be another key revenue driver for us in additional to current HPC and AI market.

Lastly, I would like to emphasize our neutral position and diversify business conditions. Similar to our key foundry partner, Alchip will never make our own product to compete with any customer. We never make any direct investment to any customer as well. We have a fully diversified and well-balanced business for all regions including North America, Asia Pacific, Japan and Europe. In terms of headcount, we grew quite a bit recently. In addition to China, we also implemented a very aggressive hiring plan to increase our engineering and supporting resources in Taiwan, Japan and U.S. region in order to provide more efficient local support and meets customers' expectation.

Thank you. Back to you, Daniel.

[Daniel Wang, executive]

Okay. Let me do the financial part.

Actually, we -- you guys may already have the revenue numbers, and we announced the bottom line, the net income numbers last week. So let me do a quick recap to the numbers.

The total revenue for the second quarter is $101.2 million, which is 8.2% quarter-on-quarter and 3.9% year-on-year. And the operating income for the second quarter is $19.3 million, which is minus 1.2% for the decrease. And the net income for the second quarter is $14.5 million, translating into EPS NTD 6.

And for the breakdown, actually, the overall application breakdown, you may see that Alchip is still concentrated into the HPC application. In the second quarter, the HPC-related revenue accounted for 81% of our total revenue and followed by 8% of niche market and 7% of networking, and 5% for the consumer products. So in 2022, the first half this year, the distribution is pretty similar. 82% revenue from HPC-related application and 7% from niche market, and 5% from networking and 5% from the consumer electronics.

And for the process node breakdown, we were -- we can say that we are still very proud. In terms of the process technology, Alchip should be the industry leader among the IC back-end type service industry. In second quarter, 7-nanometer or even the advanced nodes like 5-nanometer, 6-nanometer, totally accounts for 69% of our total revenue. And the 16-nanometer, 12-nanometer, accounted for 18% of our total revenue. And followed by 28-nanometer revenue, account for 10% of our total. And then the rest is 40-nanometer and the more flexinodes combined, accounting for 3% of our total revenue.

So in the first half, 7-nanometer and higher node revenue accounted for 65% of our total revenue and 16- and 12-nanometer related revenue accounted for 23% of our total revenue. We can probably say more than close to 90% of our revenue this year are within the advanced technology nodes.

And thus, for the regional revenue breakdown. In order to be more clearly demonstrate our geographic breakdown; previously, we have Japan, China, U.S. and others to do the -- to do the categorization. And from now, we will use Japan, Asia Pacific, which includes China, Taiwan and Korea to -- as a category alone.

So for the second quarter, Japan accounts for 16% of our total revenue, while the Asia Pacific revenue from Asia Pacific region accounts for 39% of our total revenue. For U.S. market, you can notice that the revenue from U.S. market grow quite significantly and quickly. In the second quarter, revenue from U.S. accounted for 40% of our total revenue already. And the others include the Middle East, Europe, accounts for 5% of our total revenue.

For this year first half, U.S. market accounts for 35% of our total revenue, while Asia Pacific accounted for 41% of our total revenue. We will say that our revenue breakdown regionally will become more and more diversified sites in the second half this year and going forward.

For the second quarter business review, honestly, the second quarter revenue came as mildly lower than -- if that it. Actually, we -- as the company management, we were expecting a higher revenue for the first -- for the second quarter. But due to the constraint of ABF substrate supply caused by the yield rate issue, the second quarter, we posted limited quarter-on-quarter growth. The design demand has no problem. The design demand remains very strong and as expected. We don't see any weakening demand on sight even though the macro environment is -- the macro environment outlook is worsening. The HPC industry, the demand for HPC industry remain very strong.

For the profit margin, in the second quarter, the gross margin went down to 34.5% from the first quarter, 38 something percent. That's because in the second quarter, we have relatively fewer design revenue exposure. The second quarter, the design revenue accounted for 40% to 50% of the total revenue. Comparing with the first quarter and the first quarter, design revenue accounted for close to 60% of our total revenue.

And we will soon upload and announce the second quarter -- actually, the first half financial statement very soon. So you can have it later. And we want to address that the inventory level on our book went up because of the pouting -- pump back for the second half and the 2023 shipment to U.S. customers. I guess people who follow us, should knew that these customers keep on placing the top die orders to us, and we place it to [indiscernible]. So the inventory level in second quarter end rose to $120 million from about $38 million by the first quarter end.

And the North American customers keep on placing orders for the top die. First, the purpose is to do the preparation for the expecting surging shipment in late fourth quarter in 2023. And the second reason is we have already expected substrate supply in the second quarter, and cannot pairing up with the top die to finish the goods. So that's the two reasons for the inventory number went up by the end of the second quarter.

And for the second quarter -- for the second half '22 business outlook, the first point is we expect the impact from substrate shortage to persist throughout the third quarter '22, which means the third quarter revenue outlook should still be influenced by the substrate shortage. And we believe, according to our schedule and how working with the substrate supplier, we expect the ABF substrate supply to gradually -- the substrate supply shortage to gradually ease starting from the fourth quarter '22. More precisely, we expect the revenue to trending up mildly in October and then relevant growth, month-on-month growth in November and December.

And our current solution for the substrate supply is, first of all, we will add new substrate supplier starting from late third quarter. But since the new supply needs turnaround time, so that's why we said the impact on substrate shortage will continue throughout the second quarter. And the improving industry-wide substrate supply, I guess, maybe all you're aware that even the weak consumer electronics devices demand. We do feel some deviation from the substrate capacity allocation from the current top substrate suppliers. It will help our future supply, but not immediately. The high layer, which means 20 layers in the substrate supply industry-wide, we think it's still tight. So we work very hard to solve this issue.

And last thing is, overall design demand remains strong. The HPC-related design demand remained very strong in the second half for both China and the North American market. And as John, our CEO, Johnny mentioned, we are engaging in several project discussions with very sound customers. Hopefully, we can wield that to win those projects in the second half of this year and the first half next year. And the industry end continues, especially for the HPC application. We expect our customers, our projects, the process node technology will keep on migrating from 7-nanometer to 6- or 5-nanometer. This strength, we expect to continue at least for 2 years going forward. That's our view for the overall design demand.

And I guess that's the information we are we are sharing with the investors and the fund managers. So next session, we will go into the Q&A session. [Operator Instructions] Thank you.

[Johnny Shen, executive]

Dennis, please. Dennis Chong, please?

[Unknown Analyst]

Yes. [Foreign Language]

[Johnny Shen, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Johnny Shen, executive]

[Foreign Language]

And here, I would like to announce a thing that by discussion with the suppliers and our customers, we believe from now on, we are not going to talk about any single customer's detail and projects detail in the scheduling to the outsiders to protect our customers and our suppliers. So from now on, for the China business, we will try our best to answer your questions. But when questions involve a single customer or any particular customer or any particular project, we will try our best. But most likely, we will not answer the details for those questions. Thank you.

[Unknown Analyst]

[Foreign Language]

[Johnny Shen, executive]

Okay. [Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Johnny Shen, executive]

Okay. [Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Johnny Shen, executive]

[Foreign Language]

Okay. Let me try to add more input for Dennis's question.

Yes, first of all, the China customer. Just like Daniel mentioned before, in order, due to the variety of reasons, yes, we've been in shock. Not talking about any individual customer in China, I think that's a good practice to protect customer as a major supplier.

But it doesn't mean that our China business is not doing well. In fact, our China business, I think, Asia Pacific business are doing very well, yes. So maybe people will expect next year we have a substantial growth in U.S. only in U.S., but it's not true. I think our expectation from China and Asia Pacific customer sell a lot. We will see -- you will see the number eventually from the -- during our quarterly report. During our investor conference meeting, you will find out the revenue from AP still very, very strong.

So second question for Dennis is -- actually third question. Actually, this design industry has been existed for a long time. But to be honest, not too many competitors or not too many competitors are eligible to do the leading-edge technology, yes. As long as technology keeps improving, I think our business opportunity, we're getting more and more. As you know, NIOE for leading-edge technology are very -- getting higher and higher, very high. You need to spend at like $20 million to $30 million to do a 5-nanometer design. Yes. For 3-nanometer, 1-nanometer, I think the NIOE will be much higher. So entry barrier getting higher and higher.

The reason we get more and more business because of track record. As I mentioned before, we'll be enabled more than 30 design a year, yes. Even customers decide to do it by themselves, in usual case, each product company only have one tapeout a year. So the [ analogy ] accumulation and risk management, I think, is no match to us.

Your second question is about NTK, Qualcomm and maybe Marvell, yes, those are major suppliers. Yes, in terms size, they are much, much bigger than us. But their main focus is on their own product. ASIC is just their side business. To be honestly, the gross margin for ASIC, from ASIC are much, much lower than the product itself. For [ Marvell ], for NTK, their average margin, average margin is more than 50%, sometimes even more. But for ASIC industry, it's very difficult to get over 40%.

So overtaking ASIC business will be no good for them, I think that will bring down the entire overall gross margin. So that will not be their major focus. Their major focus is still their own product line.

[Daniel Wang, executive]

Okay. Hope we answered your question correctly.

And Szeho, please.

[Szeho Ng, analyst]

Johnny. Two questions from my side.

Yes. For 5 NRE, we should expect to kick start next year. But how about [MC NRE ]? Any timeline that you can share with us?

[Daniel Wang, executive]

Johnny?

[Johnny Shen, executive]

Yes. [ MC ], we haven't had an actual desire. We only have a few test chip. But in usual case, the beginning of each generation, you can consider that NRE is almost double at the very beginning. I think that's a similar situation generation over generations.

Based on our calculation, we will tape out our first 3-nanometer in year 2024. So near that time, I think, we have a more clear picture how much it is.

[Szeho Ng, analyst]

Okay. Right. Okay. All right.

And another question, I think it's a little bit early at this stage, but I do want to ask. For the NQ, right, NRD, should we expect a jump in R&D? Because the architecture will be very different from the previous nodes.

[Johnny Shen, executive]

Yes. I think this question, I think it's too early to ask. Right now, I think the major preparation from us is a 3-nanometer plus the package solution. Yes. As you know, the UCIE-related 3D package, I think that will be the -- another important factor for 3-nanometer, yes. So 2 nanometer, we haven't -- even our foundry partner, yes, haven't shared any detailed information to us yet. But we do have a preparation for 3-nanometer.

[Szeho Ng, analyst]

I see. Fair enough. Yes.

And then at the beginning of the presentation, you mentioned the company is that -- breaking into the automotive market, right? So I just wonder, what would be the chips representing at the [ beginning ], is it their core chip or the companion chips?

[Johnny Shen, executive]

Yes. For automotive application, I think people are approaching us for two different areas. First of all, is the ADAS-related autonomous driving chip. That one, I think we'll use the most leading-edge technology. Actually, the industry also changed the term, we call automotive HPC. Yes. The architecture is quite similar to the existing HPC, but the support effort will be much higher in terms of quality, in terms of order logistics, yes.

Another automotive demand is from data center. As you know, in order to provide like more sufficient driving instruction, each of a car maker have their own data center, yes. Like Tesla, like Rivian, they have, I think. We have an opportunity for both areas.

[Szeho Ng, analyst]

It's more compute-related chips, right?

[Daniel Wang, executive]

Yes.

[Szeho Ng, analyst]

I see. Okay. Great.

And last one. For this year's revenue guidance, any update? Are we still sticking to the $500 million current revenue target?

[Johnny Shen, executive]

Daniel?

[Daniel Wang, executive]

Okay.

Previously, we did guide $500 million revenue target for this year. But on that time, we are very, very confident that because I'm putting many buffer into this target. But for now, to be honestly, because of the substrate supply shortage in the second quarter and third quarter, I would say for the $500 million guidance, I'm not giving up this target now.

If we can achieve the profit -- achieve the target or not depends on the, first of all, the substrate supply in the fourth quarter. And secondly, the cohort was coming a long time. We are trying very hard to win the schedule and the output for substrate, and we are also trying to work with TSMC to shorten the cohort's come-along time from currently 6 weeks to 4 weeks. And if everything goes very well, I think we still have a chance to achieve $500 million.

But even we could not achieve it, we -- I believe we will be not far from these numbers.

And Charlie, please.

Charlie, you can unmute, but yes.

[Charlie Chan, analyst]

Johnny, Daniel.

So my first question is about your automotive HPC opportunity. I'm not sure whether the turnkey lead time will be much longer, right, because the auto chip usually needs a very long time to build a qualification. Maybe it's coming as this relative experience to -- for the auto chip?

[Johnny Shen, executive]

Yes.

Charlie, you are right. The turnaround time and also the qualification procedure are much, much more complicated than the regular HPC. That's why I say starting from 2024, we will see more significant revenue contribution during that time.

And for the design, we are about to kick off. The tapeout will be in the middle of next year, yes, the 2023. So the real volume ramping up will be a year later. Yes, your calculation is right. But I think it's the right time for us to do all the preparation in parallel with the design.

[Charlie Chan, analyst]

Okay. Yes.

And yes, I'm wondering why Belgian -- I mean, for U.K. sensors compared to, for example, Broadcom, probably they have a related experience. And if you look at the -- it's a public information, right? Tesla, they use the nano sensor for 7-nanometer and also 5-nanometer ASIC service. What is Alchip's advantage to compete with those design service peers for the automotive market?

[Johnny Shen, executive]

Okay.

So first of all, like I mentioned before, because of our neutral position, yes, we never make any product to compete with any customer. Qualcomm, Samsung, Avago, I think they make their own products, sometimes they are complete each other. And if you want to do the ASIC, go through those partners, I think they may have a concern. Eventually, this kind of information will leak to their own product or other customers.

And so for -- within Alchip, I think we don't have this kind of -- we don't have any -- customer won't have this kind of concern. And also, we are much smaller and flexible. Yes, the supporting ASIC will not be their main focus. But going through Alchip, I think that for sure, they are our Tier 1 customer. Yes. We will -- our support effort, I think, will be much, much better than that. I think that's from the existing customers to say.

Yes. Also, yes, our profit margin expectation is lower than them as well.

[Daniel Wang, executive]

Okay.

And Charlie, to me, I would say the feeling right now for the automotive application is pretty -- is a little bit -- A little bit like the beginning of the HPC trend. Those car makers usual -- usually don't know too much about making chips. But in the same time, they want to develop their own technology, similar with those service providers previously. So I believe in the same time, they will build up their front-end design capability by hiring or acquiring company from the market, and they have various needs and trying to do various ASIC to enable their service or the functionality of their products.

So I guess I guess, to gain control on technology is a reason for them to do the ASIC by their own. And at the same time, in order to quickly come to the market to work with the back-end service provider will be definitely a consideration for them.

So within this kind of solution, I would say Alchip has a pretty good industry position to win projects. That's my feeling right now.

[Charlie Chan, analyst]

Okay. Daniel.

And so yes, I am surprised that for -- there's a new EV company aside the big company. They wanted to own the front-end design team, so that really surprised me. So do you think that going for the design service, the industry becomes more bake-in or place and route-oriented instead of running the stack in business model? Do you think this is going to be the future trend?

[Daniel Wang, executive]

Yes, I think it is. I think -- okay, for everybody's security including you and me, that we all believe that in the future, the technology feature of a car is one of the major competitive things for them to win customers. And especially for those EV makers because for the EV market, even though now Tesla is the biggest, but there are a lot of new competitors.

For the new competitor, if they knew that they had to be, at least the technology leading or to provide new technology features to their customers or to their potential customers. So I think based on our feeling or discussion, almost every carmaker, EV car marker, are very aggressively to do similar seats, which is ASIC.

[Charlie Chan, analyst]

Okay. I see.

And next is about your China business, right? So we see some news about the funding issue of some of your Chinese customers. Do you think that is going to impact your business next year? On the other hand, it sounds like the automotive HPC could be also a big opportunity for you China market as well, right, because China EV industry is booming. Do you see any opportunities from China for automotive HPC as well?

[Daniel Wang, executive]

Okay.

In general, I would say, yes, the [ funding ] environment in China right now is not as good as like 6 months or 8 months ago. But to us, I think the good thing for us is the startup customers we secured usually is the #1, #2 within their market. So funding for them is more difficult, but not unachievable.

So based on our experience by doing business with those start-ups, when the funding situation is getting more difficult, usually, it affects the project's schedule, which means the schedule of the project design will be becoming longer. But it only happens in a very few number of our customers in China. The majority of our customers in China, their positions are pretty good, and their funding situation is relatively much better than their smaller competitors.

So, so far, we don't worry too much because overall demand is still strong. Even though 1 or 2 customers mainly failed to follow the original schedule, we can quickly take other projects from the waiting list to fully utilize our design capacity. I think that's the situation.

[Johnny Shen, executive]

Yes. Let me that add to that.

Yes, Daniel is right. In China, actually, the -- we have so many pipeline for us to pick. In fact, I think China customer is very difficult to get our resource. We have a, presently, room to choose our own customer. Yes, in terms of -- in terms of customer selection, we will pick the one with good funding, and also the team member has best experienced, good potential. I think that's for sure.

And also, in terms of financial, everything is a prepaid, yes. So we don't have -- we will not suffer any financial risk for start-up company.

But Charlie, you are right. I think we expect since the funding situation getting tight, we expect certain consolidation will start maybe starting from early next year. I know a lot of companies already start to discuss on that topic.

[Charlie Chan, analyst]

Yes, that's very, very insightful. Yes.

So lastly, maybe I'll squeeze one question from some investors. So you also have some exposure to Japan, right? And you're also extending on the size there. Do you ever hear this coming quarter Social Next, I think it's a joint venture of Fujifilm and Panasonic. And when I think take a look at the website, it seems to have some exposure to automotive and also the consumer TV, et cetera. Would that be kind of your competition in Japan?

[Johnny Shen, executive]

Yes. So let me ask -- yes, we're familiar with the Social Next very much, yes. To be honest, they are doing quite well, especially on the automotive area. They are not our competitor. They are not owning the competitor in Japan, also in other regions, including U.S. and China.

But I think this company has been for a long time, that's not a new company. Overall, the company is not profitable, they are suffered quite a bit. And they do have their advantage because a Japanese company in terms of quality, they have a much higher reputation, so that's why they have a good penetration of automotive area. For other areas, I think we are doing much better than that. And I think in the automotive area, Social Next will be our -- one of the head-to-head competitors compared to existing competitors.

But this market is very big. Like I mentioned before, all the electrical car maker decide to make their own ASIC. Even we try to take as much as we can, I think in a short period, we can only take about 3 to 4 maximum. There are more than 10 opportunities out there.

[Charlie Chan, analyst]

Yes. So do they use the TSMC as well or the late --

[Johnny Shen, executive]

They use both, yes. For both -- for the leading-edge technology, they do work with TSMC and through our place our order from TSMC Japan. Yes, they do use for the mentoring stuff, and they use the Japanese IDN supplier as well.

[Daniel Wang, executive]

Okay. Gavin, Gavin Wong.

[Unknown Analyst]

I have two questions on geopolitical tensions.

So my first would be, I think there was news on the U.S. banning China from using get-around EDA tools. I understand that it's probably not a near-term issue, but maybe say, beyond 2025, for example, do you see risk towards a lot of your Chinese customers? Them not being able to do the front-end design, so there might not be back-end design work for you? I'm wondering what you think about that, yes?

[Daniel Wang, executive]

Okay. Johnny, do you want to answer?

[Johnny Shen, executive]

Sure, sure.

Yes, Gavin. Just like you mentioned, geopolitical tension will be always there. So far, to ban the GAA and also, if I remember right, men's sensor will have no direct impact to us. GAA for Samsung, maybe about in 3-nanometer. But for TSMC, that will be 2-nanometer. So based on current calculation, that will be beyond 2025, right?

I think about that such as a warning from the BIS. I don't worry about GAA at this moment, but we do anticipate the future more challenging from BIS. So I don't want to lease it out, but I think the -- to anticipate and also prepare the geopolitical tension, I think that will be one of the topic everybody need to pay attention.

So far, no GAA. GAA related has no impact to us.

[Unknown Analyst]

So it's a shorter-term risk by -- Yes, the risk longer term at how you're thinking beyond that?

[Johnny Shen, executive]

Right. I think those are GAA-related. EDA is mainly for foundry to use. Yes. As you know, the China foundry, their technology are still sitting at 14-nanometer, they try to make a 7. I think it takes a much longer time for them to go into the GAA technology.

Yes, for design, and we don't -- so far, it's either as A company or Z companies desire EDA tool do not have the -- do not cover the EAA -- GAA, we are not into that stage yet. Even the Tier 1 EDA maker, the desire kick is not to that level yet.

[Unknown Analyst]

I see Okay.

My second question would be on whether or not you're seeing, especially your U.S. customers or non-China customers, are increasingly asking to move projects in terms of designs, to move projects done in China outside of China? And can I also get a sense of how much of your design headcount is in China versus outside China?

[Johnny Shen, executive]

Okay, so let me try to answer that.

I think so far, we have a steady customer. Only one customer has this kind of a requirement, to not -- they are not allowed, the PRC citizen, to touch their database. Only one out of the 3. But we do have a few customer request database not saving in China. Yes. On the previous conference call, we said we already have a solution 2 years ago. Right now, our database are saving in Japan, Taiwan and China. Not moving the database to China, I think, that one is -- for us is very easy to do.

Yes. In terms of PRC, citizen, so far, we don't have -- we don't see so many requirement, but we do some corporation. Like I mentioned earlier in the meeting, we're doing more aggressive hiring in Taiwan and Japan. These are 2 regions has been stayed with us for more than 15 years. So it's no problem for us to increase the desire resource in Japan and Taiwan, which we already do it.

[Daniel Wang, executive]

To answer your question in terms of the headcount, the majority of the designer is still located in China region, but we have many subsidiaries in China. And of course, Alchip is born with the design center in China, it will not change.

But on Japan and Taiwan, in Japan, we aggressively do the hiring. We have been aggressively doing the hiring, and our Japan design engineers who usually are very senior designers, the headcount almost doubled this year. And therefore, timeline, we already have a team who can do the project independently and we are trying to extend wanting to -- two teams in the near future. That's the current headcount situation for the design chain.

[Unknown Analyst]

Sure. Just one follow-up.

On the one customer that had a requirement of the PRC citizens not touching the database, that customer, is that a big customer to you?

[Johnny Shen, executive]

No, it's not. It's relatively small. Yes.

[Daniel Wang, executive]

Okay. Dennis, asking questions through message.

The question is, if a customer research with a very successful third project, the first-generation project, the second-generation project, they will go -- they will do it by themselves and become the developed cut of TSMC. That's the first question.

And the second question is synopsis indicated expanded design service, human resource a lot. MTK is also adding people in ASIC. Do we feel pressure from those competitors? That's the question asked for by Dennis.

For the first question, the direct accounting, I knew there are some sayings or rumors on market, I would say, this way. Direct cut of TSMC doesn't mean they are not doing business with us. As you may know that Alchip originally did a lot of business with Sony. At that time, Sony the direct comp of TSMC, so they were still doing business with us. So like I said, to do business with us or not, it is not related to if our customer is to develop [indiscernible], not in account of TSMC. In order to do the back-end decide by themselves, they have to build up a certain level of capability back. Otherwise, it is not as simple that if I'm in the direct account, I can ask TSMC do all the back-end thing for us. That is not true.

The second thing is the Synopsys and Cadence question.

[Johnny Shen, executive]

Yes. Let me try to answer the Synopsys and Cadence design service.

Yes. First of all, Synopsys and Cadence will not -- will never focus on design service for sure. As you know, their current business model, IP and EDA, gross margin is 80% to 90%. They build out a design service team is only to enable their EDA tool and IP sell. So I don't think they are focused on the design service area. We think the gross margins are much, much lower, and turnaround time are much longer as well. And Synopsys and Cadence would never do turnkey. They can only do DS service. They won't touch the production as well because the production margin are even lower. So that's -- they never make any production business.

So I think the -- recently, we've been working with at least the 2 companies very closely. The -- I think they -- instead of they compete with us, I think they are willing to work with us to enable for the business.

[Daniel Wang, executive]

Okay. And actually, the sensing -- the similar thing for MTK. Actually, MTK is our customer. So in terms of -- in contrast of competition, I think we work as a partner to work with TSMC. For example, for -- well not TSMC. For MTK, the projects, production volume may be lower than $100 million per year. It is not a good mixed business for them, but it is a good business for us. So when the industry wide design capacity is not enough to fulfill the whole market demand, we think cooperation or work together is a better -- it is the current situation and a good approach for us to do a business.

Okay. I think -- I hope we answer your question well. And [indiscernible], please, you can unmute.

[Unknown Analyst]

My question here is on your NRE business in the second half. Can you just provide us a bit of color on how -- what we can see there in terms of scale vis-a-vis what you saw in the first half?

[Daniel Wang, executive]

Excuse me, your voice is a little bit noisy. Can you repeat your question?

[Unknown Analyst]

Right. My question was on the NRE business in the second half. Can you provide us some more color on the sort of scale? There's new projects that we are going to be working on in the second half, and in comparison to what we've bought in the first half?

[Daniel Wang, executive]

Okay. I would say for the third quarter, I expect similar revenue mix to second quarter. And with similar revenue mix, I would say the gross margin will be similar.

And for the project, I think we currently, like Johnny mentioned, we can do 30-plus projects parallel, in parallel. So we are pretty diversified but concentrated in the HPC area. So there are a lot of high-performance computing like CPU, GPU, AI first chip, a training chip, DPU, something like that. That's what we are doing right now.

[Johnny Shen, executive]

Yes. And also, like I mentioned before, we are enable so many design early this year on the first half. And most of the design will be taped out on Q4 and sometimes next year. So NRE growth, I think, is highly expected. But I think the mass production increasing speed will be faster than NRE because mass production revenue can be -- we expect exponentially increase. NRE is, we can say, is only linear type of momentum.

[Daniel Wang, executive]

Okay. Brian, are we answering your question?

[Unknown Analyst]

Yes. Got it.

So my follow-up here is on the pickup in the ABF substrate supply in November, December. It does sound like if you are still hopeful you get the $500 million, there is going to be a very, very substantial increase in ABF supply, [ people ] revenues increment of about $30 million to $40 million, if I'm just -- just on a ballpark. So I said, this ballpark we're talking about to get there, and does that also feed through to what we think we can be booking incremental best production in 2023?

[Daniel Wang, executive]

Yes, let me answer your question.

First of all, I would say the substrate output, that can be translated into revenue. Which means anything after November, not -- any substrate output after November will not translate into revenue this year. So the fact is when we guide that our monthly revenue likely to gradually pick up starting from October, which means the substrate output increase happens in October and September. Otherwise, we will not have them transforming to revenue in November and December.

So I think it is a trend, but how fast we can put in the schedule or the guys that call us turnaround time? So that's why I said we try very hard. If everything follow the expectation in good form, we may have the chance to achieve $500 million. But if not, we will not -- we will be not far from it. That's the situation right now.

[Johnny Shen, executive]

Yes. So if we're doing a little bit easy backwards calculation, our Q3 revenue increase is not so significant. That means our Q4 incremental will be a lot in order to meet the $500 million target. So Q4 revenue growth, I think, will be very, very, very big.

Yes. But that's just the beginning. I think the momentum will last all the way to 2024. So you can expect -- we can expect 2023 will be another great year for us in terms of revenue.

[Daniel Wang, executive]

Okay. For PGIM [ query ], ask questions through message. This question is pretty similar to the questions Brian just asked.

Could you give us third quarter and fourth quarter seasonality and the gross margin trend? If your ABF capacity turn to blue at situation, how much would Alchip grow in first half '23 year-on-year compared to 2022 target?

Okay, to answer your question for third quarter and fourth quarter, I think the relevant quarter-on-quarter growth will happen in fourth quarter. if the substrate supply will -- supply will become -- will meet our expectations. And another critical point is we have to have pretty -- substrate supply improvement to fulfill the significant demand from our customers last year. By comparing the demand this year and the next year from the North American customer, the demand is more than double or triple. So ABF is really a key.

So that's why we mentioned even put on the slide that, first of all, we diversify the supplier. Until now, we only have 1 supplier, which is [ Dana ]. And in the future, we will have 3 suppliers in fourth quarter and 2023 whole year. I haven't done the number forecast for 2023, so I cannot give you year-on-year guidance for the first half '23. But as long as the substrate issue, the substrate shortage easing, we believe the revenue growth momentum will be very significant. Because, first of all, the forecast from our customers is really, really high. Secondly, when you look at our inventory level in the end of second quarter, lowest top die is all for the preparation for the future shipment in fourth quarter and 2023. So I think you can consider the inventory pile up as an indicator to the future revenue growth.

And the second question is 2Q22 U.S. revenue contribution grew a lot. Could you give us the U.S. contribution breakdown in terms of meaningful customer or ongoing product?

Sorry, I can't give you -- I cannot give you a detailed breakdown. I believe no company will give you a very detailed breakdown for each customer. I can just say the majority contributor in the second quarter for the mass production revenue is the service provider customer in U.S.

And [ Case ], Brian, has a quick question. Why is the NIE only single-digit percentage on the financial report versus the 40 to 50 that company planned? What is the difference?

I think for this question, we already answered many, many times. When we went IPO, the categorization required by the authority, which is TWSE, they asked us to do the categorization similar, follow our peers, which is duty. So the NIE on our financial book, which means is the project only has designed revenue, will result in potential production revenue. When project won a complete turnkey project, which means NIE last production, it will go to ASIC.

So to us, of course, we think it is not reasonable, but at that time, we have to follow the instruction by the authority. So that's the reason why we, every earnings call, we tell the investors the real NIE percentage and the production percentage. Because to us, NIE is totally different, has totally different cost structure from production revenue. So that's the reason.

I think we've answered your question well.

And [indiscernible] ask questions about, can you share Alchip's other customer for the data center AI chip?

Johnny, you want to share?

[Johnny Shen, executive]

Yes, we do have a few harder [ comp ], but it's not appropriate to specify the earlier ends, yes. We know the some Israel company acquired by a U.S. company, they do have -- this company give us a certain order. And a few companies in China and a few companies in Japan, to give us some AI chip-related order in additional to the North American account.

[Daniel Wang, executive]

Yes. Okay. Hope we answer your question well. Is there any questions? [Operator Instructions]

I guess no, so. And really, it's about the time to close today's meeting. And thank you for your participation in our second quarter earnings call meeting, and thanks for your support. And have a good weekend. Thank you.

[Johnny Shen, executive]

Right. Thank you very much. Thank you. Thank you.