Alchip Technologies Ltd

TWSE:3661

Earnings Call Transcript 2021-Q3

[Daniel Wang, executive]

Okay, for the first session, I would like to ask our CEO, Johnny Shen, to start the meeting with a very brief company introduction. Johnny?

[Johnny Shen, executive]

Yes, okay. Yes, good afternoon, ladies and gentlemen this is Johnny Shen, President and CEO of Alchip Technologies. Once again, thank you for attending the Q3 investor conference meeting. Yes we appreciate the opportunity to share our Q3 results and also provide the guidance for future business. In case some of you are not familiar with Alchip, allow me to make a quick company update and identification.

Our company is found in 2003, IPO in Taiwan Stock Exchange 2014. Our current head count is 485 people. The majority of our employees are engineer. Since we found the company, we've been focused on ASIC business. Right now, we're being successfully tape-out more than 470 designs, all in leading-edge technology.

Revenue last year, we are achieving $240 million. Yes this year, we improved quite a bit. The first 3 quarter will be over $283 million already.

Our current capacity, we can support 30 design concurrently. 80% of our business is focused on the leading-edge technology, mainly for HPC and AI.

Yes we are one of the VCA member for TSMC which can distribute TSMC's technology worldwide.

Yes next page, please. Okay. Overall, we can see we had another outstanding quarter with a reasonable number, almost as good as previous quarters. Q3 actual number really outperformed our printed number, which we made earlier this year. Yes all detailed analysis and comparison will be provided by Daniel in a later section.

Q3 achievement is not only in numbers. Most importantly, we have established a few new business from so-called dream customer in different applications including cellphone and automotive, et cetera. We had multiple tape-out and design won, mainly in 6-nanometer, 5-nanometer or 7 nanometers. Of course, HPC and AI, yes including CPU and GPU, 2.5D cohorts related business demand remained very strong from existing repeated customer also from newcomers.

As for the mass production forecast, we received an incredible high volume from key customers. Number is too large to digest. Honestly, if we can hit, yes we can easily hit another home run if we can get the support from supplier to fulfill just 50% of their forecast. Yes honestly, the NP forecast we receive is incredibly high.

There are 2 major challenges for our business. Number one is tight resource. Nowadays, recruiting or containing engineer is the most critical challenge for the company. I will thank you very much for the share pricing support. It makes our senior turnover rate almost 0.

Another challenge is the capacity allocation, not only for wafer but also for substrates. Almost all HPC AI suffers ABF substrate shortage. Fortunately, most of our suppliers are buying our story and the future potential, since we are representing more than 30 customers. Working with Alchip help supplier to diversify their business concentration without too much effort.

Lastly, I will make a quick update for Phytium status. Since the incident happened April 8, we are working with a customer, U.S. major supplier and also government authority closely, try to address all parties concerned. The situation is so far so good towards a positive direction. At this moment, we have a consensus agreement from all parties we will no longer disclose the detailed progress for each of our Phytium product lines, unless there's any rumor or showstopper happen which need us to clarify. Yes we are looking forward to resolve all issues soon.

Yes above is an update from me.

[Daniel Wang, executive]

Okay. Okay, starting from this session. The number is pretty straightforward. The detailed P&L numbers, we already upload to the marks.

So for third quarter, the revenue is $91.9 million, which is 38% year-on-year growth but 5.7% quarter-on-quarter decline. For the operating income in third quarter is USD 15.3 million, which is 84% year-on-year growth and 12.4% quarter-on-quarter decline.

For net income level, because of the lower operating expense and a little bit lowering income tax, the net income for third quarter alone is $12.9 million, which is 57.9% year-on-year and 7% decline quarter-on-quarter. In terms of EPS, the third quarter earnings per share is TWD 5.12.

And this page is for the breakdown by application for third quarter. You can see the HPC-related revenue still dominate our total revenue, which accounts for 81% of our total revenue. And for the first to third quarter this year, HPC accounted for 87% of our total revenue. And for the consumer part, consumer accounts for only 4% of our total revenue this year.

For the revenue mix by process node for this quarter, as you can see that because we already we already hinted that our major revenue contributor in the first half, which is our second largest China customer, their first chip, the first 7-nanometer chip shipment was tapering off in the quarter. So lesser reason for the 7-nanometer revenue contribution to a decline quarter-on-quarter to 44%. But for some other projects, they received quite strong demand from our customers, so for the third quarter, 7-nanometer or even 6-nanometer, 5-nanometer plus the 16- and 12-nanometer. Combined, these process nodes accounts for 86% of our total revenue.

For this year until the end of third quarter, the leading-edge technology node, 7-nanometer, 16-nanometer, 28-nanometer accounts for almost 95% of our total revenue. So in terms of position within the leading-edge technology node market, I would say, Alchip is definitely the leader in this field.

For the revenue breakdown by region, as you can see, China remains our biggest market for our revenue. In the third quarter, revenue to China customers account for 75% out of the revenue. And Japan accounts for 11%; and the Taiwan 3%, and the others account for 11%.

[Operator Instructions]

[Unknown Attendee]

[Foreign Language]

[Daniel Wang, executive]

Okay, for this year until the end of third quarter, China market -- revenue to China market account for 76% of our total revenue, while the other region account for 15%. But we expect the other, which includes the North American and the Middle East, the percentage to surge significantly in 2022 when our 7-nanometer AI projects begin to contribute to our sales.

For the third quarter operation, there are mixed reasons for better-than-expected third quarter results. First of all, increasing orders from China major customer. And the NRE project inflow is really strong. And the new projects are with high volume projection. We won several of them from China service provider, which we are pretty excited that this project is a major win for us to get into the China service provider supply chain. And we expect the production revenue to contribute a lot starting from next year. For the operating income, which is 15.2 million for the third quarter, it's 84% year-on-year growth.

And you may see that for the third quarter, gross margin went down slightly. That's because the NRE percentage in third quarter is a little bit lower to comparing to the second quarter.

And for the production revenue, among the production revenue, the exposure to certain high-margin project is a little bit lower to less -- comparing to the second quarter. That's the major reason for the gross margin went down.

For the operating expense, which is about $1 million lower to our second quarter operating expense, the main reason for the lower operating expense is the -- we do less bonus provision for the third quarter.

For the fourth quarter outlook, again, the industry-wide demand is still strong. I believe that most of you even view these better than I do. And the whole demand within the semiconductor industry is really, really good. The design demand within the leading-edge technology nodes remain robust. Many projects out there waiting for design resource, and that's the reason why we always mentioned that the current design resource is in shortage. And we really try our best ever to recruit people to expand our design resource in order to serve more customers.

And the HPC demand keeps its momentum as increasing applications and the participants. Yes, this industry-wide concept, I'd also guess all you already knew it a lot that because of the AI, because of there are many, many new concepts coming out of market. So along with that, there are a lot of new applications emerge within the HPC or let's say AI field. And of course, there are more and more participants with more and more these opportunities out there, which have all contributed to our operating performance.

Last thing is the AI chip, our 7-nanometer AI chip shipment to increase its contribution going forward. The first 7-nanometer AI chip to U.S. service provider customer, we assembled it -- we sampled it out in third quarter. And we expect mass production shipment to start in fourth quarter. And after ramping up, we think next year, revenue contribution from this project will be huge.

Our CEO mentioned that the customer is keeping on adding the forecast. And the headache right now is we have this -- we need to find a substrate support. It's not an easy task to do. We are trying our best to do that.

And another AI chip to you -- and another AI to the U.S. chip maker is also expected to start its contribution in fourth quarter this year. And another one to the same U.S. chip maker, which is a training chip, I expect it to start in the first quarter next year. And we also believe the shipment volume could be considerable. So all these 3 AI chips to U.S. customers, I expect to be one of the growth drivers to our 2012 revenue performance.

[Daniel Wang, executive]

And I think that's the end of the company presentation session, and we will quickly go into the Q&A session. As mentioned, please tell me your name and the company you are working for. [Operator Instructions] Haas, please.

[Haas Liu, analyst]

Okay, Daniel. This is Haas from Credit Suisse. Congratulations on the -- hello, can you hear me?

[Daniel Wang, executive]

I can hear you. Go ahead.

[Haas Liu, analyst]

Okay. Congratulations on the good results. And my first question is regarding your 2022 business outlook. As we get closer to the year-end, could you provide us your guidance for fourth quarter, and also for annual target for the sales growth, and also margins outlook by turnkey and also by MRE for next year, if we don't consider any Phytium contribution?

[Daniel Wang, executive]

Okay, I would say we don't have a numeric guidance for next year. And we are not allowed to give it because of the TSMC requesting us not to deliver any numerical guidance to the market. But for the picture, I guess Johnny can talk a little bit about it for our 2022. And we do believe as long as we can resolve the supply chain issue, 2022 will be another great year for Alchip.

For the fourth quarter, fourth quarter -- For the fourth quarter, I think the AI chip to U.S. service provider, the shipment is just going to kicking off. So the contribution in the fourth quarter is not that significant compared to the forecast last year.

So in fourth quarter, we still believe is a happy quarter. So we expect the total revenue would be like flat to mildly quarter-on-quarter growth for our fourth quarter. And we also expect the margin, the gross margin will remain at the same or a little bit higher level comparing to the third quarter.

For 2022 as I mentioned, there are many major projects, 7-nanometer projects will go into production phase. And according to the forecast that we receive right now, the shipment volume could be incredible. Again, the substrate supply is a headache right now.

So Johnny, are you going to go to...

[Johnny Shen, executive]

Yes. Sure. Yes Haas, to answer your question, 2022, I think we have quite confidence. Yes first of all, NRE, yes as you know, the demand is very strong. Even the existing customer, all existing customer has their next-generation repeater project. And so many newcomers, not only in China but worldwide. So in terms of NRE, the only challenge is our design capacity is our design resource.

In terms of number, as you know, the other supplier increased, yes the NRE. That definitely will reflect on our revenue. Mass price increase, IP price increase, and our EDA tool increase. And I think it's all adding boost to our revenue. And also since our design capacity is very limited, and we also increased quite a bit for our own design margin.

Yes that's the overall situation. And also technology migration, this year we are focused on 7, mainly 7; few 5 and few 16. But the next year, our concentration will be 5-nanometer. And we expect some 3, some 4, and 6. So each of a generation NRE increase is quite significant. So that's the NRE part.

For the mass production, like I mentioned before, recently we received incredible high volume forecast. Honestly, this is too big for us to digest. Like I mentioned before, we could easily hit another home run if we can get the support from supplier just for 50% of the current demand. That will be incredible already.

So -- but this one, MP revenues still have a certain uncertainty because of substrate shortage. Hopefully, we have a breakthrough discussion with all the suppliers soon. So Haas, does that answer your question?

[Haas Liu, analyst]

Okay. That's very helpful. And before discussing on the capacity constraint, just a quick follow-up. Could you share your mix for NRE and also turnkey for 3Q and 4Q, and also your expectation for next year?

[Daniel Wang, executive]

Okay. So the new online coming in, I would say as I mentioned in the slide, we won't -- we own an AI-related project but more to the end user side, project from China service provider, which we expect to have less production contribution most likely in the second half of next year, which is a very high-volume project. And for other projects, there are too many.

I will give you several examples. We are going to -- not going to, we already won a project from a China player, which is also considered -- which is a 6-nanometer project, I think. And the -- because of the end application is handset-related, we do believe the production opportunity and production ballot could be good.

And -- yes there are too many. And we are going to close a project, which is also -- which is for the mobile devices. We won a U.S. customer, which is also considered a high-volume project. And as I mentioned, we are handling image process project with Taiwan as the vendor. And the end application is handset with China handset vendors.

So all in all as we keep on emphasizing that NRE is not a problem to us. The, I would say, how to choose the projects wisely is the top priority we are failing -- we are facing right now.

[Haas Liu, analyst]

Okay. That's very helpful. And my second question is about the turnkey business and the overall capacity constraint. So you mentioned you still have a significant gap to meet your customers' demand on 7-nanometer and also 5-nanometer.

So could you try to quantify how much demand at this stage you are unable to fulfill? And how much more foundry capacity do you expect to secure for next year versus this year? And are you worried about the potential overbooking from your customers, especially during the time of the foundry supply tightness?

[Daniel Wang, executive]

Honestly, we don't worry about it because we do see very strong demand for the HPC regulated projects. In terms of the percentage, I would say this way. For the wafer capacity, we don't worry too much because we have a very good customer portfolio. And the customer and Alchip will work together to trying to get the capacity from TSMC.

But for substrate because as you may know that the current substrate capacity for next year is almost dominated by the big players like Intel, like NVIDIA, like AMD. So trying to get some capacity support from the substrate vendor is more difficult than getting wafers. For wafers, we don't worry too much. For substrates, we are working very hard. But because the customer is keeping on adding forecast numbers to us for the percentage right now as Johnny mentioned, we -- if we can provide 50% of the demand, we will be in a very good shape next year.

[Johnny Shen, executive]

Yes. So Haas, to add on to your question, the -- yes originally I think our fulfill rate is reasonable, but somehow recently customer keep increasing their forecast. One particular customer, original demand is already high, but somehow within half year a year they quadruple it. So I think it's almost impossible to fulfill their demand, their forecast.

Yes in terms of substrate, we've been talking to many vendors. In fact, if a customer come to them individually, they deny all the meeting, but they still work on Alchip. The reason they want to work with us because we are representing more than 30 customers. So yes they need -- they also need to diversify their business concentration. So I think we get -- we can say we get a great support, but of course not 100%. Because all the capacity is booked by the tier 1 customer Daniel mentioned before.

[Haas Liu, analyst]

Okay. just -- Sorry.

[Johnny Shen, executive]

Go ahead. Go ahead.

[Haas Liu, analyst]

Okay. Also just a quick follow-up on how much your foundry partners' price hike do you think will help your turnkey business growth in[indiscernible] ? And will you be able to pass on all those costs, or even add a little premium to your customers to keep or to raise your turnkey margins?

[Johnny Shen, executive]

Okay.

[Daniel Wang, executive]

All right.

[Johnny Shen, executive]

Okay. So yes, as you know, the application we are focused is HPC and AI. Fortunately, those field are price insensitive, much price insensitive compared to consumer. Fortunately, all our customers buy into TSMC's pricing increasing, so does all the supplier who being successfully transfer all the pricing increase to our customer. They are willing to pay. Most of them are willing to pay. And because of design capacity shortage, they are fighting for our design resource. So they also expect yes certain NRE increase as well.

So to answer your question, we don't have too much trouble to transfer all the pricing increase to our end customer. Yes Daniel, do you want to add more?

[Daniel Wang, executive]

Yes similar to Johnny, actually we -- I thought this issue is a [ invest us ] many times that for the majority of our production pricing is cost plus margin. So for this part, we have no problem to pass the increasing cost of wafer -- from wafer to our customer.

And for some very limited customer product, maybe there will be a [ mouth ] impact to the cost. We have -- we may have to share some. But since the consumer revenue accounts for very low percentage of our total revenue, so all in all, we don't see the wafer price appreciation is a threat to our operation.

[Haas Liu, analyst]

Okay. Is there a way to quantify the price hike from the foundry partners that will help your turnkey business? Is there a way to quantify the impacts?

[Daniel Wang, executive]

No, we didn't do the calculation.

[Haas Liu, analyst]

Okay. So my next question will be on Phytium. You made some good progress, as you just mentioned. But should we expect shipments to start pretty soon? Or at this stage, there is no update yet?

[Daniel Wang, executive]

No comment.

[Johnny Shen, executive]

No comment. Yes we can only say so far so good and no comment. That's an agreement from all parties.

[Daniel Wang, executive]

And please understand that I think for the Phytium thing, no comment is the best strategy we can do right now. It's for -- it is good for our customers, and it is good for our suppliers. And of course, it is good for Alchip itself. So forgive us, that's the agreement among all the parties that we don't comment on the details of Phytium project anymore.

[Haas Liu, analyst]

Okay. And my last question before I hop back to the queue is that I would like to check on the R&D engineers sourcing. So you mentioned you have 470 employees as of 3Q, but you originally had a target to expand it to 500 to 600 employees by the year-end. So could you discuss if any change on the target? And do you think it will be a bottleneck for you to take more projects?

[Daniel Wang, executive]

[Operator Instructions]

[Johnny Shen, executive]

Okay, Haas, to answer your question, the plan changed a little bit. By the end of this year, we still have a confidence to be over 500 for sure. Yes because the -- in China and the next year, starting from next year, we do have a plan to increase another 200 people. Actually, the offer already made. They're supposed to join by the -- first portion will be March. Second portion will be July.

Yes fortunately, the senior people turnover rate, as I mentioned, is almost 0. Yes because most of them being compensated from the stock. Share price increase would become majority of their income source. But junior people, to contain the junior people is still quite challenged. Because the junior people, they only have a salary. They don't have a stock.

So next -- this year, we can be -- we can hit more than 500 for sure. But next year, we are -- our internal target is 750 people. Right now, the offer already -- more than 100 offers already made. Hopefully, they will sign that soon.

[Haas Liu, analyst]

Okay. So most of the new head count will be in China? Or you are diversifying it?

[Johnny Shen, executive]

Yes, in China, Japan, Taiwan. You can say majority is still in China. Yes, you're right. But we are -- we're doing hiring worldwide, not only in China.

[Haas Liu, analyst]

Okay. That is very clear.

[Daniel Wang, executive]

Szeho, please.

[Szeho Ng, analyst]

Congratulations. And I have 2 questions basically. The first one, just want to [indiscernible] How do you think about the states of your U.S. hyperscaler business when they move from generation to generation? Basically, U.S. is still seeing very strong visibility into 2022, but I'm not sure if there will be any risk for them to move to other service houses? Or are you already working on their future projects?

[Daniel Wang, executive]

Okay, let me answer your question first. For U.S. -- For the U.S. customers, of course, we want to do generation by generation of projects. And we do have confidence to do so. But in the end, it's the customer to do the vendor selection. And the situation right now is almost all the customers, especially for the service providers, are trying to do multiple projects. At the same time, you may see the news that Facebook is aggressively doing their chips. And Ali has their own CPUs. And not to mention AWS has many new projects.

So of course, we cannot grab them all. But to us, the concept is there are increasing design opportunities from those hyperscaler players. Because of our position within the leading-edge technology node, we are pretty confident we can do -- we can win some of them. And actually, we already won some of them.

So -- but for the future, again, the decision is made by our customers. We cannot guarantee to our investors that no problem, we can win. That's not the thing we are going to promise.

[Szeho Ng, analyst]

You are still quite confident, right? Thinking of competitive position.

[Daniel Wang, executive]

Yes, we think the leading -- actually, we almost have everything. We have a good track record. We have excellent engineering. The customer satisfaction is high to us for their previous projects. So actually, I think our position is good.

[Szeho Ng, analyst]

Sounds great. My second question going back to your slide, in one slide you mentioned that you're working on 30 projects simultaneously, right? Let's say going into 2022 when a lot more projects going through the final geometries like 5-nano, 3-nano. Would the number of projects be similar, even though you keep adding more head count? Because each project would add certain engineering resources. I'm not sure if that's the correct reasoning.

[Johnny Shen, executive]

Yes, Szeho, you are absolutely right. I think if you pay attention for our design capacity would be increased insignificantly. Yes, because of technology migration is the -- yes, just to share you -- share one information to do -- for example, to doing 16-nanometer design, in usual case we only need 20 people. Now if you're doing a 7 or 5, yes, we need 40 or even 50 people.

So increase the number of head count eventually, we're doing 5 or 3, need more resource. So focus number for design is our -- is not our intention. Yes, like Daniel mentioned before, how to select the right project will be our highest priority. The new design is using more people and a lot of the machines. So number of design, I don't expect will be increased too much, maybe fractional. But in terms of technology, in terms of NRE, yes we have a high confidence to have a very reasonable growth.

[Szeho Ng, analyst]

Okay. Sounds good. And more head count required for each project. But design size cycle time should be similar, right, even if we move to the smaller nodes?

[Johnny Shen, executive]

Yes, I think the design cycle, yes, if we use more people, there will be more parallel effort. We try to make a life cycle the same. Your design cycle, I think dictate by many factor: Machine performance and also customers' experience.

Based on our track record, if we're doing the -- if it's a start-up company, usually the design cycle will be 20% longer. If the same customer doing the repeated business, yes, we can easily shorten the design schedule by 20% to 30%.

So that's why our -- one of our priority is a repeated customer instead of a new start-up company. That will be safer, a lot of TAT they can increase our capacity.

[Szeho Ng, analyst]

Yes, that's right. The very last question, at this point in time, we still don't have any plan to give up from IP library, right? Even for some select applications like advanced packaging [indiscernible] you don't have the plan?

[Johnny Shen, executive]

Yes for IP, yes we still try to be remain independent position. Yes like I mentioned before, leading-edge technology, HPC AI, using many complicated IP. And different technology know and different purpose is, at this stage, is very difficult for us to design off. So instead of a compete with the partner, we are heavily relying on partner and we can work together on the IP side.

Yes so far, so good, yes because it's almost impossible for us to prepare all the IP. And yes right now, I don't think IP is a showstopper for our business.

[Szeho Ng, analyst]

All right. Okay. That's very useful.

[Daniel Wang, executive]

And then Charlie, please.

[Charlie Chan, analyst]

Yes so just some follow-up question to a previous question. So first of all on the IP, I'm not sure if you still see the entry barrier for the COAs implementation. Do you think your -- for example, the production yield is in line with industry peer? Or do you do see there's actually no difference anymore for COAs implementation?

[Johnny Shen, executive]

Okay, yes. let me try to clarify. This is not the first time I'm hear somebody compare or complains about our COAs solution. Yes in fact most of our design like more than 10. Right now, it's 3, 3 to 4 already in volume production. and in CPU, GPU, AI training-related application, our COAs, 2.5D COAs application, we are winning a lot. A lot of them already in volume production.

Yes in fact based on our forecast next year, COAs related design, MP volume will dominate our entire MP business. So I don't think there's any showstopper for COAs-related business for us.

[Charlie Chan, analyst]

In that case, you said right way to ask how much COAs will contribute to your revenue? Or compared to the previous kind of substrate base, those packaging, what would benefit you more?

[Daniel Wang, executive]

Charlie, we don't have a percentage right now. I'm lazy, I didn't do -- I didn't do that statistic.

But Johnny mentioned, I think, let's say this way. Many investors may think that our peers have their own in-house COAs, which implies that we don't have the COAs ability. That's totally wrong.

I think As Johnny mentioned, one of the biggest revenue contributor next year is using COAs. And I believe in terms of the production revenue contribution, COAs will be COAs-related revenue will be pretty dominant to our overall total production revenue next year.

[Charlie Chan, analyst]

I see. And also maybe just bring a great point, right? Meaning that's -- so internet company or data center customers say, do their own projects as well? Right, like Graviton from AWS or Alibaba that, right, has the CPU.

[Daniel Wang, executive]

Uh-huh.

[Charlie Chan, analyst]

I know you cannot address all those demand, right? But from your observation, those are big guys. What kind of projects they want to outsource to you or your peers, and what kind of projects they prefer to do themselves?

[Daniel Wang, executive]

Yes. It is also possible to ask that we know, for example, AWS did the Graviton, and Ali do their own CPU project. Based on my knowledge, I don't know who did the back-end design for AWS. But for Ali, I know that they did it by their own, but the whole process is very difficult and...

Let's say this way. As long as they found out that doing the back-end design is not that efficient by their own, they may consider to outsource. And -- or when they are trying to do multiple projects, but their internal design resource is limited, they will consider to outsource.

For us, we don't know what's the category for them to select which project is going to outsource and which projects they are going to do it internally. But to us, no matter how, it is a good news. There is still opportunity out there. The number of this opportunity is increasing. And because of our position, we always have a chance to win some of them.

[Charlie Chan, analyst]

Yes. And...

[Daniel Wang, executive]

Johnny, do you want to add some color?

[Johnny Shen, executive]

Okay, sure. Yes like Daniel mentioned before, there's so many design opportunity out there. No matter how hard we work, is impossible to grab it all. So some of -- before, some of our potential customers were doing by themselves or share some of the design to our competitors. I think that's a good thing. It's not the bad thing for the companies, yes. But we have the confidence to maintain a competitive position, yes because we always believe and also share with the customer. Each of our customer, they only do one project or 2 projects every year. We're doing 30. So the knowledge accumulation, the risk management, we are doing much better and more efficient because we have more experience.

So in fact the current long time if you're finding Alchip, you can save a few months at least because we have -- we did it before. And also from an investment point of view, doing one design, they need to invest so many EDA tool and server. For us, it's highly justified because we have many customer doing all together.

So I think based on this trend, the track record and design experience, we can always maintain a competitive position. We are much better than customers doing by their own or most -- compared to most of our competitors.

[Charlie Chan, analyst]

Okay. And lastly, yes 5-nanometer, right, I mean I'm not sure if the last quarter or 2 quarters ago, you mentioned there are two 5-nanometer NRE. So what was the update? Any more design wins for 5-nanometer, even 3-nanometer you just mentioned?

[Johnny Shen, executive]

We do. We do have a few. I don't recall which one, but in terms of 5-nanometer, we have many design wins and -- yes recently. Yes for 3 nanometer, not yet, but we do have some test chip opportunity. We're helping one of the customer to do the test chip. And also we are doing our own test chip, yes proven few of the [indiscernible] IPs by our own. Daniel, do you want to add more?

[Daniel Wang, executive]

Okay. Charlie, I think you are referring to the 3-nanometer -- 5-nanometer chip to North American service provider. I think they are preparing for the mass design. We don't win it yet. But as you know, this service provider has many projects out there, and we are engaging in discussion with them for some of that. So as long as we have good news, I will let the investor know. So far they are still preparing the, I would say, pre-project kickoff preparation right now.

[Charlie Chan, analyst]

Yes. But for those projects, they can enter mass production. Can you do some...

[Daniel Wang, executive]

By the way, the first 5-nanometer for mask project, we are going to [indiscernible] probably in the first half of next year.

[Charlie Chan, analyst]

What's the application or region?

[Daniel Wang, executive]

AI to the Middle East customer.

[Charlie Chan, analyst]

Okay. So is that the only one in 2022 or any more tape-outs?

[Daniel Wang, executive]

I am not so sure about if we can have multiple tape-outs next year. But we are winning several 5-nanometer projects, and the design is going to kick off sequentially. But for design time a long time for 5 nanometer, I'm not so sure about if we can tape it out by the end of next year.

[Charlie Chan, analyst]

Okay, that is fair.

[Daniel Wang, executive]

Jeffrey, please.

[Jeffrey Ohlweiler, analyst]

Great. Okay. Johnny and Daniel, can you hear me okay?

[Daniel Wang, executive]

Yes.

[Johnny Shen, executive]

Yes.

[Jeffrey Ohlweiler, analyst]

So the first question, the fund-raising you did early this year, one of the key reasons for that was to prepay foundries. So has that helped you get more capacity secured for next year? And how much have you prepaid?

[Daniel Wang, executive]

Thank you for this question. Okay, for the whole scheme with TSMC and the schemes like we put money for deposit and we get credit from TSMC, at this moment actually, our POs to TSMC already exceed the credit they give us. So we need to pay in cash, but we are negotiating with TSMC to raise the liquidity line for us.

For the other hand, the preparation, for the foundry and the preparation, one of the major reasons is to let's say for the 10-nanometer tape-out for -- or even future 3-nanometer, the mask cost is huge. So if we cannot lift up our credit line by TSMC, we need to pay it in full. So that's the reason.

But now so far, so good. Our cash position is still very good, and we are preparing for the -- for next year. And on the other hand for substrate, we do need to pay in advance to secure some capacity for next year and even 2023. So the funding in the early days of this year do helps.

[Jeffrey Ohlweiler, analyst]

Okay. Great. And then a follow-up question, if I read correctly on your percent of sales by technology node, over 40% in third quarter was 40-nanometer? Or was that -- did I read that incorrectly?

[Daniel Wang, executive]

You mean...

[Jeffrey Ohlweiler, analyst]

Third quarter sales by technology node...

[Daniel Wang, executive]

No. Third quarter, 7-nanometer or 5-nanometer accounts for 44% of our total sales. And 16-nanometer and 30-nanometer accounted for 42% of our total sales. So for 28, it's 9%. For 40, it's 5%.

[Jeffrey Ohlweiler, analyst]

Okay. And then you made an analogy earlier to hitting a home run. So if I do my math, is it double 20%-plus revenue growth, triple 30%, and a home run is 40% revenue growth for next year? Or what is...

[Daniel Wang, executive]

I cannot provide you the numerical guidance. It's -- we already warned by the TSE many, many times. A warning that we gave -- if we did the sales growth guidance in numbers, we will be forced to do the financial forecast.

[Jeffrey Ohlweiler, analyst]

Okay, understood. And then the last sensitive question I have, you mentioned all parties to the Phytium kind of task agreement. That includes U.S. government, I assume.

[Daniel Wang, executive]

No. Actually, we don't have a position to talk directly with the U.S. government. But for our customers, Alchip and our supplier, mainly TSMC, we do have discussions about this issue.

So -- yes, for -- it's good for everybody that we don't disclose the details of the Phytium project.

[Jeffrey Ohlweiler, analyst]

Understood.

[Daniel Wang, executive]

Charlie, are you have -- Charlie, are you have more questions?

[Charlie Chan, analyst]

Yes, I just noticed that your OpEx in third quarter [indiscernible] you said that it's because that's a bonus provision. I'm not sure if there is also other factors. For example, I believe the legal lawyer expense should be quite intense in the recent quarters? What is the kind of the new norm for your OpEx in coming quarters?

[Daniel Wang, executive]

I think you can say that $15 million per quarter will be a new norm to our OpEx. For third quarter, I think the major reason is no -- is relatively lower bonus provision. And of course, for some legal fees or some others, there are some sales. So that's the mixed result for many, many items.

But if I said -- if I want to add an opinion on the norm of our operating expense per quarter, I would say that $15 million for -- $15 million or $16 million is a good -- is a good guess.

[Charlie Chan, analyst]

Okay, yes. Actually just to clarify, you said you can only fulfill half of demand. Did you refer to the turnkey demand or NRE demand or both?

[Johnny Shen, executive]

Any turnkey demand. NRE. Actually -- our fulfill rate depends on how you calculate. Yes if it's for the project we try to win, I think our fulfill rate is very, very high. So we can say it's 80% to 90%. And -- but compared to all the potential business, Yes I think we don't have a position to grab 1/2. So many opportunity out there.

[Daniel Wang, executive]

Okay Charlie, let's say this way. The industry demand is really, really strong. For example, I think in previous institution [indiscernible] because of the Phytium incident. We told the investors that our target for this year is 20%, which means 300 million for the whole year from our previous target prior to the Phytium incident. Prior to Phytium incident, the yearly revenue target is about 360, 370. I guess most of you already knew it.

But because of the industry-wide demand so strong, you may see based on our guidance in fourth quarter, our full year revenue actually exceed our guidance prior to Phytium incident. You -- from the numbers you can, I hope you can feel a little bit about the strong demand from the industry.

[Charlie Chan, analyst]

Okay. Yes so just out of curiosity, right, for those unfulfilled NRE projects, do you think those are perishable or go to your industry peers? I'm not sure how real are those requests.

[Daniel Wang, executive]

We don't know about the situation of our industry peers. But honestly, I do think almost all our industry peers are in a very good shape. I guess -- not I guess, I read some reports that say -- they say Global Unichip, their project is also full. And there are even some projects begin to like Valley Silicon, which means the demand is real.

It's not the air. It's not the air projects. Those projects, they do need back-end design support and maybe the turnkey help but they cannot find resource. I think that's the current status for the whole industry.

[Charlie Chan, analyst]

Okay, I see. That's super helpful.

[Daniel Wang, executive]

Okay, because it's already 3:30, we take the last question, okay. Is there any questions? Okay, Jeffrey, please.

[Jeffrey Ohlweiler, analyst]

Yes. I don't know. Daniel, did you give a breakdown for NRE versus turnkey in the third quarter?

[Daniel Wang, executive]

Okay, sure. For -- they -- wait me for a moment.

[Jeffrey Ohlweiler, analyst]

And the follow-up question is fourth quarter outlook for that.

[Daniel Wang, executive]

Okay. For third quarter, the third quarter accounts for about 40 -- lower 40s percent of our total revenue.

[Jeffrey Ohlweiler, analyst]

Any major change you expect in the fourth quarter? Or like you mentioned NRE seems like it's growing faster.

[Daniel Wang, executive]

For fourth quarter, we expect NRE percentage to be higher, like high 40s.

[Jeffrey Ohlweiler, analyst]

Okay, great.

[Daniel Wang, executive]

Okay, if that's the case, thank you. Thank you all you joining our institutional investor meeting. And have a good weekend. Thank you.

[Johnny Shen, executive]

Thank you very much. Thank you for your support. Thank you very much. Thank you.