Alchip Technologies Stock

Okay. Thank you for you for waiting for our First Quarter '26 Earnings Call. We are subject to start the meeting at 2:30 p.m. It's about 2 minutes later. So just be patient for 2 minutes. We will start the meeting accordingly. Thank you. Okay. It's time. Thank you for waiting.

Dear analysts, portfolio managers and all the participants, we welcome to join our first quarter '26 earnings call. And I'm Daniel, CFO of Alchip Technologies, and our CEO, Johnny Shen, will also be hosting this conference call. And thank you for your patience.

We will start. Okay. First page is, again, safe harbor disclaimer. And for this meeting, we will conduct this earnings call in Chinese. But me and Johnny, we are -- English, and Johnny and I are Chinese speakers. So if you want to ask questions in Chinese, please feel free to do so. And the Chinese version of presentation slides, I believe right now is on the MOPS already. So you can download it from MOPS.

For the Q&A session, you can write down your questions, through Teams message board, and if you want to ask question orally, you can use the raise hand function and we can -- we will call your name for your question. This video and audio content of the meeting will upload to MOPS probably after 2 hours after -- 2 hours after the meeting. So probably sometime because the file is too big, you have to wait for a little bit longer.

So this session is for the message from our CEO, Johnny Shen. Johnny, please?

All right. Good afternoon, ladies and gentlemen. I'm Johnny Shen, Chairman and CEO of Alchip Technologies. Once again, thank you for joining our investor conference meeting today. We truly appreciate the opportunity to share our Q1 financial results and provide an update for our business outlook.

For Q1 summary, our first quarter revenue came in slightly below plan. Revenue was lower than last quarter due to the limited production revenue, while our NRE remained very strong. As a result, total revenue reached USD 132 million, with net income of USD 45.1 million and EPS TWD 17.55. A detailed financial breakdown and analysis will be presented by Daniel in a later section.

There are a few highlights worth mentioning in Q1. First, our gross margin reached 50%, driven by strong NRE demand and higher production margin. This demonstrates even during the production transition period, company can remain highly profitable through strong NRE contribution.

Second, our N3 design for #1 customer is now ready for production. The shipment expected to begin in June time frame. And we successfully secured required capacity across all suppliers, including wafer including wafer, CoWoS partnering, substrate, cooling, tester, et cetera, to support on time delivery. At the same time, the next generation design also progressing smoothly and remain on track to tape out by this year.

Third, our automotive business enter volume production last quarter. The volume expect to ramp in Q2 and remain stable through the end of the year. We expect automotive project become our #1 revenue contribution in the first half, and our second largest contributor for the whole year. In parallel, the next-generation automotive chips currently under design remain on track to tape out by Q3 this year.

Quick update for geopolitical risk management. We continuously to diversify our business and design resource beyond China to mitigate geopolitical risk. In China, we are mainly focused automotive, robotics and consumer-related products using N3 technology and above.

In terms of engineering resource, we have launched a very aggressive hiring plan focused in the region outside China. Now our Japan office can accommodate up to 250 employees, while our Malaysia and Vietnam office can host more than 120 engineers combined. As a result, the majority of our design resources are now located outside China.

As for the future business outlook, starting from Q2, particularly from the June time frame, we expect to regain momentum in production business. In terms of the revenue trend, we expect Q2 revenue to be higher than Q1, followed by a much stronger ramp in Q3 and Q4, both of which we expect it to be significantly higher than Q2. We expect this revenue momentum will continue through the remainder of this year and extended into late next year, followed by the mass production of the next-generation chip.

In conclusion, we truly believe the most challenging period for the company has already passed. We have confidence to perform a significant revenue growth even compared to our peak year in 2024.

Looking ahead, we remain very optimistic about long-term outlook for AI market. For this year through 2029, we expect our growth momentum to remain in line with the latest industry leaders and competitors. We are also confident in our ability to outperform overall market CAGR in this high-growth HPC and AI market. Thank you.

Okay. Thank you, Johnny. And for next page, it's a very straightforward quarterly income statement of Alchip. So in the first quarter this year, the revenue came in at $132.4 million, which is a 13.3% quarter-on-quarter decline and a 58.5% year-on-year decline.

For the operating income part, the operating income for the first quarter reached $43.2 million, which is a 10.5% quarter-on-quarter growth and a 4.8% year-on-year decline. With the additions of the non-operating income and the deduction of income tax, our net income in the first quarter reached USD 45.1 million, which is a 5.7% quarter-on-quarter decline and 1.6% year-on-year growth. And the EPS for the first quarter is TWD 17.55.

And the next page is for the application breakdown. As always, our #1 revenue contributor in terms of the application is HPC. HPC in the first quarter accounted for 70% of our total revenue, and we are expecting these numbers to trend up in the following quarters this year.

For this page, this is the process node mix. As you may see that the N3, N2, N5 and N7 combined revenue contribution accounts for more than 80% of our total revenue. I still believe that based on this product mix in terms of the process node technology, our chip is still the leader within the digital design industry.

And for this page is the geographic breakdown. For the first quarter, it's a little bit different from the quarters last year. The North America used to be our #1 market. In the first quarter, the contribution from this region reduced to 23%. This is because we don't have too significant production revenue contribution from this region in the first quarter.

And for the Asia Pacific, 47% of the revenue goes to this region. That is because of our automotive business. In the following quarters, I expect the breakdown of the -- I expect the regional breakdown will change quite significantly once the N3 accelerator production revenue kicks in.

So for the first quarter business review, like Johnny mentioned, the revenue came slow, a little bit below our previous guidance and the plan. However, the profitability for the first quarter is quite promising. Like I just mentioned for the numbers, the revenue for the first quarter this year declined 58% year-on-year. However, we record year-on-year growth profitability.

The first quarter margin surprises on the upside because of the high percentage of our NRE revenue. And we believe this kind of mix will slightly -- the high percentage of NRE will slightly go down in the second quarter as we are shooting to kick off the N3 accelerator shipment, and keep on going down in third quarter and the fourth quarter. So the gross margin trend for this year will be trending down because of the significant increase in revenue in the following quarters.

For the NRE pipeline, we see the NRE pipeline remain very, very strong, especially for the North American market. The design demand from North American region is very strong, especially for the AI-related sectors such as the accelerator, CPU, networking projects due to the massive CapEx by those hyperscalers in the industry.

And we do see the process node technology for AI-related chips are moving from N5/N3 to N3/N2. We are expecting this year, the majority of our AI-related project will be in the N3 technology nodes. And we do see multiple ASIC design opportunities from North American hyperscalers. Okay. I guess that's conclude the first quarter.

And for the outlook this year, as we mentioned many times, we expect the growth momentum to pick up starting from the second quarter '26 and actually, the production momentum to start in late May or early June. And we expect a very strong quarter-on-quarter revenue and profit growth starting from third quarter this year and going forward.

The main reason is the N3 AI accelerator shipment to our North American customer. And for the revenue distribution, we expect for this year, it is a very back-end loaded distribution for our revenue distribution. Again, that's because of the N3 AI chip shipment starting in June.

For the NRE, the NRE revenue will be growing strongly. First of all, the overall demand for design is still good. And secondly, as Johnny mentioned, our N2 accelerator project is going smoothly, and we are shooting to tape out this project by the end of this year. And the related revenue will be another reason for our strong NRE revenue performance this year.

And this concludes the outlook for this year, and we are entering the Q&A session. Thank you.

[Operator Instructions] Gokul, please.

Great results. So for the N3 accelerator projects, it definitely looks like the customer demand seems to be much higher now compared to what people were thinking maybe 3, 4 months back, given they have signed several gigawatt deals. How does Alchip benefit from this? Should we assume that you will benefit proportionately from this? Any updated size of the project during its lifetime given this demand upside?

And lastly, any thoughts on your 3-nanometer and CoWoS wafer allocation given this upside in demand, given that we are hearing many different vendors are trying to enter into the wafer sourcing or the customer is trying to kind of find various sources for 3-nanometer wafer sourcing from various kind of fabless companies.

Okay. Gokul, I will say for the -- obviously, the customers' demand is really, really strong. For now, for the real revenue contribution, I think there are 2 factors are very important.

First of all, the wafer capacity -- how many wafers, extra wafers we can get or the customer can get is a very important factor to the upside on our plan. And secondly, what is the execution of the production. As you may know that the yield rate is quite critical to this kind of accelerators. As long as we can execute the manufacturing smoothly, there could be upside from the yield improvement. So definitely, the increased demand from our customers or the increased demand on our customers' customer is definitely a good thing to us.

As for the various source, looking for various different vendors or sources by customer, I can assure you that for the design part, there is only one physical design vendor for the N3 and the future N2 projects. It is Alchip Technologies.

Let me also add some comment on this. Yes, I think it's not a secret. It's not the secret news. I think our customer really received the higher demand. But to be honestly, now it's already May time frame. If you talk about the upside for this year, I think it will be very limited because wafer turnaround time need about, including CoWoS need about 6 months plus. So even the upside will happen, but for sure, it's not going to be this year.

For next year, yes, we are working with the customer very closely, try to get the upside. I think from the wafer, we all know N3 capacity is the most precious thing in the industry. So very difficult to get an additional one. Yes, of course, over the year, foundry will have some upside because of yield improvement, those kind of stuff, we try to capture those kind of gain. Again, we are working with the customer very closely to try to maximize the upside next year.

Got it. Understood. And on the N2 project, the follow-on generation, as you mentioned, you are kind of going to complete the tape-out by end of this year, so probably revenue sometime end of next year, very likely. Could we have some understanding of like the value capture for Alchip given this is a much more complicated design, is it like multiple times like what we are seeing in some of the other ASIC projects out there in the market, like let's say, the 2-nanometer version versus 3-nanometer version, your value capture could be multiple times of the 3-nanometer version.

And secondly, there seems to be so many different interconnect technologies or interconnect solutions that are being used, I think NVLink, UALink and maybe some proprietary stuff as well. So what is -- how does Alchip get involved in each of these areas? Or is that not something that you're kind of involved in because you are largely focusing on the compute die and the overall back-end integration?

Okay. Gokul, for your question. For the N2 project, I would say for the NRE total contract value, definitely the N2 project is much, much higher than N3. And the same thing for the chip price. The chip price, as you already mentioned, it is a chipset and there will be different -- there will be multiple part of the chip, the compute die, the I/O die and the others. So the chip price will be much, much higher than the N3 chip. And for the so-called what is our role for the I/O die or the others, I would say we will provide the physical design for the compute and the integration of the whole chip. So for the I/O die part, we will also involve in part of the physical design as well.

Got it. Got it. Understood. So compute die and overall design is still -- you are the only partner?

Yes.

Understood. Understood. Okay. And maybe last question from me is on any -- I think previously, you have talked about CPU is probably not something that you want to kind of engage too much in given it's a lower margin, lower value-add project. Any change in thinking on that direction given CPU demand is now growing much faster than what anybody would have thought with the rise of Agentic AI? And any thoughts on any potential kind of CPU-related projects that you're working on with some of the hyperscaler customers?

Okay. First of all, I have to do some correction. We are not saying that we don't like CPU application. We prefer -- we will be very cautious about taking production-only project. It is not because of it is a CPU. It is because of it is a production-only project because we consider for the production-only project, the value added from our is very limited, and the gross margin for this kind of project is relatively low to those so-called PD1 or PD2 project, which we provide the design value to the chip. So in the future, if there are CPU opportunities, definitely, we will compete.

Yes. As you know, our company has a long history to do this kind of arm-based server CPU. I think we still have a few customers there. But just like Daniel mentioned, if any particular customer come to us only for wafer capacity only for production service only business, we will put the upside. We need to provide the value in order to sustain the business. But nowadays, the situation is very -- changing very dynamic, the CPU design also getting more complicated.

If the customer needs some design resource, need our support, we definitely will take it. But obviously, the CPU design compared to GPU is relatively easier, because in terms of size, all the GPU is radical now and CPU is much smaller. Nowadays, most of the companies go for the COT trend. The first project, most of them start to do with the CPU. They have a certain volume and entry barrier is relatively lower. But again, there are a few opportunity we are talking on right now. Just like Daniel mentioned, we are not against to take any CPU business, still very good business.

Okay And then Haas, please.

Daniel, congrats on the great results. I guess 2 questions from me. First one is probably just regarding the upcoming 3-nanometer AI accelerator ramp. How should we think about the linearity throughout second half this year? When should we expect it is going to hit the peak, at least the near-term peak in second half of this year? And related, I think you mentioned there's going to be some upside from the volume perspective. But I was just wondering if the COT business model is going to constrain your sales and also margins upside, even if there is additional volume demand from your customers?

Okay. The ramping up speed for the N3 project will be very fast. I would say you will feel the revenue to jump in June, and there will be another jump in the second -- in the third quarter. For the monthly, we expect the monthly revenue to reach the peak starting from the middle of third quarter.

And as for your question for the upside, I would say that Johnny mentioned, for this year, the upside from extra orders from customers is a little bit limited because the turnaround time for this project is very long, 6 to 7 months. So you can imagine if we place the wafer orders today, the chip will come out in December. So for this year, I would say it's pretty much that from the orders perspective. And like I mentioned, there is still another factor to the revenue. It is the yield rate. So we will keep on improving the yield rate of the project and to see how much is the upside we can get for this project this year.

Your question regarding about when volumes start to increase, are we going to lose part of production margin or not? I think -- to be honestly, I think that's a problem most of people, major supplier competitor also facing the same situation when the project used to be $1 billion, now it's a multibillion $20 billion to $30 billion, can they maintain the same margin? The answer is very difficult. But for us, we all know that we are a very reasonable -- we charge customers a very reasonable price after the volume increase for multiple generations. And we are able to maintain the same profit margin. But I think it's going to be quite challenging for our competitor. I also consider that's a benefit for us. If the volume increase so much, sooner or later, people will go for the COT direction and try to find a more appropriate partners.

Got it. So based on your comment, would you be able to remind us about the contribution from this project this year and also next year? And it doesn't seem to be there's going to be like a ceiling even if the volume hit to a certain level next year, even if your customers' demand is stronger than expected, that you can still recognize a lot of revenue and also profits beyond the original scope that you signed or you have an agreement with your customers?

Yes, definitely, we are still working on extra orders from customers next year. And we do believe, based on the current situation, we will still enjoy pretty strong growth for the revenue contribution from this project.

Okay. Got it. And then my second question is just regarding the revenue or profit sharing for the upcoming 2-nanometer project. I guess since it is going to be on the chiplet structure, are you able to capture the whole content when you put everything together or the other IC design service partners doing some part of the design on different tiles will be able to share the revenue once the chipset enters into mass production. Yes. Just wondering how the business model is going to be working for the upcoming projects on 2-nanometer?

Yes, we shouldn't comment too much about customers' architect. But we honestly in the future, maybe starting from next generation, maybe it will be more provider, more partner getting involved. But current production, I think it's straightforward. We are pretty much handle everything, except the HBM, I think is consigned. The rest of them we are handling just like before, even go to the chiplet stage. I didn't see any additional partner get involved for the design we are doing now.

Sure, sure. And then I think just regarding your prepared remarks that you mentioned that you have visibility through 2029. Would you be able to share some of your financial target regarding what is -- what kind of the sales CAGR outlook through 2029, we think we should be thinking about for your company in the next few years and also your expectation for the overall addressable market in the next few years?

No, we are sorry, we cannot provide it. Yes. And first of all, it's the earnings call, it's a quarterly earnings call. We suppose not to give the growth guidance to -- in this meeting. And the reason why we are so confident for next 4 years is because, first of all, we secured the 3-nano -- not 3-nano, the N3 and N2 project. And the N2 project definitely will bring the revenue contribution to another scale than the N3. So that's the reason why we guided outsiders saying we are really, really confident for our growth in the next 4 years. As for the numbers, I'm afraid we cannot provide further information to you.

Got it. What about just the market forecast, if you have anything in your mind you can share through 2029 from the CAGR perspective?

No, I guess that's your job.

Okay. Yes.

And Charlie, please, Morgan Stanley.

Also congratulations for a very strong quarterly results. So maybe not to get your so-called numeric guidance, right, but your major customer announced a 5 gigawatts with Anthropic just recently. So I'm not sure if you see so-called upward revision from the key customer in the coming years for your order. Or if you cannot disclose your revenue CAGR, I think your industry peer MediaTek shared their view about the TAM. It's industry information, right? So are you okay to comment on both of those. First of all, do you see upward revision recently? And secondly, if you have any view about AI ASIC TAM, no matter for 2028 or 2029, it would be great.

Okay. First of all, for the TAM numbers, I would say actually for this number, we -- our information is most likely from you. And to me that I think MediaTek guided $100 billion next year for the TAM. I think, first of all, it depends on the definition of the AI chip because some include those networking, some are not. But to us, I would say $100 billion for the market TAM is not that -- I would say it's pretty accurate because we see the number going up every day, every month. What we know is the demand -- the end demand to our customers and our customers' demand to us keeps on increasing, for the past at least 1 to 2 years. There is always upside request for how many wafers we can get from TSMC.

Okay. Johnny, do you have anything to add? And also based on the TAM, any -- your target, say for market share?

Right. Personally, I mentioned so many times, I'm very optimistic for this market. I'm a true AI believer. And yes, the market TAM, I think on TSMC event, right, they also mentioned about by 2030, people thinking about $1 trillion. But this time, TSMC symposium in the U.S., they revised to $1.5 trillion overall TAM size. And I think the ASIC among these TAM will play a significant role. But for the past 3 years, everybody think about ASIC. But in reality, Google, Amazon contribute majority, more than 90% of the ASIC revenue in that area.

So through that, I think we have a confidence to overachieve the market CAGR. And in fact, we keep receiving some pressure and also additional demand from our end customer for 2 things: maximize the capacity, and we are using all kind of channel and influence to try to get more wafer as much as possible. In addition, we need to tape-out on time for the next generation. I think that's -- we can see customers is so aggressive. I think we should be able to capture this wave in the near future.

Great, Johnny. So since you mentioned about the tech symposium, I think on your website, you also have a press release. And I think you talked about you highlighted 2-nanometer ecosystem readiness, 3DIC integration and also advanced packaging leadership. But there were some participants also told us that you showcased your design with Ayar Labs, which is optical I/O die using TSMC COUPE technology, right? So may I know that it's going to be used for your 2-nanometer project already or the CPO or optical I/O dies for the next generation?

Yes, Charlie, I'm afraid that we cannot answer your question. It is related to our customers' design in the future.

I can also mention about -- I think on the previous few earnings call, I emphasized our ecosystem. The reason Alchip is so different compared to most of our competitors because we are completely neutral. We didn't make any IP, we didn't make any products. So in the other world, everybody, whatever the solution provider is willing to work with us very closely since we already have a track record, and we are neutral.

So you will see more and more this kind of cooperation or even press release in the future. So I cannot -- it's not appropriate to make which one is going to hit volume. Are we going to have any production design soon? Yes, it's not appropriate to comment. But overall, I think you will see more and more well-known company is willing to work with us very closely.

Sure, sure. Yes, I think that's totally reasonable. I think it was great to see you can showcase your technology capability with partner. So last one, I will be back to the queue. I'm wondering about the competition, right? I think some is well discussed. I think I can call a name, for example, Meta, 2-nanometer projects. And there's also another one. I think it's a U.S. automotive for space or robotic customer, right? I think that is also very important for your foundry partner. So can you comment a little bit about those 2 project win chance? And also, how do you compare yourself to those short list, right, meaning GUC, MediaTek, even Qualcomm for those project competition?

Okay. Yes, I think -- yes, it's true, the competition is getting more intense. But if you think about the whole picture, the design opportunity is getting more and more. And before each of the hyperscaler only have one solution. Now they are thinking about the primary alternative or second source. Eventually, each of design will have a huge volume. They are going to have multiple source.

I think this trend is unavoidable. But if you look at all the competition, maybe just 5 fingers. I don't think there will be any newcomer or the hyperscalers barely to use any newcomers. So I think at the end, we are only competing with maybe 4 of them. Of course, each of them are very respectful competitor. The size are even much bigger than us. But I think we have our niche. We have our own DNA

If you talk about the pure ASIC provider, I consider we are still #1. A lot of newcomers, they are doing product in parallel with doing ASIC. By natural, there's -- first of all, there will be some conflict interest out there, plus there will be a different DNA because doing the service and doing the product are totally different, totally different. So when the market opportunity getting more and more, and if we still -- if we can deliver the design on time with the quality like we used to do, I think we can -- for sure, we can capture more projects. But I don't intend to win in all. But for sure, we are going to be continuously to be a very important player in this industry.

Okay. Next one, Jeffrey, Macquarie, please. Jeff?

Can you hear me okay?

Yes.

Yes.

Okay. Great. I guess maybe to follow up on Charlie's question. Over the past couple of quarters, you really said you're focused mainly on your current customers, current generation that you're ramping up now and next generation one. And then this time, you also add that multiple ASIC design opportunities for North American CSPs. So I guess, are you a lot more confident on getting other major orders in the next year or so now versus a few months ago? Anything has changed there?

Okay. As always, we really don't want to release something like, oh, we have 70% confidence to win or 60% confidence to win because NRE winning everything, lose is nothing. I will say we do have opportunity to compete for multiple projects from those North American hyperscalers. As long as we have good results, we will find a proper time to deliver the message to the investors.

Okay.

You're right. For the past years, our current customer will be our primary focus. We need to make sure that design tape-out on time and winning their next generation. And -- but in that way, in addition to this customer, we do have so many wins in the North American region for the emerging account. So if you count number of tape-out and number of design win, compare Alchip with any vendor in the industry, I can tell we are one of the best.

In terms of number of tape-out, in terms of number of project winning, I think we will be one of the #1 for sure. But if you talk about the hyperscaler significant winning, I have to admit we have a chance to win. We are in the progress to win another. But right now, I think our current customer, I think, play the most important role. We don't have other hyperscaler -- major hyperscaler in our portfolio yet -- I'm not talking about the consumer for the AI, HPC accelerator, we are -- right now, we only have one important account. And fortunately, this is one of the most important account in the industry.

Great. Understood. And one last quick question. You talked about the top 1 and top 2 customers this year. Who do you think emerges as top 3 customer by next year?

Top 3 customers, I think, is very difficult to estimate. Maybe I think the top 1, #1 will remain #1 for a while. Whether we have another account can overachieve our #2, I think it's also possible.

And if that happens like the networking company or something else, you say, within the next year?

Yes, a few significant -- few good account we already won. We hope they can hit volume starting from next year.

Okay. Next one is Gokul, please. I'm sorry, Laura, please. Laura, please.

I just have a quick ones. We know that Alchip has a very close relationship with TSMC and also work very closely on the CoWoS ecosystem. But we also noted that various different customers may also looking for other alternatives on the OSAT or a different approach on the advanced packaging. So just wondering that from your experience or your expertise on the back end and also the packaging side, will that be any kind of a challenging when you're working with other non-TSMC's packaging partner? Would that have any impact on your project progress going forward?

No. Actually, first of all, for now, the wafer is the bottleneck, not the packaging, not the CoWoS. And secondly, I would say, for the N3 project, TSMC support the capacity pretty well. TSMC has a very high commitment to this project. So no matter for the wafer or for the CoWoS capacity, we were -- we are satisfied with the support by TSMC.

However, if there is other vendors who can provide the so-called 2.5D like packaging, we don't have a problem with them, okay? So our ground rule is straightforward. I think everybody has a huge dependency on TSMC and we wouldn't provide -- we wouldn't propose any non-TSMC solution to our customer, if TSMC can provide related capacity. But if our customer due to capacity shortage thinking for an alternative solution, then we will -- based on the past principle, that will be noticed TSMC because we don't have a capacity, then we are thinking for alternative solution, and then we can working with other vendor closely. Yes. In fact, we -- on the previous generation, we're also working with that particular vendor to support customer project before. So I think it's -- in terms of technical, I think there's no limitation for us to find another package vendor.

Sure. So we can actually basically expect for the -- maybe the next 2, 3 years, the majority of your packaging was still at TSMC. But other than TSMC, if any other alternatives, you may also try in case of any capacity shortage.

That's correct.

Okay. The next one -- I guess Gokul raised hands ahead of Lucas. Okay. So sorry, Gokul, let's have Lucas ask question first. Lucas, please. Okay. I guess -- okay. Lucas's question is here.

The management previously shared some progress on networking application. Could you provide more details regarding the current status and the specific application of your networking ASIC projects? Furthermore, what's your outlook for the networking ASIC market? And what kind of revenue contribution do you expect?

Okay. For the networking projects, everything goes smoothly. We are doing multiple projects with multiple networking customers in North America, one of them already approaching the production phase. And the others, we are -- the other customer, they are trying to do multiple projects with us. And the N3 project is in design phase, and we are going to kick off the N2 project very soon. So those networking projects are actually data center related. I cannot disclose the details for each of the projects. But I would say for the networking project with the North American customer for the N2 and N3, we do expect they can contribute us meaningful revenue in the following years. The meaningful means to us, it means projects with revenue exceeding like $100 million annually. That's meaningful -- that's the definition for meaningful revenue.

Okay. I guess this answers your question. Lucas, I'll go back to your second question later. So Gokul, please.

So Johnny, I think you mentioned the new hyperscaler customers coming in that you are engaging with. Can you talk a little bit about the nature of the engagement? Are they more like COT based largely like PD2 or beyond? Or they are also mostly PD0 or PD1 kind of Netlist level or spec-in kind of projects. Could you talk a little bit about what is the nature of these engagements? And your view on like how this COT trend is accelerating and the capability of some of these hyperscaler customers that you're engaging with on their ability to execute COT projects themselves?

Okay. Yes. I think to be very straight to you, I think I can say at this moment, all major hyperscalers, they have a huge intention to go to COT sooner or later. So we are discussing in so many different phases. The most simple one is our preferred model is if they have architecture-related capability, we can help them to do the back-end implementation and then doing the packaging testing. I think that's our normal business model.

And some customers go even further, they say, I can handle part of a physical design. And I take the confidential block, you take the critical block, we can work together. I think this kind of flexibility we also have. And someone even say, do you want to do the production only kind of business, even though it's not our preference, but I think we also take. And -- but going further, if some of them need some I/O chiplet-related design, they don't have IP, they don't have a resource. And we find -- we are working with them to find the right IP and implement the I/O chiplet as a KGD to help them out.

I think that kind of business model, we also start to establish. But if the customers do not have a capability to do anything, they need us to do the design architect design, provide the rack and those kind of stuff. I think those kind of business right now, we try not to do by ourselves, but we also have a partner that's also public announcement. We can -- if they are willing to use NVIDIA as a solution, we are NVLink partner, we can provide this kind of networking solution through partners. So there's so many different models. Like I mentioned before, now customer has so many different design opportunity. Each of the design has a multiple version and they need some -- they really need some help. And sooner or later, their preferred model is to go to pure COT. And then we can -- I still believe that -- going that direction will be favored the company like us.

Got it. That is very clear. Then secondly, I think for your automotive customer project, I think it's already ramped up. How are we thinking about the size of this business for the current generation and maybe for the follow-on generation as well, given there has been quite a bit of ups and downs in the China EV market. Are you seeing any changes in terms of the size of the demand? Or like some of the other automotive companies are also using some of these chips for nonautomotive use cases, including drone or robotics. Are you starting to see some of those things happening with this customer as well?

Okay. Actually, your question is very similar to the question from Lucas, the message board. I'll say this way, for now, we are doing -- we are doing projects with Auto for their first project and the second project. And the first one is in production already, and we are doing the second project. And as for the other automakers, for now, we are targeting 1 to 2 automakers in China. It's not proper for me to speak out the names of them here. But we do consider that some of those China automotive makers are trying to build up their own ASIC, not only for their cars, but also for the future applications such as the robotics.

Yes. And also one highlight was to mention for this kind of business. Yes, we all know the total number of cars, the market is predictable. But nowadays, because of competition, because of functionality and people -- all the car industry is planning to put multiple chips into one vehicle, the current generation, minimum of 2, then for the high-end one, they even think about the 4. So I think the -- and similar situation happened to our customer. I think starting from the next generation this year, we will see multiple chips being imported per vehicle. I think that increased the volume quite a bit.

Okay. I guess we will take the last question from Charlie to conclude this earnings call. Charlie, please.

Great. So very quick follow-up. One is a follow-up on question about 2-nanometer generation. It was about ASP revenue size, but I'm wondering about the gross margin or operating margin profile versus 3-nanometer. Is that something you can talk about?

I would say the gross margin will be pretty similar with what we have currently.

Okay.

Yes. We also negotiate with the customer very closely. I know the revenue getting bigger, but exact capacity are also getting higher. But yes, to be honestly, we are the most reasonable service provider in the industry. We need to -- yes, so customers also understand that.

Okay. And next one is a follow-up to Lucas's question about U.S. networking project. But I remember you have 1 or 2 accelerator start-up customers as well, right? Can we get a sense about the progress and can either of those be the jackpot for your revenue next year?

Okay. Charlie, I guess I can understand what the project you are mentioning to. I would say for the 3-nanometer project, it's going to kick off shortly. And for the 3-nanometer one, we expect the production revenue to kick in most likely next year, the first half next year. But for the 2-nanometer, the N2 project, we are going to kick it off very also shortly. And for the production revenue contribution from this N2 project, most likely 2028, I would say. For the scale, honestly, we don't -- I don't have a picture for you.

Okay. And last one, probably more a bit long term or kind of strategic question to Johnny. So in the recent years, you hired several high-profile senior management, including 2 years ago, your CTO. In the recent months, you hired your Chief Business Officer. I think he was from NVIDIA, right? So just out of curiosity, how do you convince them to join your team? What do you expect them to deliver for you, especially it is a CBO, right, since he comes from NVIDIA. Can we enter some partnership with NVIDIA in the future?

Yes, I think, this is a -- NVIDIA is our good partner, but I think the different company has a different strategy. I think with this new CBO on board, I think we really boost our company's relationship and reputation to the next level. I think -- to be honestly, I'm also very surprised. He well, very shocked and happy he's joining us. Last week -- two years ago, I just attended a very important event from TSMC North America VIP dinner. Literally, every single one congratulate me to hire the right people.

But anyway, so we consider when we talk to hyperscaler people from the technical side, from the track record side, there's no issue. Every time when we talk, the potential customer always extend the meeting period. They really like our solution. But in terms of upper management relationship, we are kind of behind compared to our competitor in the U.S.

So in the future, we will continuously to invest in U.S. and hire more related people on the business side, on technical side and in order to fulfill the gap and also in order to prepare the solution ahead of the competitors.

Got it. Yes. So with those senior customer relationship, we look forward to your future major project win.

Yes. We are all very excited that people with Freddy, his name is Freddy Engineer, with Freddy's cliche can join our company.

Right. Yes. If you have a chance to get all his background, it's all data center or hyperscaler related on their previous company in NVIDIA and also even more previous company in Xilinx.

I guess because of the time limitation, we will end our first quarter earnings call now. And if you have further questions, I guess you can mail to me or just call me. It's really easy for you to have access to our company. Thank you very much, and thank you for joining our first quarter '26 earnings call. Thank you. Thank you very much.

Thank you very much.

Dear investors, analysts and portfolio managers, this is Daniel Wang, CFO of Alchip Technologies. Welcome to our fourth quarter '25 earnings call. And thank you for your patience. We will start the meeting immediately. So for reference, as a routine, it is safe harbor disclaimer. And this meeting will be in English. If you need Chinese presentation slides, you can please go to the MOPS, go ahead and download the Chinese version.

And you can write down your questions through Teams message function, and we will answer them accordingly. During the Q&A session, you can use the raise hand function, we will comfortably answer your questions. This video and audio content of the meeting will upload to MOPS. It takes about 2 to 3 hours to upload the file. So if you want to review the meeting, you can go to MOPS for the video and audio content about, like, 5:00. So the first part will be the message from our CEO, Johnny Shen.

Good afternoon, ladies and gentlemen. I'm Johnny Shen, CEO and Chairman of Alchip Technologies. Thanks for joining our investor conference today. We truly appreciate the opportunity to share our Q4 financial results and provide the update on our business outlook going forward. Our first quarter revenue come in below the plan. Primary reason is due to lower-than-expected production revenue. However, our service business recorded modest growth. As a result, the revenue reached $153 million with a net income of $47.8 million and EPS TWD 18.29, which is slightly higher than Q1 and the highest quarterly EPS for the year. The more detailed financial breakdown and analysis will be presented by CFO in the later section.

Now, let me recap few highlights of the last year. 2025 was not a present year for us, especially given the most of our major AI-related players delivered exceptional performance in terms of revenue, earnings and share price. In contrast, Alchip's revenue declined significantly with net income and EPS also decreasing by approximately 10% to 15% year-over-year. The primary reason is the decline -- for this decline is due to lack of production revenue as we miss one product generation from our #1 customer.

The most important highlight for last year is that we successfully regained the position with this customer. The new design was taped out last year and chip now is ready for high-volume production starting from Q2 this year. In addition, design activity for the next generation has already begun. We expect to complete the design by Q3 this year, positioning us well for the next phase of growth.

Another highlight of last year is our automotive business in China. While the design and prototyping stage progressed smoothly, we did encounter some geopolitical-related challenge during the process. These issues has been fully clarified and resolved, and mass production has already begun. In addition, development for next generation product has already started, further strengthen our position in this segment and supporting continuously growth in automotive market. So other than these two high volume production, we have also achieved several important milestone with the emerging AI-related customer, primarily in U.S. market, leveraging the latest technology like N2 or N3. This engagement representing promising opportunity to lay foundation of future growth in advanced AI silicon platform.

Another highlight is was improvement of our gross margin, although the revenue declined significantly due to lack of production revenue, but our NRE remained very strong, contributing about 7 percentage points improvement in gross margin compared to the year before, reflecting our different business mix and improve of supplier relationship. Ecosystem partners, like I mentioned before, starting from Q2 -- starting from N2 process, sorry, the HPC design become very complicated.

Yeah, single design require integrating multiple directs and diverse solution. Unlike most of our competitor, follow a captive kind of solution, syncing for higher margin. Alchip is promoting an open ecosystem strategy, collaborating with a broad range of partner to develop comprehensive and efficient solution. Our ecosystem network has expanded substantially in the recent quarter with many partners eager to get in. We firmly believe the future of AI industry will lie on ecosystem, instead of a captive solution.

Geopolitical risk management, we continue to diversify our business and design resource beyond China. In 2025, less than 8% of the total revenue contribute from China. Yeah, to strengthen our global engineering capability, we have launched a very aggressive hiring plan, focused the region outside of China.

Now, our Japan office can accommodate more than 250 employee, while our Malaysia and Vietnam office now hosts over 120 engineer combined. And in conclusion, we expect Q1 revenue remain at a similar level. Beginning in Q2, we anticipate a strong ramp as a key production revenue resumes. For the full year, we have a confidence in delivering significant revenue growth, even compared to our peak year in 2024.

Looking ahead, we remain very optimistic in long-term outlook for AI market. From this year to 2029, we expect our growth momentum remain in line with the industry leader and competitors. We are confidence in our ability to outperform the overall market CAGR in high growth HPC and AI market. Thank you very much.

Okay, this page is the fourth quarter P&L. The numbers just like Johnny mentioned, for the Q4 last year, we record $152.7 million, which represents 31.5% quarter-on-quarter decrease and a 62.2% year-on-year decrease. But given the improvement of the growth margin, our operating income last quarter was $39.1 million, which is 1% year-on-year -- quarter-on-quarter growth and 27.9% year-on-year decline. For the net income, last quarter, we recorded $47.9 million for the net income, translating into EPS of TWD 18.3, which is 8.1% quarter-on-quarter growth and 16% year-on-year decline.

And for yearly numbers, like Johnny mentioned, due to lower production revenue contribution last year, our revenue for last year is $991.9 million, which is a 39% year-on-year decline. However, given the gross margin improvement, our operating income last year was $160.9 million, which is a 20% year-on-year decline. The net income was $179.5 million, which is an 11% year-on-year decline. So the full year EPS for last year 2025 was TWD 69.2.

In the next page is the revenue breakdown by applications. You can see that the HPC/AI related revenue still accounts for the majority of our revenue, quarterly or yearly. For last quarter, the AI/HPC revenue accounts for 67% of our total revenue, while the niche market, networking, and the consumer accounts for 4%, 7%, and 22% respectively. The yearly breakdown, for last year, 83% of our revenue contributed by the HPC/AI category. And the other sectors such as the niche market, networking, consumer, accounts for about 15%-16% of our total revenue last year.

And for the Process Node, we can still proudly say we are the industry leader in terms of the Process Node technology. For last quarter, 3-nanometer and the 2-nanometer combined accounted for 36% of our total revenue, while 5-nanometer and the 7-nano accounts for 43% of our total revenue.

Combined with the 3-nanometer, 7-nanometer total at nearly 80% of our total revenue last quarter. And for 2025 as a whole, 3-nanometer and the 2-nanometer revenue accounts for 14% of our total revenue, while 7-nanometer and 5-nanometer accounts for the majority, which is 73% of our total revenue last year. For the regional breakdown for last quarter, North America is still the major market for us, which accounted for 50% of our total revenue. While the Asia Pacific accounts for 18% of the total revenue. The revenue from Japan accounts for 6% and the others account for 26% of our total revenue.

For last year as a whole, North America remains the majority, accounting for 78% of our total revenue last year. And the other three areas, including the Japan, Asia Pacific and the others account for 8%, 8% and 6% respectively. For the number review for last quarter, like Johnny mentioned, despite the weaker revenue last quarter, the high gross margin made it the most profitable quarter last year. The Q4 revenue declined 31% quarter-on-quarter, due mainly to lack of the production revenue. Although the sales is not strong, the gross margin last quarter reached 42%, which makes our net income the highest among all quarters in 4Q '25.

Number wise, we consider last year is a temporary hiccup prior to returning to a long term growth. Because, like I mentioned, we lost a generation of the major product, but we regained the next generation last year, which makes our revenue has the gap in 2025. However, since we kicked off -- we already kicked off the 3-nanometer accelerator last year, and then we are targeting to start the shipments in the second quarter this year. We think for this year, the overall revenue, we will enjoy a very good growth. Beyond this year, since we already secured the 2-nanometer project, which will lead a relatively long term growth outlook for Alchip Technologies in the next four to five years.

And this page is for the outlook in the first quarter in 2026. The fourth quarter, revenue wise, remains sluggish, to be honest. I would say the first quarter this year will be pretty similar to last quarter. Production net revenue is that we don't have too many production revenue. The NRE, although from the full year perspective, the NRE will be strong. However, the first quarter usually is the lowest quarter for our NRE revenue performance. So for the first quarter, we are expecting the overall P&L will be pretty similar to the fourth quarter last year.

And for this year as a whole, first of all, we emphasized many times that our 3-nanometer AI accelerator will start contributing to our revenue in second quarter. The NRE demand and the pipeline projects remained very strong. We see multiple projects in both leading-edge Process Node to kick off this year, starting actually from the first quarter through the whole year. The majority of the projects, those AI HPC related projects, come from the North American market. And we do expect multiple 2-nanometer project to kick in, in the following days of this year, which will bring in strong momentum to our NRE growth.

The last one is we are expecting the most important 2-nanometer accelerator project to tapeout by the end of this year, which will ensure Alchip's pretty good long-term growth outlook. I guess that's our presentation part of today's earnings call.

[Operator Instructions] We will answer those questions accordingly. Thank you. [indiscernible] please.

It is great to see the business is coming to the inflection. I would like to start from your major hyperscaler AI accelerator projects. You mentioned we should see significant growth from 2Q this year and also into second half to drive a solid growth this year and also next year. I'm just wondering how should we think about the linearity for the project ramp on a quarterly basis? or to be more specific, we think...

Your voice is a little bit breaking down.

Okay. Yes. I just want to be more specific that how should we think about your revenue headwind for first half versus second half of this year? That's my first question.

Okay. I would say it will be very imbalanced for the first half. I would say the distribution will be quite, I would say probably 80% of our total revenue this year will be concentrated into the second half.

Yes. That includes NRE and also production business, right, both of the business?

Yes. The total revenue. The total revenue standpoint.

The total revenue, production revenue become very big, the NRE began to play a very insignificant role for total revenue.

Okay. Yes. And just on that, how should we think about the margin profile because you are reramping your production business quite significantly again. And should we expect that trend to persist into 2027, especially with your customer recently signing a 2 gigawatt [ power ] supplying to OpenAI powered by the ASIC.

I would say our customers' business has nothing to do with our margin. For the margin guidance, our previous guidance remains unchanged. I don't consider 2025 is a good benchmark for 2026 since in 2025, we don't have a very big production. So 2024 is actually a better benchmark for 2026. And our guidance remains the same. Our gross margin will be higher than what we had in 2024.

Okay. And yes, I mean, just on the 2 gigawatt computing power signed between Amazon and also OpenAI last week or two weeks ago, I was wondering if you are seeing incremental orders from your customers on that kind of agreement? And/or on the supply chain side, are you able to mitigate through the supply shortage of 3-millimeter CoWoS as well as substrates this year? And how are you going to just manage that.

We don't comment [indiscernible] or actions by those hyperscalers. I can only say for the substrate shortage. I would say this way, we communicate frequently and intensively with our suppliers, including the substrate supplier. And since this project is very important, a very good application from a very good end customer. So the substrate supplier has very high commitment to the project. So even though there is a shortage -- potential shortage for the substrate, based on the current information we received from those vendors, the impact will be very, very limited.

Yes. And also, as you know, the [indiscernible] capacity is very, very high. So even though you see some upside from somewhere, I think unlikely it happened in this year. So right now, the N3 capacity is fully booked in the industry.

Okay. At least that is a good reason for 2027 for the incremental demand, yes.

So we will come back to you later. Okay, Charlie, please? Charlie, you can unmute your microphone. Charlie, are you there? Okay, he seems to have problems -- okay, sorry.

So my first question is also about this year's revenue trend, because you just mentioned that the second half, you have like 80% revenue concentration. So can I also get another hint whether your single quarter revenue can reach like USD 1 billion in this year?

That, we cannot give such precise guidance because of the regulation. I would say for this year, that's possible.

Okay, okay. Yes. I wanted to provide some more ground for you to come from the potential target, like a quarterly revenue to be USD 1 billion. So I want to follow up whether your team can really squeeze out more outputs from your testing program? So that's why you see kind of additional revenue from the major 3-nanometer projects.

I would say it is not that related to the testing broker because like Shyang mentioned, for this year, actually the wafer capacity is very, very tight. And it is also because the [indiscernible] for the production for this 3-nanometer accelerator is very, very long. So for now, we already placed the wafer orders for like November. So the room for the expected numbers to change is limited.

Okay. Okay. Yes, because last time, you just mentioned that through your wafers in a testing program, there could be additional outputs...

Yes. We are still trying the last month. And the end of this year, a month revenue for a single month is also quite significant.

Thanks for the additional color. Yes. And also, you mentioned that you're going to tape out the 2-nanometer by the end of this year, right? So I'm not sure is there any schedule pulling, because I know the demand from your major customer and also your customers' customers, right, the OpenAI deal seems to suggest very long-term demand for that chip. But our [ checks ] also suggest that the [ 23 ] system performance is not that ideal, right? So I'm not sure if you can have this kind of a conclusion that 2-nanometer need to pull in. And also, can we get your confirmation that whether second half next year, we are going to see 2-nanometer [indiscernible] revenue?

Okay. Charlie, first of all, I would say our customer is very satisfied with the performance of the 3-nanometer accelerator we designed. So I haven't heard any complaint about the performance for design by the customer. And for the schedule, I would say the customer always want the chip to be -- to take up quicker, trying to bring the project schedule. It is a norm in the industry, which can lead our customers more buffer for a range, the timing, the presentation, everything. So the quicker, the better. However, it is about engineering. So we try our best to satisfy the customer. For now, I would say we are not committed to do that to meet the schedule, but we will try our best. For now, everything is on schedule. We are very happy with it. That's the current situation driving the 2-nanometer project.

Yes. For N2, even you call 2-nanometer, but you also contain other tape-out in, other technology like N3. So this is design unlike before, it's very complicated. It requires multiple tape-out and also the verification stage will be longer. So if we can complete the design by this year, I think that's much to achieve. But if we can do that, I think the customer will be very happy to achieve. They are shooting for -- yes, you are right, they are shooting for prototyping potential schedule by near the end of next year. That's they schedule. That's [indiscernible].

So last one I will be back to the queue. The CPO adoption timing, right? So I think Broadcom CEO said that the CPO adoption for ASIC would be very late. But I'm not sure what's your observation? Would there be CPU adoption in your N2 generation or your 1.4-nanometer generation? And what's your take on MediaTek stacking in your optical IO die partner Ayar Lab?. I know you want to promote this open ecosystem strategy, right? But why would your industry peer want to stake in this Ayar Lab?

Okay. Yes, for -- when will be the CPO-related product go to production, I think the situation changed a bit. Before people thinking about whatever the speed over 400 gig, it has to be go to optical. But recently, NVIDIA just announced this kind of bidirectional service. I think that we can say that still one generation. So unlikely, the N2-related design will adopt -- fully adopt the CPO. Most likely, I think will be the next, next generation. I think the similar situation to our customers, I think they don't have a current plan yet. But in terms of CPO potential, yes, I still very optimistic. It's design dependency also manufacturing design dependency. This is beyond 400 gig. Beyond 400 gig I think the CPO is a must to adopt. So -- and comment on the MediaTek invest, one of our partners, I don't think there's any competition between us and MediaTek. We're still winning. We were still doing the tape-out for this particular customer. During the design, I don't think NVIDIA MediaTek has involved for design activity. The probably -- they have a partnership for other strategic reasons.

Got it. So let's say, if you continue to win 1.4 nanometer and then they will adopt the optical I/O die for the CPO, UBL chip provides the design service?

Charlie, we cannot count upon particular project here. I can only tell you, first of all, you probably can see the press release from IR, not only MediaTek, Alchip Technologies is also the investor for this series [indiscernible]. And we have been partner with Ayar Labs for long term and Ayar is our partner and these also our customers. We are working together on some projects. So in the future, we think these two companies [indiscernible] and Ayar will keep up close relationship [indiscernible]. And the same thing, I would say the same thing for MediaTek. MediaTek invest in Ayar, and I would say MediaTek will also be [indiscernible] in the ecosystem for sure.

And Laura, please, with Citigroup.

Yes. Can you hear me?

Yes. Yes.

My question is also about the future chip designs. As Johnny mentioned that it's becoming more complicated with different kind of chiplet designs going forward. So I'm just wondering that for L chips, you will still handle the 4 chips integration in the future or you might also kind of do the partially design and tape out and work with other partners potentially like MediaTek or other peers in the industry?

Yes. I think our preference, if we can handle customer has related resource to prepare on the architecture, I don't think for back-end implementation, we have any limitation. But if the customer are willing to adopt the commercially available I/O chiplet, we can also do integration. But for right now, most of the design we are doing for N2 chiplet is all done by us doing back end. But eventually, if available solution appear, yes, I think that's also a possible case.

Sure. So in the near term, maybe in like a two years perspective, so far, our project is still fully handled by ourselves, right?

Yes. Yes. Even the customer decide to get the I/O chiplet by themselves, but that will be the [indiscernible] similar model to HPN, yes, we will take the die to the final integration and also the production.

That's very clear. And also, my second question is that aside from your biggest customers in U.S. right now, are you also working with other CSPs for next-generation AI accelerators, and which we may see potential contribution in two years?

Yes, of course, we talk with everyone. But just like the scheduling we are talking about the 3-nanometer or 2-nanometer. For now, actually, if you want to have revenue -- production revenue contribution, probably you have to win now and you can get revenue after 1.5 and 2 years. So I would say this way, the trend I talked to investors two years three years ago is actually realizing. First of all, we told two years, three years ago that the CSPs, especially those big ones, they have very strong incentive to go for ASIC, it is realizing, right? And another trend I would say we are also seeing the trend is ongoing right now is those CSPs are trying to lower their cost, because the CapEx is getting unrealistically tough. Any savings to them will be quite significant. So we still believe under this trend as long as we are capable of doing those [indiscernible] design and meet the customers' needs. We -- our position is very good.

Yes. So given that we see various different kind of like inference or training perspective, now your products are mainly focused on training or big model, the potential projects you are now engaging with your customers, are they like a new market or focus you are looking for, which may contribute in the next two, three years?

We do have some applications, but some customers we consider will be a jackpot to us in next two, three years. We do have those projects.

Okay. And Jeffrey -- Jerry Su please.

Can you hear me?

Yes.

Yes.

Okay. So my first question is want to understand that I think for the current ASIC design, the chips are getting more complicated. I think previously, you have discussed that your customer adopting a COD business model. So might be although Alchip do all the design service, but the actual wafer start could be a split between you and your customer. Can you give more color on what is you are seeing for this year's project and also perhaps for the N2 as well? How should we expect the allocation on this front? That's my first question.

Okay. Like I said, we are not allowed to talk about specific project into details. I would say, again, like we talked to the investors in previous meeting, we -- when we talk with the customers, there are many considerations. First of all, the gross margin. Secondly, the scale we can handle for the production revenue because as I mentioned, the production turnaround time is very long. So the working capital requirement is high. So we will evaluate every element of the project in order to talk with the customer for a proper business model. That's what I can push to the boundaries for answering your question. Further detail probably I may not be able to share.

Also the allocation thing.

Yes, yes.

Okay, I got it. Then just to follow up on the 2-nanometer. I think in the prepared remarks, you mentioned that you have multiple other projects. So aside from your largest customer, can you also comment a little bit about those other projects? What are they going -- what are the -- can customers? And when should we expect to see revenue contribution?

Actually, various type of customers. We understand that the N2 project, the N2 process node will be -- it's a very, very expensive project. However, since in the North American market, for some emerging accounts, they are funding very, very well, because all the capital in the markets [ go ] to the AI sector as long as they have strong team and the innovative ideas, probably to do a 2-nanometer project is not a problem for them. So for our 2-nanometer [ traditional ] projects, we have emerging accounts and we also have some traditional networking companies in North America. [ F4 ], N2, I think obviously, the use are very limited, either it's all AI-related application, either in the networking or in the accelerator side. I hope we answered your question.

What is the rough timing to see revenue contribution for these emerging accounts for traditional networking companies?

Actually, the revenue is what, already there. The NRE kick off already there.

So that means that our mass production could happen after your main customers take off? Should we -- is that the correct interpretation?

Yes.

Okay. Got it. And lastly, on the automotive side, can you also give us some color on how should we expect for revenue this year? And also perhaps into next year as well.

Sorry, because actually, the [indiscernible] worn specifically asking not to say numbers in the earnings call. So I can just tell you like we described for this year, we are shooting for high revenue performance. And the potential for AI accelerators growth is quite significant. And our CEO, Johnny also mentioned we are expecting our growth to match up with the industry growth or even better.

Yes. For all the business, I think -- yes, for sure, that will be our #2 customer in terms of revenue.

And Johnny, please. [indiscernible], please.

I just have two quick follow-up questions. I think the first one is just regarding your value add on the chiplet on 2-nanometer project because it seems that there are going to be multiple takeouts on different nodes. So I understand that on the back-end side, it's going to be pretty complicated. But the reality is that there are going to be more of the chiplets or the tiles coming from the other part of the design service partners or ecosystems. So I'm just wondering if you could share the margins profile for the upcoming 2-nanometer projects, whether it is going to be as high as the one that you are going to ramp pretty soon in the following quarters?

Various type of form is possible for the 2-nanometer process in general. We cannot have a given project. For example, we can do the [ Top die ] physical design and we can do the integration for the [indiscernible] type of business model. Of course, we can also do the physical design for the I/O die and do the integration for I/O die and Top die. So any kind of the business model, we will be kind of...

Yes. So for I/O die, I think so far, like I mentioned before, most of the integration and production are handled by us. And also in terms of size and the die price, I/O die is much cheaper than -- I mean the computer. And if in the future, with more I/O die, play more significant role, then the model, I think, will be similar to HBM. We get the I/O die, if it happen, we get the I/O die in and we count out this portion of the revenue is similar to HBM and maintain our gross margin.

Okay. Yes, that's pretty clear. And then just a follow-up on the CPO, and I will be back in the queue. I saw that you and Ayar Labs at TSMC's OIP symposium last December that you actually would provide EIC and also the networking switch to integrate with Ayar Labs [ PIC ]. Would you be able to comment about this which nodes that you are running on? And second thing is that it seems that the networking switch that you are able to provide to integrate with Arya Labs PIC is actually just -- it's actually not simple at all or the die size -- yes, I was just wondering regarding the die size for that networking switch and also the EIC, whether it is actually going to be another significant opportunity for you outside of the core AI accelerator business.

First of all, your voice is breaking up a little bit. I try my best to get your question. For I, please consider it is a partnership, just pure partnership. Arya Lab is our customer and we do project with them. As long as for what kind of project EIC, PIC whatever, we cannot disclose this kind of information in earnings call. And we -- both companies management committed to each other to the future design for those chips requiring high-speed transmission. So yes, I'm sorry that we cannot disclose such detail for a given company or a given project.

Okay, and next one will be Charlie. Charlie, please?

Okay. I'm fine if you want to get new caller to ask question or maybe I do it quickly, okay? So yes. So first of all, I remember you sort of have some involvement in LPU design. And I think the company recently was a so-called acquired hire by NVIDIA. So I'm not sure if customers still want to take out that LPU. And also, I'm wondering because that design include SRAM, right? So I'm not sure is that the same foundry for the SRAM production.

Okay, for the project we are doing with [indiscernible]. Currently, it is a cost. So I would say the decision will be made by it's new owner, NVIDIA. If they want to continue the business with us, we are more than happy to so. If they want to do it by themselves, of course, they pay for our work, they already pay. So we cannot work on that. So I cannot give you a firm answer, but the current status is the project is in the cost.

Yes. As you know, the supplier relationship between us and NVIDIA are different. So yes, it's kind of debating situation who's handling if they go.

I see. And also another very, very big U.S. customer opportunity I'm referring to the 2-nanometer U.S. automotive and potential robot chip design, right? So is that a reasonable target for our Alchip sometime in 2028 or 2029?

Of course, any big company in U.S. with big volume is our target. We are shooting for, I would say, everyone. Actually, we are engaging with almost everyone in North American market like Microsoft, Google, those kind of CSPs or other big names. We are happy to do business with them for sure.

Okay. But if you look at the current so-called 3-nanometer project, I think is by your industry peer, GUC. Do you believe there is a level of so-called level playing ground when you compete for 2-nanometer?

I would say GUC is a respectable competitor and peer for us. I think the market is very big, and we compete, yes.

Okay. And last one, I think it's a little bit more strategic discussion. So Johnny, I wanted to get your view because recently, as you know, that the AI already started to transform or even disrupt the software industry. So some of your EDA partners like Cadence, Synopsys, they got some doubts from investors whether this is also disrupted by the AI. So I'm not sure to Alchip, right? It's kind of AI automation for design flow, validation, whatsoever. Is there a long-term positive or negative to Alchip? I think positive argument is that your productivity will increase, but negative is that whoever maybe not with a very long experience, they can use AI tools to design the chip for customers.

Yes, I think that this is a very big question. Actually, personally, I am the AI believer. I think sooner or later, most of the work can be replaced by AI gradually. I think -- but right now, we are also working with all the EDA vendor very closely at Synopsys and Cadence. There will also improve quite a bit using this kind of inference. But what I understand is currently AI is still a statistic approach. If you have enough reference on the specific [ process ] node, you can -- they can anticipate all the timing problem, electrical problems in order to shorten the kind of long time.

But for most leading-edge technology, there's no database yet. They don't have this kind of reference. So from a statistical point of view, AI doesn't work. So that's why including us and also our competitors, when they are doing a leading-edge technology like N2 plus multiple N3, they need more than 100 people. But if you go back to like a 28-nanometer, 40-nanometer or 60-nanometer, in usual case, within 10 people, we can do most of the work. I think AI is the power getting bigger and bigger. Maybe ultimately, they can do something. But right now, for the most leading-edge technology, including us, including our customer and industry peers, they need more people. [indiscernible].

Yes. That's super helpful. Yes, so I think even back-end design, there are several stages like place routing. And as you said, right, there's no database. You need to -- based on customers PDK, based on your experience. But for some sort of steps like validation, I think, is a pretty labor-intensive, very tedious. Would that kind of a chip as [ station ] be gradually migrate to the AI?

Yes. I think for some point work, we can see the AI really help. And also most of our work is done by using the server type of CPU, some specific case, and we are working with the vendor to use the GPU. As you know, the GPU performance for the point task is much, much faster than CPU. So those kind of improvement can reduce not only the design resource, but the design turnaround time. I think that's also very important. So AI is gradually get involved for all design activity almost everywhere.

Because of the limited time, we answer the last three questions, and I would say, after that, we will conclude our earnings call this time.

Mr. [indiscernible]?

I just wanted to clarify, OpenAI and Amazon have signed like a 2 gigawatt worth Trainium order, right? 2 gigawatts is a lot of capacity. So you're saying 2026, there's not a lot of room for orders to change. But I want to clarify whether there can be upside to what you guys are forecasting for 2027? Or should I interpret this 2 gigawatt upside will come in Trianium 4. That's my first question. yes.

First of all, I'm sorry that we don't answer the pacific project or pacific company. I will say this way, for our major product, the 3-nanometer accelerator chip, even we place the order today, the chip will come out in very late this year. So any incident happens or any upside surprise happens, most likely will be next year, 2027. However, for 2027, I cannot give investors a number because -- we are not -- the allocation is variable. The demand is variable. And those industry dynamics is not very clear yet. So I cannot give you a very firm answer for 2027. But definitely, we will enjoy a pretty good growth in 2027 for this project for sure.

Right. I understand that there will be growth. What I'm trying to understand is that relative to like what you thought like, say, 5, I don't know, 5 days or 10 days back prior to this announcement, in your mind, is the upside higher in 2027? And I think related to that question is NVIDIA and Broadcom are saying they have locked up all capacity, memory, ABS substrate, front-end capacity for their requirements till 2028, right? Your peer, Marvell is also saying that. So I'm just -- like even if there is upside, will you be able to capture it? I just wanted your sense on this.

Again, we cannot comment on specific news or events. Honestly, I would say for your question you're supposed to ask AWS, OpenAI, not us, right?

I know, but like it really depends on whether you guys will be able to secure the supply necessary, right? You are getting upside in orders, but then you have to ready the supply chain, where you have to place orders at TSMC, you have to coordinate the supply chain, right? There is a lot of shortages all across the supply chain, right, in every -- so I'm just trying to figure out whether -- even if there is upside, will you guys be able to see it because every one of your peers is saying they have locked down capacity, they have locked down supply. So I'm trying to understand whether you guys have also done it? And will you be able to enjoy this OpenAI upside, right?

Honestly, I don't think those so-called lock-up is a real thing for 2027 or 2028. The current -- like I said, the current capacity for 2-nanometer and 3-nanometer will be very, very high in 2027. It's not the negotiation or the talk between the customer and the TSMC is not there yet. How can they lock the capacity. So I'm sorry, I cannot give you an answer for that. I'm sorry, we have to speed up -- if you have further questions, please welcome to mail me or call me any time you want.

Okay. Next one is Jennifer [indiscernible].

I have 2 questions. So first of all, about the CPU projects for the CSPs. They are now becoming quite large in size, even though the margin could be possibly lower. So do you think at this large scale, it makes sense for Alchip to start engaging in some of these CPU projects? And do we have any potential progress on this? This is my first question

Honestly, we are not ruling out to take this kind of so-called production only project. However, we do worry about the margin can go very, very low. So it is not a very easy equation because we have to consider a lot of the elements into it. For example, if we want to take project with such low margin, the purpose is not trying to make money. The purpose is trying to break through into the supply chain. However, we still think that through providing value, it is the best way to secure a customer. To do the production only business is not that valuable to customers and it usually ends up with a pricing war -- so I cannot give you a firm answer, but I can only say we are not taking those projects. However, it will be a lot of influence.

Yes. Understood. So another follow-up is on the networking customer. So you have the 2-nanometer project with the U.S. networking customer you mentioned before. Could it be possible to become the second biggest customer of yours and say, 2027 or 2028 once the 2-nanometer tapeout goes into production? Can you give us some color on that?

It's hard to judge because we do have high expectations for these projects because the customer is probably [ big name ]. However, we also don't rule out the [indiscernible] to become very big, because in the AI era, as long as your product is very innovative and being very efficient, [indiscernible] could go up very quickly. So of course, we consider the contribution of the [ networking ] project, we are currently doing can bring us some revenue.

The revenue mainly happen in or maybe 2029 in your -- for the 2-nanometer production, do you think it will maybe possibly come in 2028 or maybe longer in 2029.

Yes, 2028, definitely. The 2-nanometer project will be in production in 2028. And the last one would be for Laura from Citigroup.

Just a quick one, actually quick two. I'm not sure if Alchip has done some study of Intel's EMIB packaging. As we see that some of the U.S. CSP, they kind of been asked or encouraged to do more of the production in the United States. And we see some of the CSP, they are also kind of working with Intel's on the EMIB packaging. So I'm not sure if there's also the possibility that Alchip to work up with Intel on their advanced packaging process.

Yes, it depends on customer decision. And actually, we did, and did for the packaging before. So we are not -- we are -- actually we are familiar with this EMIB.

Yes. So do you see any like progress or any schedule you potentially aiming for?

Yes, the previous design we're using the EMIB, I think it is already in production for a couple, two years ago, two years ago. Yes, we are pretty familiar with the team. As you know, you can consider Intel is our customer, right? They acquired one of our customers. We've been working with the them entire infrastructure team very closely.

But again, the decision is still made by customer. But we don't do a thing. We are okay to work with Intel for the EMIB.

Yes. As long as TSMC, CoWoS capacity is not an issue. And I think not too many customers decide to design the big portion using EMIB.

Yes. Understood. Yes. And the next question is more like housekeeping. We understand you already kind of explained that Q1 will be similar to Q4 in terms of the revenue, and there will be less NRE in Q1. But can you give us kind of indication about like the gross margin because Q4 was really strong in gross margin. So should we expect that the Q1 or first half margin to back to like a Q3 level last year? Or how should we think about that this year's gross margin.

I would say the first quarter will be very similar. So the gross margin will be also high, I think. So I would say for the first quarter this year, last quarter will be a very [indiscernible].

And for the second quarter, it's kind of a mix because the revenue is picking up because of the contribution from the 3-nanometer production. So the growth is mainly because of the production, which is a lower gross margin business compared to our [ NIE ] -- and obviously, the second quarter's gross margin will be lower to the first quarter, but however, still higher than the third quarter for the second half. That's what we see. I cannot give you the numbers.

And I guess it concludes today's earnings call. And thank you very much for participating into our fourth quarter '25 earnings call and see you next time.

Thank you very much. Thank you.

[Audio Gap] We'll upload to MOPS, [ both video and audio ] content about a couple of hours after the finish of the meeting. So it takes time for uploading. So please be patient if you need it. So this is the message from our CEO, Johnny Shen.

Okay. Good afternoon, ladies and gentlemen. I'm Johnny Shen, Chairman and CEO of Alchip Technologies. Once again, thank you for joining our investor conference today. We truly appreciate the opportunity to share our Q3 results and provide an update for our business outlook going forward. For Q3, let me summarize a bit. Our third quarter revenue came in below plan, primarily is due to the planned change of our IDM customer and also capacity shortage for our cryptocurrency business. As a result, the revenue reached $223 million and net income $44.3 million and EPS is TWD 16.4.

The detailed financial breakdown and analysis will be presented by CFO, Daniel, in the following section. There are a few highlights for last quarter. Number one, we made a significant progress on our -- with our #1 most important customer. The N3 design we tape-out was successfully verified. A substantial number of wafer order already placed to the major supplier. The project remains on track for high-volume production starting from Q2 next year with no change in our annual revenue forecast. In addition, the design activity for next-generation product have already begun. We expect to recognize a portion of NRE revenue this year.

Number two, regarding our automotive business, our end customer is highly satisfied with the chip's performance, has already placed substantial wafer orders. The chip was deployed across all their product line, and customer has even decided to integrate 2 chips into their high-end model. Production is scheduled to begin late this quarter, and we expect this product will become one of our top revenue maker starting from next year. Meanwhile, the next generation is already underway, ensuring the revenue continuity and strong business momentum through 2028.

Number three, regarding our gross margin improvement, although our revenue -- Q3 revenue declined significantly due to lack of production revenue, but our NRE business remains strong, contributing to a 6 percentage point improvement in gross margin compared to previous quarter. Despite 20% decrease in total revenue, our net income and EPS was slightly higher than last quarter, reflecting our different business mix and disciplined cost management. Looking ahead, our Q4 is a traditional peak season for NRE. We are confident of achieving even higher gross margin this quarter.

Number four, regarding the ecosystem partners, starting from N2 process node and beyond. HPC capacity has increased dramatically with a single design often integrated multi-die and diverse solution. Unlike most of our competitors follow a captive model, sync for higher margin, Alchip is promoting an open ecosystem strategy, collaborating with cross range -- with broad range of partners to develop comprehensive and efficient solution. Our ecosystem network has expanded substantially in recent quarter with more partners eager to engage in co-development.

We firmly believe the future ASIC industry lie on the open system, not in a closed captive system. As for the geopolitical risk management, we continuously diversify our business and design resource beyond China to mitigate the geopolitical risk. In Q3, less than 8% of total revenue are originated from China. To strengthen our global engineering capability, we have launched a very aggressive hiring plan focused on the region outside of China. Our new Japan office can accommodate up to 200 employees, while our Malaysia and Vietnam office now host 100 engineers combined.

We plan to expand our Southeast Asia workforce to around 120 employees by the end of this year. Conclusion, we anticipate a further revenue reduction this quarter. However, our gross margin percentage is expected to improve again, driven by higher contribution from NRE revenue. Despite the revenue decline, our quarterly earnings are projected to reach the highest level of the year. Looking ahead, we remain highly optimistic about the AI market. From 2026 to 2029, we expect our growth to stay in with the industry leading partners and competitors. We are confident in our ability to outperform the average market CAGR in a growth -- in a high-growth HPC application. Thank you very much.

Okay. Thank you, Johnny. And for this page, this is the details about our third quarter P&L. The numbers are very straightforward. For the third quarter this year, we record almost USD 223 million, and it represents 25% quarter-on-quarter decline and quite significant 51.5% year-on-year decline. I will address the reasons behind it later. So as a result, the operating income in the third quarter is $38.8 million compared to last quarter, which is a 3.2% quarter-on-quarter increase, while the year-on-year decline is 33.6%. And for the third quarter net income, we record USD 44.2 million, translating into TWD 16.4 EPS. The net income represents 3.1% quarter-on-quarter up and 20.3% year-on-year decline.

And this is the revenue breakdown as usual. You can see that the HPC remains the majority revenue contribution for our revenue. The reason for the consumer product to our revenue in percentage going up is because the production contribution from Japan's consumer electronic projects. So as usual, we are focusing on the HPC, especially AI-related applications for our future. And for the process node breakdown, yes, like always, Alchip has been proud to be the leader within the most leading-edge process node technology. So in the third quarter, we have combined close to 90% in revenue exposed to 7-nanometer, 5-nanometer, 3-nanometer and the 2-nanometer those so-called most leading-edge process nodes and only around 10% of our total revenue exposed to 16-nanometer, 12-nanometer or the more legacy process nodes.

I believe this revenue breakdown in process nodes remains the top tier within our industry. For the geographic breakdown, like I mentioned, for Japan, because of the mass production of the consumer product to Japanese entertainment end customer. The third quarter revenue exposure to Japan went up to 17%. In the meantime, the majority of our revenue exposed to North America -- still exposed to North American region, accounting for 74% of our total revenue in third quarter. And for the Asia Pacific, which includes China and Taiwan and almost no Southeast Asia exposure accounted -- combined accounted for 7% of our total revenue.

So for the third quarter numbers, as just mentioned, the revenue declined. The main reason is our 5-nanometer accelerator chip. The shipment has tapering off because of -- the end of the life cycle actually happened in September. The 5-nanometer AI accelerator shipment, which shifted to the U.S. IDMs ended its life cycle in late quarter. And in the same time, we don't have too much production revenue contribution from the other projects. However, because of the higher NRE percentage in contribution, our profit margin improved quite a bit.

The third quarter '25 gross margin improved to 28% from 21% a quarter ago. The NRE revenue contributed around 30% to 40% of our total sales in third quarter. And like Johnny mentioned, we have done a good job in the OpEx cost and expense control. And another reason for a relatively low operating expense is the less employee option amortization expense, which we expect to steadily go down a little bit in the coming couple of quarters. And I would say the increase in NRE revenue in third quarter is because mainly to the strong project inflow from -- mainly from the North America region. And in the same time, we do tape-out several big milestones for some important projects.

Okay. This page is for the outlook for the fourth quarter this year and 2026. We expect our NRE revenue to further grow sequentially, which means we are expecting better profitability in fourth quarter. And we see the process node migration continues, and we expect higher NRE contribution in percentage also in absolute value in fourth quarter. And we expect the 2-nanometer projects to begin revenue contribution in fourth quarter. Actually, we already record some revenue for the 2-nanometers already. And for the revenue outlook next year, for 2026, we expect our total revenue to jump up.

Let me starting from the fourth quarter. Fourth quarter revenue in all will remain weak, unlimited project to significantly contribute production revenue to us. It is a fact. As we mentioned, as the 5-nanometer AI accelerator project enter the end of the life cycle, in the fourth quarter, we don't have projects to contribute significant production revenue to us. And another reason for the weak fourth quarter revenue expectation is because the ADAS project, previously, we were expecting to begin its contribution in the middle of fourth quarter.

However, because of the test -- longer-than-expected testing process, right now, we are expecting the revenue contribution from the ADAS project starting from very late fourth quarter, which is one of the reasons behind a weak fourth quarter. However, like I said, we expect revenue to level up significantly starting from the second quarter next year because of the shipment started for our most important 3-nanometer accelerator project to kick in, in the second quarter next year.

Okay. I guess we addressed many points for the investors. And we are going into the Q&A session.

[Operator Instructions] Okay. Laura, please? Laura, you can unmute your speaker, your microphone. Okay. There could be some technical problem for Laura. So Charlie, please, you can unmute your microphone for questions.

Thanks Johnny and Daniel and also your comments about the results and the outlook. So first of all, I wanted to know how we can probably model the 3-nanometer or the future 2-nanometer revenue contribution from the major customer because I seem to sense that there could be sort of a business model change to customer on tool. So I think for this, right, not just the sell side, but also buy side, we do have some hard time to predict your future revenue. So just if I -- for example, in the past, we can cross check from supply chain to get a sense about the potential of the chip volume. And based on the ASP, we can derive our top line gross profit and then your EPS. Can you give us some guidance how we are going to model your future profits or revenue properly?

Okay. I'll go first, and Johnny will give you a broader overall picture. Actually, we cannot comment on specific projects. But since it is the most important project from us, I would like to provide some clues for your projection. First of all, based on our experience and the 5-nanometer project of this product, this 3-nanometer revenue definitely could be a multibillion business to us. And for next year, I want to emphasize, probably you may hear about that we told that the shipment likely to kick off in the first quarter. And right now, we shifted to the second quarter. However, no matter it started -- it will start in the first quarter or second quarter, the scale -- the yearly scale for this project remain unchanged. To us, next year, I will still expect this is a $1 billion business. And Johnny, go ahead.

Yes. So in terms of how much revenue we are going to get and some of the -- I also agree some of the business maybe the customer decide to handle by themselves due to some reason. But honestly, that's a customer's decision. For us, we just make sure the growth rate meet our expectation. I think that's already prior agreed with the customer that a certain portion of our revenue that definitely will be allocated to us with upside.

Yes, if we have some prior agreed percentage, unfortunately, we cannot share, but it will ensure companies to grow and sustainable -- revenue will be sustainable in the future. And as you know, the N3 capacity is so tight and customers try to get more capacity. If any additional allocation they can receive from TSMC, we will share some of them as well. So I think we are -- even though we didn't get the full allocation, but our customers make sure the growth rate for our customers satisfied for both sides. And also when they have an upside, we will also enjoy it. I think that's an agreement on the current generation and also the generation gap.

I see. So can we get a sense of the so-called potential EPS contribution? Because no matter how hard we try to do the modeling, right, the biggest unknown is always the allocation. And that allocation seems to be very fluid based on what you just described, right? So I think some of the U.S. company when they provide revenue or gross margin guidance, sometimes they also provide the EPS range, right? So I'm not sure if management can also do that for us.

Okay. Charlie, unfortunately, we are listed in TSE. So we cannot provide the numbers. The authority, the TSE will be mad about that. And another thing is, actually, we usually -- we cannot comment the EPS or the things on a particular project. So I would like to offer you some clues for the production, for our 7-nanometer project, the 2 generations ago, we guide the gross margin for the product is about 10% to 15%. And we are pretty confident for the 3-nanometer project to be in the same range or better.

Okay. Yes, put it this way, it just came to me 10 seconds ago. Maybe let's assume the TAM of the ASIC would be USD 30 billion next year. Do you think you can get like 10% of market share next year? And your industry peer, right, they said 2028, the TAM would be USD 50 billion. Do you think you can get a market share of like 10% to 15% as well?

Charlie, don't push us with the numbers in this call. Yes, it is -- yes, we -- like I said, it is definitely a multibillion-dollar business for the project in generation. And since the life cycle of the product is expected to be in 2026 and 2027. So you can -- I guess you can easily get a ballpark range for next year's revenue contribution from this project.

Okay. Charlie, I know there's a certain answer. Yes, a lot of stuff is not clear at this moment. But I think we believe this customer, we've been working with them for a long time, whoever make more contribution to them, I think you will enjoy, I think, more outcome. I think that's for sure. Yes, in terms of EPS and those kind of things, I think once the project start to kick off after you do some calculation, I think on the given quarter, during the production you will figure out. But right now, I think it's too early for us to tell, and we'll be wrong almost every time to share some future numbers.

Okay. Okay. We will be patient. It's just from a little bit goodwill because for investors, they don't like uncertainty, right? Just my very, very honest opinion but we hopefully...

Yes. I also agree.

Yes. But we appreciate it and hopefully, we can get your updates next time when that project enters mass production. Yes, it's a long discussion. Probably I go back to the queue. I do have some other questions, but I will leave it to other speakers first.

Okay. Laura, you can unmute your microphone. Laura? So it seems Laura still has some difficult technical issue. [Operator Instructions] Okay, next question. So Charlie, please?

I will continue. Yes. So I just want to know kind of progress of other new projects. I think one is the 2-nanometer project you said you just booked some revenue. I believe there's similar types of chip. But in terms of the 2-nanometer mass production timing, is there any change? I think a quarter ago, you kind of talked about the revenue in the coming 4 years, right? So I'm not sure when should we start to incorporate the 2-nanometer mass production revenue in your future revenue forecast?

Okay. Actually, for the 2-nanometer project, because it's still times for -- from tape-out. So we don't talk about the potential production scale yet with the customer. However, based on the current industry practice and the outlook for those users' future CapEx, we do believe that the production scale for each generation will be bigger and bigger. And for the scheduling, I would say the cadence for the project for this customer is usually every 2 years. So I guess it's quite easy to predict the potential production time for the 2-nanometer project. However, I have to say that everybody wants to have the project go smoothly and quickly. Everybody wants to get the chip as soon as possible. So we will try our best and the customer will try their best. And of course, the whole supply chain will try their best in order to get the chip on time.

Okay. Let me also add some information. First of all, let me clarify, we have multiple wins for 2-nanometer, but I definitely know which project you are pointing to. So I think the -- just like Daniel mentioned, the scale for the -- for each of generation, I think that increased exponentially, I think like before even for the given N2 project. So I think we have -- we are under the huge pressure to complete this design as soon as possible. But to be -- I think both of us and also our customers are in sync, and we will provide the best service and to achieve the -- in order to control the schedule and to make sure the product go to production as soon as possible.

But for us, to be straight, unlike the current generation because we don't have N5, so we have a huge expectation for N3, we are waiting for N3 to go to production in order to fulfill the gap. Like this year, there's a huge revenue gap. But in the future, this kind of stuff will not happen. If next generation happens sooner, we'll be very, very appreciated. We'll be very happy. But even though any production labors, it doesn't hurt our revenue too much because in usual case, when the next generation due to some reason, slow down a bit, the current generation volume will increase. I think the best thing for us is we have to continue. I think that's very important there.

Right, right. So are we confirm to win this 2-nanometer project as a big customer? There just have been several debate, right? How do we convince investors that you win this? And second question is that you talked about generation on generation, the revenue scale would be much bigger, right? But after changing to circular COT business model, I feel like the narrative should be on whether your profit -- your total profit to earn on a 2-nanometer project will be bigger than 3-nanometer. Yes. Can you comment on both? Yes.

Okay. How to convince. Honestly, I don't know how to convince. But what...

Okay. I guess that's our job.

Yes. Honestly, from our point of view, we just do our job. Actually, like I always talk to the investors for project with such scale and complexity, actually, in order to catch up with the cadence of the customer, a lot of engineering work is already there. So I don't know if it is true, but it is happening. So that's why we mentioned, actually, we already have 2-nanometer related revenue in our P&L in the fourth quarter this year and also profit scale.

Profit -- yes, profit scale. Yes, profit scale.

Profit scale, I would say the pricing pressure is always there. If you -- where customers choose, definitely, you want the suppliers to provide some cost cut every generation when the volume keeps on rising. However, we will try to defend the pricing pressure by showing our value to the design, by showing our value to the product and most importantly, by showing our value to our suppliers, which is the manufacturing, the OSAT and the packaging. So all in all, by combining those reasons, I would assume even there is pricing pressure for the next generation, we can mitigate the pressure to a certain degree by working with the suppliers.

Okay. Yes, I feel like 2-nanometer is much more complex and profit scale is much bigger. I think you deserve higher profits generation by generation. So -- anyway, so that's my second question, and I will hand over back to you.

[ Jeffrey ] from Macquarie.

So you mentioned the big accelerator customer, you mentioned the ADAS customer. In the past, you've also talked about networking projects. Can you maybe give a little bit more details on geometry, scale and timing of some of those bigger networking-related projects?

Actually, we do several projects within the networking application with a couple of North American networking players. And I would say for the smaller customers, the production scale is not that significant, honestly, because it is in a quite special application. But for the second customer, I would say it is a series of project change. And for the first project, it will go into the production phase next year. However, we do not expect very significant volume from the first one. But for the second one, which is going into the design, already, we are expecting the shipment volume to be significant. But the production scheduling is most likely to happen in 2027.

Yes. Jeffrey, I think the networking-related application, we all know the chip size are much smaller. But I think customers also adopt the leading-edge technology like N3. And we expect the revenue will be a certain number, but it's not happened to be a $1 billion scale, I think, for sure. But I think to be honest, if it's a few years ago, we still consider it's a very, very good project for us. But right now, I think because of the other -- most of the investors, I think, has a very high expectation for our growth rate. I think networking only play a small portion of the revenue starting from next year.

Okay. Great. And my last question, your IDM customer, any future projects do you expect the next couple of years? Or you think that's done?

Okay. For the IDM customer for now, honestly, no. But our concept is the same. For doing the AI-related chips, especially the accelerator or let's say GPU, if anyone wants to have a competitive edge, they have to find the best manufacturer to produce their chip. For now, it is TSMC. So for this IDM customer, if they want to do AI chip and with high commitment, I would say the better way for them is to do the manufacturing in TSMC as well in order to compete with their competitors. So if this IDM wants to do the project in TSMC, I think we have a pretty good chance to play the same role like we did in the previous generations of chip.

Yes. If they decide to use their own fab, I think the chance for us to win is very slim. And we probably do not want to touch.

Okay. Next is Patrick Bob [indiscernible].

I just wanted to ask about the N3 project. So whilst you can't give us guidance on the absolute size, have you seen that size be increased in the last few months or any changes in the potential size of that project?

The size of the production scale.

Yes.

Which project you mentioned about the...

Yes, which project you mentioned, sorry?

The N3 project next year.

N3. Okay. Actually, for this project, starting from the design, early design phase, the customer keep on telling us the scale of the production is a must. And we keep on hearing the additional thing, additional scale all the way through the design phase. However, as you may know, that the wafer capacity, the wafer and the CoWos right now in TSMC, especially for 3-nanometer is very, very, very tight. So like Johnny mentioned earlier, if we can or the customer can get more wafer allocation, there could be upside. So the scale really depends on the wafer.

Yes. For this product line, fortunately, the CoWoS doesn't play too much important role in terms of capacity because they're using different CoWoS solution. The major challenge is N3 wafers.

Okay. Got it. And so when do you anticipate finding out if they can secure more N3 wafers? And how much more could they secure? How big an increase could you see to these projects?

Actually, for the next year, we already have the numbers. But in the same time, since the demand is better, so both parties are talking with TSMC in order to get extra wafer allocation. There's -- in usual case, there may be some upside in the past, TSMC reserve little capacity for the emerging usage and maybe some of their existing customer change in plan. So that's a sort of upside.

Got it. And will the upside that could be unlocked there be proportional to you? So if they could increase wafers 20%, would you get 20% higher revenue? Or does this change in business model mean it's not as proportional?

Patrick, I know you want to quantify the numbers. But honestly, for now, we don't have an idea.

But as long as the customer has an upside, we will enjoy the upside.

Okay. Great. And then looking at your kind of other customers and potential new customers, has there been much progress in -- with other hyperscalers or with other large customers?

Okay. Yes. So the definition of the large customer, you probably mentioned about other CSP, right? We do -- we encounter so many customers right now whoever doing the accelerator in the industry. I think right now, we have a chance to win even for the CSP. To answer your question, if you ask me, do we have -- do we already have any significant win? Unfortunately, the answer is no. We don't have any other CSP at this moment. But to be very straight with you, every time when they have a big project on the accelerator side or on the CPU side, we have a shot. I think just like I mentioned before, sooner or later, I think most of CSP will adopt COT, this kind of open solution. I think they really like to work our business model to make everything so transparent.

Okay. Let me try Laura again. Laura, you can unmute your microphone. Okay, it works. Yes, we have to talk to her...

I just told Daniel, we have to pick up your phone before this earning call ends.

So you can hear me clearly right now, right?

Yes, very crystal clear.

Appreciate to help me come back. Johnny, you just mentioned that your open ecosystems business model will help you to engage more of the opportunity when it's moved to 2-nanometer project. So may I ask that what would be -- more details can you share with us on the business model? You work with a third party? And how would that impact your gross margin and also the business scale for the future AI accelerators? And before you answer me, can I clarify your 3-nanometer project business model is pretty much the same as your previous 7-nanometer one, that's correct?

Yes. Yes. Yes, the model is pretty much the same. Yes. So basically, the open ecosystem, what we propose to our customer, I think number one is the transparency. The customer know all the costs, including wafer, including IP, including our design service and also our margin. We agreed with a certain margin to add up to their cost. So this is, we call, the COT model. And both parties agree with a certain percentage margin. I think that's a prior agreement. The upside for us, yes, as you know, the volume increased drastically generation over generation. So in the other word, even agreement between us and the customer, the number is fixed.

They negotiate with all the pricing by themselves. But sometimes because of a volume accumulation, we get -- we will get additional support from the supplier side. In this industry, I think the supplier play a very fair role. Whoever place more order, they can enjoy better pricing. I think that's an upside. If we accumulate more customer together, we will have more benefit from supplier directly. It doesn't conflict with the pricing, which customer negotiate with the supplier directly. And for the N2 technology or beyond, the design becomes so complicated, it's not like -- it's no longer a homogeneous type of one single tape-out and produce a chip.

One design require multiple tape-out, require a variety of IP and also the solution. For example, we may work with some chiplet, I/O chiplet, chip provider. We can do some integration with them. We may work with a CPO vendor. We may work with different IP vendors. So I think I don't believe one single company, no matter how big they are, they can provide most comprehensive and total solution in the future technology, because different solution has different expertise, has different company to focus on that area. So we just try to put everybody together to provide the most comprehensive and cost-effective solution. So right now, we have multiple IP partner and PCB partner and I/O chiplet partner and also CPO partners.

Yes. So given the complexity of the chip designs and how chips will provide this kind of system integration and silicon modulation, et cetera. So can we assume that the gross margin in that kind of type business model will be higher than your current business model? [indiscernible]

Hopefully, I think that customer is very smart. If we will be providing more -- higher contribution to their share, I think that we deserve higher margin. But in fact, our margin expectation even increased a bit, still much less than our current competitor in U.S.

Yes, of course. Okay.

Okay. Next one, Gokul please. You can unmute.

So when we come to the COT business model, the one question that a lot of investors ask us as well is like is it the final kind of stopping point for the customer? Or will they move forward to kind of control everything themselves? Because your main customer also has some CPU projects where they do it pretty much direct to the foundry itself. So I just wanted to understand your thought process in terms of how you kind of make sure that your value is getting captured and the COT model with the open structure kind of continues to remain and the customer does not want to kind of move to like kind of internalizing everything themselves?

Gokul, I assume you are asking, is there any possibility for customer in-sourcing the production, right?

Yes. It's not just production, but I mean they are already doing COT. So is it the natural progression for them to do everything themselves in maybe not in the next or the next generation, but just wanted to understand how you kind of keep your value still.

I will say this way. First of all, if you are talking about in in-sourcing the physical design, we don't consider customer has very good incentive to do so because unlike the CPU and networking, the accelerator design -- the physical design of an accelerator is very, very difficult and complicated. No need to mention about the process node. So for them to build up a capable team to in-source the physical design for such complicated chip, what is the benefit they can get. And they have to take the risk for delay and mistake, multiple tape-out and a much longer design turnaround time. So from our point of view, we don't see the in-housing happen in -- I won't say in the short time. Even in the mid- to long term, I don't consider it will happen.

Yes, I agree. I think to answer your question, if you're asking me about the possibility, of course, anything is possible. If a customer can do the better job than us, yes, of course, if I'm a customer, I was doing everything by myself in order to save the cost. But nowadays, I emphasize so many times, design becomes so complicated, each of the player in the supply chain should focus on their own area. The reason we can tape-out everything on time because we're doing this kind of design at least like 10 to 20 design every year. If a customer decides to do by themselves, they're only doing the one design every other year. So the knowledge accumulation and those kind of things at the end, I believe customers will make it happen, but likely, the schedule will be delayed.

Right now, I think the each of generation only less than 2 years or a little bit over 1.5 years. If the delay like a previous generation just happened, delayed for 6 months, the market is not going to be waiting for you. You lose the market, you try to catch up on the next generation. It's not worthy to take this kind of risk. And also different region has a different working mentality. I just joke with my customer, even I send my team to your company, do you have a confidence to make them work through the weekend, work through the holiday, work through the Christmas? I think different company has a different DNA and mentality. If a customer try to go beyond that, I think most likely, they will suffer a bit.

Understood. That is clear. So second question, since you talk about the Alchip moving to a bit more of a kind of collector of all the IPs and kind of offering it in an open kind of environment to customers. Could you talk a little bit about networking and chip-to-chip interconnect? I think right now, it feels like scale-up networking becomes as important, if not to some extent, even more important than the ASIC itself.

You have the partnership with NVIDIA on NVLink Fusion and you are working with Astera Labs also on some of the other interconnect stuff. But at least observing from the market, it feels like that piece of the IP seems to be still very proprietary. The open source seems to be -- at least if you look at what happened in OCP and all the developments, it felt like open source is definitely behind the curve compared to proprietary technology from NVIDIA or Broadcom. So how do you see this is evolving when you talk to all the customers? And what does Alchip's -- what could be Alchip's role here, including any progress you are seeing on the NVLink Fusion?

Okay. For the customer silicon or just say ASIC, we are trying to provide an open ecosystem to customer. The reasons are, first of all, by providing open ecosystem, customer has much, much better room to save some cost because in the future, you definitely know that those future CapEx plans is crazy. Any percentage saving is a big money. We do believe with -- by providing an open ecosystem to customers, customer can enjoy much better pricing or cost saving from the ecosystem.

And secondly, like Johnny mentioned, we always believe that everyone should do what they are good at. We are a physical designer. We do physical design. And if the customer needs relevant related IP, we can provide IP -- our IP partners to them. And for CTO, the same thing. For I/O chiplet, the same thing. So by providing that, we believe we can have pretty strong competitive edge to our competitors. I would like to mention one thing. 20 years ago, actually, TSMC is providing an ecosystem and win out the whole market from IBM. For now, Qualcomm, Marvell, MediaTek probably can offer everything, just like IBM did 20, 30 years ago.

Got it. Any significant progress you are observing on NVLink Fusion, given it's already about 6 months since you signed the partnership?

Yes. NVLink Fusion is a very good technology, and we are more than happy to work with NVIDIA for that. But in the end, it is customers' decision. It's a good technology and many of our customers are interesting with this technology.

Yes. So saving has many dimensions. Sometimes a quick turnaround time is a saving. Sometimes the total power consumption is a saving. We do have a few -- many inquiry on NVLink Fusion cooperation, and we work with NVIDIA very closely. They even assign the people when the customer come in, we co-visit customer to promote the solution altogether. Hopefully, we have -- in the near term, we have some good news to share.

Okay. Okay. Understood. Understood. That is clear. And just a follow-up on a different question, I think, from a different analyst. On the second customer in CSP, Johnny, in your mind, what is the main challenge for you to get the second customer? Is it the customer coming to have the same kind of capability as your first customer that they can easily embrace your open ecosystem? Is that the bigger challenge? Or is there some other factor that is the bottleneck to potentially win the second CSP customer?

I think the most challenge for us is we have to change customers' mentality and perception a bit. And I think when we talk to the potential customer, I think they are kind of convinced which area they should focus and which kind of area they should outsource. But it takes some time for other -- I think our current customer is different. They already have a design team even before everything. They have a core team prior to winning this business. And the other CSP doing reversely, they already have a business, they try to build team. They hire a lot of guru from each of company like IC company, NVIDIA, AMD, everywhere.

So they have a different mindset, they have a different mentality. I think we have to -- working with them, I'm not saying educate. We have to work with them and tell them what's the right way to adopt the COT model. Yes, it takes time. But every time when we have some engagement with them, I think they are lessened, and we are -- I think we have a shot and some capability they have to develop. And sometimes more people doesn't mean they can do better job. I think efficiency and also the one team with a good leader, I think they can help us to do a much better job. So yes, to answer your question, yes, that's a challenge because we try to work with the pure CSP and work with pure system company to do COT. I think that's still a lot of lesson learned for both parties.

Okay. And Charlie, please.

Sure. So I remember a couple of quarters ago, you sort of shared some chip price -- not chip price, right? The ASP is like 4x to 5x versus the 7-nanometer generation, meaning your 3-nanometer chip ASP. So do you still hold the same assumption? Because management just said that in coming months, right, you probably will have a better visibility for the wafer allocation. So can we also get a little bit color about the ASP assumption?

Yes. Unfortunately, Charlie, we cannot talk about the pricing. Yes, it's a hard requirement by the customer.

Right. I think recently, you can see a lot of news from that player. Yes, they just have a concall. They have -- pretty much has a high confidence to use their own chip, eventually replace their current supplier. I think the next generation and also the generation behind, I think the plan doesn't change. We expect a very, very big volume and progress on N3 and beyond.

Okay. Okay. Great. Yes. So the next question is a little bit harsh. Yes, because for your recent quarter revenue mix, part of that is due to you cannot secure a 3-nanometer wafer for a crypto customer. So how investors should be convinced that they can -- you can secure 3-nanometer wafers for your major customer next year? And also another tougher question is that your local peer, which is also your foundry subsidiary, right? Recently, it seems to be okay to secure those wafer source for crypto. Can you comment about what should we think about your circular foundry partnership?

Okay. First of all, crypto project is totally different from accelerator. They have huge difference for the priority within TSMC. So for crypto business in TSMC, the priority is low. So when you try to secure wafers from TSMC, especially for the 3-nanometer, it is really, really difficult. And I do believe that our peer is also facing difficulties of getting 3-nanometer wafers for the crypto customers. And for the accelerators, it's a totally different thing. First of all, the customer is what TSMC wants and the application is what TSMC wants. And fortunately, the CoWos of the chip is in less crowded process. So for the 3-nanometer accelerator project, for now, yes, the customers do want more wafer. However, the current allocation is quite good.

Okay. Sure. So which means that for next year's 3-nanometer for AI accelerators, it will be totally different case versus the crypto.

Yes, yes, yes.

Okay. Okay. Great. Yes. And last one is the Arm Total Design. I think following Gokul's question about NVLink Fusion, Astera Labs partnership, all good, right? But I remember you also have this Arm Total Design circular partnership. So I'm wondering if you consider to be more aggressive in Arm Total Design because lots of CSP customers, they wanted to do their CPU as well. And also, again, referring to your industry peer, very, very low margin, but actually it's very, very good for their revenue momentum. And I believe it should be still positive to the EPS. So Johnny, how do we think about if there will be future opportunities coming for this kind of Arm-based CPU, how should we handle this kind of opportunity?

Right. I think a couple of weeks ago, we just announced we joined Arm Total Design service. I think we work with Arm very closely, and they think about -- even though they say this program is close before, but they kind of open and reinvite us in for some reason. There are some CPU-related design opportunity we are using Arm. I think focus on the design is our #1 priority. We try to do design along with the production in order to provide value and also to get a higher margin. I think that's our #1 priority. We do have some opportunity in U.S. and also in Japan using Arm as a server type of CPU.

To answer your question, if any design -- any customer come to us to do the production only type of business. First of all, we will evaluate the margin. If the margin are within the range, it doesn't fall out of our bottom line, we will take. But it's -- I think I agree with you in terms of EPS, in terms of risk, it definitely helps. But the drawback side, they will have a certain impact on the gross margin as well. So if it's a CSP type of customer come to us, most likely, we will try to participate because we try to win their design and eventually try to provide more value on the design side. If it's other business, other smaller customers come to us for production only type of business with low margin, most likely we will reject.

Okay. Because of the time constraint, we took 2 more questions, one from Laura, one from Edison. So Laura, please.

Just very quickly, Johnny, you did mention that the constraint of 3-nanometer wafer supply and yet for the CoWoS part, I'm just wondering, do you already work with OSAT partners or still mostly at TSMC on the CoWoS packaging?

Okay. Laura, actually, the bottleneck for the 3-nanometer project, right now, the bottleneck is actually wafer but not in CoWoS. So CoWoS has a different time, right? The specific time we are using, the capacity is not the bottleneck to provide the chip. The top die wafer will be the area, major shortage.

Yes, sure. So I'm just wondering that do you already kind of secure enough CoWoS supply at TSMC or for the CoWoS, you also have kind of a backup plan to work with the OSAT partner, thus there is a relatively less constraint?

Actually, recently we learned the CoWoS is secured.

And Edison?

Can you hear me clearly?

Yes.

Yes. Just a quick one. I recall in 7-nanometer generation, we were facing some of the ABF substrate shortage issue. So we increased the suppliers. So I think as ABF now is getting tight again, my question is, can we get enough ABF substrate supply this time? And will this impact our 3-nanometer project revenue scale if we cannot secure enough ABF substrate? Because you have already talked about 3-nanometer capacity, cost capacity. So I just want to know your view about the ABF substrate situation.

Okay. Let me explain to you. Actually, there are numbers. The numbers based on the secured capacity for wafer, CoWos and of course, the substrate testing, everything. So there are numbers because we are entering November now. What we are trying to say is if there is any upside from wafer because the demand is getting higher, if we can have or the customer can have more wafer allocation from TSMC, definitely because of the [indiscernible] of the customer. I don't think the other parts of the supply chain will be a very big problem. Yes, I think there's a big lesson for us and also for our end customer right now for -- except the top die for HBM, for substrate, I think they have a multiple source in order to diversify the risk.

Okay. Got it. Can I ask another question or we need to...

Sure, sure, sure. Please.

Yes. I think my second question is about your major competition and also on the 2-nanometer project because we're kind of hearing that your major competitor is also considering lower the ASP or margin in order to seek more opportunities from your largest customer now on 2-nanometer project. So I just want to know that if they lower the ASP, will this impact our current relationship with our largest customer? Or do you think the ecosystem we are building now is strong enough to compete even though they consider to lower the ASP? That's my last question.

Okay. Edison, let me make sure the competitor -- major competitor, are you referring to in U.S.?

U.S., yes. Yes. U.S...

Okay. First of all, we try not to comment on other companies. But for the competition, I would say this way, first of all, design capability and ability are our strengths. We want to win because of our design. And our existing customer knows it very well. They understand inside out about our design capability and the value we can provide to our customers. And on the other hand, it's the consideration of the cost. I don't think there is any chance that the U.S.-based competitors can compete with us on pricing.

So for the future generation, first of all, like I -- like Johnny mentioned or like I mentioned, for a project with such complete -- such scale, design scale and the complexity, the engineering is already there. And for the other thing, I don't know. And I really don't want to comment on it because it was like we are trying to -- we really don't want to say things on other companies.

Okay. And the time is late. And I guess this concludes our third quarter earnings call. Thank you for your participation. See you again in our next earnings call. Thank you.

All right. Thank you very much. Thank you, Daniel.