Q2 2026 Alchip Technologies Ltd Earnings Call
Speaker #1: Off to join a video or audio content immediately, please be patient. I think this meeting will start with our CEO's words to investors. Johnny, please.
Speaker #2: Good afternoon, ladies and gentlemen. I'm Johnny Chen, Chairman and CEO of AeroQ Technologies. Yeah, thank you for joining our investor conference today. Yeah, we appreciate the opportunity to share our Q2 financial results, and provide an update on our business outlook.
Speaker #2: So, Q2 summary: our second quarter revenue came in line with plan, revenue increased significantly quarter over quarter, due to higher production revenue. While the NRE remained very strong, as a result, total revenue reached $242 million with a net income of $58.51 million, and EPS of $20.01.
Speaker #2: A more detailed financial breakdown and analysis will be presented by CFO Daniel in the following section. There are a few highlight worth mentioning: last quarter, first, our N3 AI accelerator entered mass production and began shipping in June 2023.
Speaker #2: The program is under early ramp-up stage, but even with a month's revenue contribution, it drove our quarter-to-quarter revenue growth up more than 80%. We just announced a few days ago our July revenue reached a record high for the company, reflecting the continuous production rhythm for this program.
Speaker #2: Meanwhile, the next generation design also achieved a major milestone and entered the final implementation phase. We remain on track to take part by the end of this year.
Speaker #2: In addition to our AI accelerator business, our other production programs also perform well. The automotive ADAS program in China continues to see strong demand.
Speaker #2: And it's now our second-largest revenue contributor for this year. We highly confident to sustain this business and further expanding this business. As we already secure the next two generations of design from this customer, the first next generation remains on track for take part in early Q4 this year.
Speaker #2: We have also two on-page CPO programs in mass production now. Shipment volume increased meaningfully in recent months. Supported by ongoing growth of CPU supply shortage, in addition, several consumer programs are contributing steadily to our production revenue.
Speaker #2: Including GAN application in Japan, smart device applications in both US and China, these programs continue to run smoothly. Provide a healthy level of business diversification.
Speaker #2: For future business outlook, overall, like the industry leader, and many some of our competitors, we remain very optimistic about the long-term outlook for AI market.
Speaker #2: Particularly in ASIC segment. We believe our competitive position is even stronger than most of our peers. Because we continue to serve as a solid design partner for our end customer.
Speaker #2: In addition, our end customer maintains one of the highest CAPEX levels in the industry. Creating a very big sand serviceable available market for AeroQ.
Speaker #2: On the execution side, we are largely resolved most of the key constraints that previously limited our growth. Including engineering resource, manufacturing capacity, production allocation, and working capital.
Speaker #2: As a result, we believe we are well positioned to catch the significant growth opportunity ahead. Looking ahead, we expect our business to enter a new phase of growth beginning of this quarter.
Speaker #2: Production revenue will expand substantially and we anticipate to deliver the record high revenue and earnings in Q3. Followed by another sequential increase in Q4, as our major product program continues to run.
Speaker #2: More importantly, we believe this is not a simply a single quarter or single year's growth story. Based on the production program already in place, together with our next generation design pipeline, we believe this growth momentum will sustain for at least the next 3 to 4 years.
Speaker #2: For conclusion, I would like to emphasize once again we believe the most challenging period for the company is now behind us. We regained our growth momentum are well positioned to capture.
Speaker #2: Large share of the rapidly growing AI ASIC market. The industry continues to move toward a COT model. Exactly as we anticipate for many years.
Speaker #2: We believe this is a secular trend paved directly for AeroQ's strengths. Based on the ongoing customer engagement and business pipeline, we are highly confident in securing another major hyperscaler CSP customer in the near future.
Speaker #2: Looking ahead, for the near 10, we remain very optimistic about the long-term AI opportunity. From this year to 2029, we expect our growth trajectory to remain in line with our key customers and industry leading players.
Speaker #2: We believe AeroQ well positioned to deliver sustainable growth and create long-term value for our shareholders. Thank you.
Speaker #1: Okay, thanks to Johnny. This page will start the financial part from this page. So for our second quarter, that the number will be in US dollars.
Speaker #1: So for the second quarter, P&L, the revenue in second quarter is 241.7 million. Which is 82.6% quarter on quarter. Growth. However, the year on year it is a decline for 18.7%.
Speaker #1: And for the operating income, which is quite I think which is quite promising, our second quarter operating income is at 52.1 million. Which is a 20.5% quarter on quarter growth.
Speaker #1: And the 38.7% year on year growth. And for our net income in the second quarter, it is 51.8 million. Which is a 14.9% quarter on quarter growth.
Speaker #1: And the 20.7% year on year growth. For the second quarter, the EPS is 20.01. NT dollars. And this is the breakdown by application. You can see the second quarter's breakdown is pretty similar with what we did in the first quarter.
Speaker #1: 50% from HPC. 1% from niche market. 16% from networking. And the 32% from consumer. The reason for 32% for consumer in the second quarter and the 36% for the first quarter is because we currently put our autonomous driving chip business into the consumer.
Speaker #1: We are internally considering to recategorize the autonomous driving chip business into probably the niche or HPC categories. In order to better fit its original purpose of the chip.
Speaker #1: For the process note, because the N3, as I said earlier, started to kick off the production in late May. Last quarter. So you can see the 3 nanometer, 2 nanometer process note revenue contribution grow to 47% in the second quarter.
Speaker #1: From first quarter's 21%. And for the contribution, you may see again the same reason, the N3 accelerators production in place. It's the major reason for our 51% revenue contribution from North American region in the second quarter.
Speaker #1: From 23% in the first quarter. So for the second business review, actually there are many parts is a repeat from what we said previously.
Speaker #1: Again, I want to re-emphasize the numbers again. The second quarter revenue grew 42 million. And for the second quarter, gross margin although it went down on increasing portion of production revenue, however, I would say this way, it is a little bit better than we expected previously.
Speaker #1: And we think although the gross margin went down, the operating margin improves on year on year if you do the year on year comparison.
Speaker #1: So for our business model, we do believe the revenue scale keeps on going up. Even the gross margin goes down. Because of the increasing portion of the production revenue, the operating margin will keep on growing given our five goods operating leverage.
Speaker #1: And you may notice that the second quarter OPEX went up. If you do the quarter on quarter comparison, it is quite significant. The main reason is because first of all, the headcount expansion and the salary adjustments of our company.
Speaker #1: Secondly, we do see the expense increase for our EDA tool licensing. And our server usage because nowadays the design in leading edge process note requires quite significant amount of server time.
Speaker #1: And for the future, we do believe for the third quarter and the fourth quarter, the operating expense the operating expense will be pretty similar with the second quarter.
Speaker #1: But we are very confident that for the yearly OPEX growth, it is still in control. Secondly, like I said, the N3 accelerator business keeps in.
Speaker #1: Starting in late May. We don't we didn't have too many we didn't have too much revenue in May from this N3 accelerator. However, as the N3 as this N3 accelerator business keep on ramping up, we are going to see increasing revenue sequentially in the following.
Speaker #1: Months. From this product. As for the autonomous driving chip, I would say overall the shipment remains very stable. We are still shooting for not still.
Speaker #1: I would say the demand since a little bit better than what we delivered to the investors before. So we are currently very optimistic for the current autonomous driving chip shipment.
Speaker #1: And the next generation project is going to tape out. Probably late this quarter or early next quarter. And I think these are these concludes our presentation.
Speaker #1: And we are going to enter the Q&A session later. Thank you all. Okay. I noticed that has raised the very early. So has please you can unmute by yourself.
Speaker #2: Yes. Thank you Johnny and Daniel for the great results and I would like to ask questions just regarding how we should expect your gross margin and operating margin trend in the next couple of quarters as the training three or the your largest hyperscalers ASIC stars ramp in a meaningful way because what we can see is already gross margins declining from 50% to 35%.
Speaker #2: Operating margins down from 33% first quarter to 22% in same quarter. So what should we expect in the next few quarters when the business starts to scale up with your production business ramp?
Speaker #2: Your gross margins and also operating margins targets in the next few quarters. Thanks.
Speaker #1: Okay. I'll give you some numbers for it. For our gross margin, yes, it went down to 30 something percent from 50% in the first quarter.
Speaker #1: I would say this way. Since we only have one month high production revenue in the second quarter, so based on our calculation, I would say for the third quarter and the fourth quarter, the gross margin the blended gross margin will most likely be about 20 something percent.
Speaker #1: And for the whole year, this year, I think our blended gross margin should be in the low to meetings. Low to meet 20s. And I would say this way as the N3 keep on shipping, the NRE rate the NRE to the production revenue ratio will most likely be in 10 to 20 percent for NRE.
Speaker #1: And 80 to 90 percent for production. Based on these scenario, the reasonable blended gross margin will be in like 20 something lower 20s. That's the outlook for our gross margin.
Speaker #1: Secondly, as I mentioned, our business model enjoys pretty good operating leverage. So when our scale reaches certain point, I'm targeting our operating margin to be in high teams.
Speaker #1: Am I answering your question?
Speaker #2: Yes. That's very clear. Thanks Daniel. I think that gross margin guidance is actually way better compared to your previous training one project. When you started to ramp, would you be able to provide some more detail regarding how you are able to lift the gross margins while you are ramping your production business to 80 to 90 percent since second half in second of this year and even into 2027?
Speaker #2: Thank you.
Speaker #1: Okay. I would say for the for the pricing for the gross margin for the margin to given project, I cannot discuss I cannot disclose into the detail into the narratives.
Speaker #1: But I would say first of all, I think the customer started to appreciate our value. We are providing much better value generation by generation to our customer.
Speaker #1: That's one reason. Secondly, our position within our suppliers, within boundary, within the OSAP is getting better and the better. So from customer, from supplier, we do have the we do have the room to stretch our gross margin.
Speaker #1: A bit. Thank you.
Speaker #2: Yeah. Right. Yeah. Yeah. What Daniel says is exactly the right. So I think it has to answer your question. I think we have the confidence to outperform the gross margin compared to compared to our first high volume production.
Speaker #2: I think that this statement is true. Okay. Yeah. And then just relatedly on training on the your on your follow on project, which is set to be run tape out in later this year or early next year.
Speaker #2: I was wondering if you could just provide some more detail on the scheduling for the engineering verification and also the time frame for mass production for that project.
Speaker #2: And whether the customers would further appreciate your work and then your gross margins for that project could stay could be staying at similar level or even better compared with the current ramping chip set.
Speaker #1: Okay. I think the design schedule for for this design, I think it's very sensitive. I don't think customer will allow to us to share anything.
Speaker #1: But I can tell you right the designs are like before. The designs is a heterogeneous. It's like a chiplet design. One design require multiple tape out.
Speaker #1: So we are going all tape out is not going to happen in the same time. Yeah. As you know, the turnaround time for N2 will be much longer than Q3.
Speaker #1: So it allow us to tape out Q3 later. Then also they have an interposer tape out, another tape out together. So I think overall customer are very satisfied with the current status as I just mentioned before.
Speaker #1: The current target still by the end of this year. Yeah. We try to meet this target and production similar will be by the end of next year.
Speaker #1: That's the current plan.
Speaker #2: Okay. Just a quick follow up before jumping back to the Q is that so it sounds like you are going to be the one in charge of the next generation chip set as well.
Speaker #2: Would you be able to discuss about the opportunity the content opportunity and also the volume opportunity there since your customers recently also mentioned they are going to be more aggressively selling their selling the chip set to the external customers in addition to for their own use?
Speaker #2: Thank you.
Speaker #1: Yeah. The continuity I think is the most important like I mentioned before. I think right now the relationship between between us and the customer we can say is getting better and better.
Speaker #1: At the end, I didn't sense any urgency for this customer to pursue other choices. So again, the precise schedule it really depends on the manufacturing of availability and most likely will be the A series and also customer need to decide for the IO chiplet for the memory chiplet which technology they are going to use.
Speaker #1: So I think prior customer make a decision we're going to have another test chip similar to the previous one. To do test chip first.
Speaker #1: I think the that happened on the previous generation. The test chip scope we are under discussion now.
Speaker #2: Got it. Thank you so much. I'll be back in the queue.
Speaker #1: No problem. Okay. Go to please. Goku. You can unmute. Okay. Let's go back to Goku later. Charlie please. You can unmute by yourself.
Speaker #2: Hello?
Speaker #1: Hello. Charlie. Please.
Speaker #2: Yes. Okay. Okay. Yeah. So first of all, also congratulations for good results and also looking forward for the next generation training for tape out.
Speaker #2: So first question is really about this year previously coming provider some is very revenue range, right? So with that training M3, I feel like the mass production is kind of slightly ahead of schedule starting from late May.
Speaker #2: With company revised of the original guidance for the training M3 revenue contribution this year.
Speaker #1: I will say for this year training M3 is pretty much the contribution from training M3 is pretty much as we mentioned to investors because as you may know the lead time for this product is very long.
Speaker #1: So actually at current stage we almost waste all the orders of this project. This year. So I won't change the guidance for our training for the M3 project contribution this year.
Speaker #1: But for next year yes we do have chance.
Speaker #2: Next year you mean a chance to grow or chance to revise up your original target?
Speaker #1: No. So the chance to the chance to revise up the previous assumption for next year's shipment and the revenue contribution. Of this M3 project for sure.
Speaker #2: Okay. So what was the original target for next year's growth for this?
Speaker #1: Charlie, I cannot I cannot set the number here. That's the requirement by the authority. Sorry.
Speaker #2: Okay.
Speaker #1: Yeah. I yeah.
Speaker #2: Okay. Okay. Sure. Yeah. And also Johnny you mentioned about
Speaker #1: Ball . Elche feels better for customers needs for COT business model , right ? So I think Yeah . Besides your current big customer , there seems to be another big CSP are trying to .
Speaker #1: Considering the COT , right . So what do you think is going to happen ? Meaning the same , for example , TPU design .
Speaker #1: You cut into several compute die . I , o , d and everyone can have reports or you know , it would be like several different skill , right ?
Speaker #1: So just like today , right ? You have a TPU , VATVAI and whatever you go for COT what , what is the kind of a likely development for , for customers CLT efforts ?
Speaker #2: Yeah , I think the COT is already happened . To be . Honestly our end customer . You can consider is one of the typical COT model .
Speaker #2: Yeah , they doing they doing the front end design , doing the architecture . They try to find the design partner like us , boundary partner like a TSMC and we work together and find out the testing and packaging partner together .
Speaker #2: Yeah , I think the another customer , I think Google eventually is already doing that . Yeah . Unlike the original pure AC model doing with the Broadcom a bottom doing everything .
Speaker #2: And Broadcom dictate the the unit price . But the COT doing reversely . They try to figure out the cost of each element and add together and profit margin .
Speaker #2: And to providing to the service provider . So I think Google has so many different generation . They they already try to minimize dependency from the Broadcom type of a pure ASIC model .
Speaker #2: So eventually I think all CSP , Google included will go towards COT model . When the volume continuously increase . I think that's unavoidable .
Speaker #2: We see we will see a lot of inquiry . Yeah . From research or even from other accounts . Yeah . So to answer your question I think it's already happening .
Speaker #1: Okay . But but is it likely that one project you have two design service on the same same , you know , products or it would be kind of different skill and customers looking for one design service for one SKU
Speaker #2: Charlie . I'm guessing you are referring if it is a possibility for like . Altair responsible for just using an example like algebra , responsible for the physical design of the compute and company responsible for the I , o .
Speaker #1: Yes , exactly .
Speaker #2: Yeah , yeah . And so on . I , I will let Johnny come . I think that that's the right channel because the content so many elements .
Speaker #2: Yeah . For from customer perspective . Yeah . They , they don't , they want to diversify the dependency . So you are right .
Speaker #2: There's a , a , some discussion . One of the potential customer discuss with us . We can do compute and working with other people to do the I o chip .
Speaker #2: So I'd we can provide CGD type of model back to customer when they can do the integration by themselves or the AC house like us can do the final integration .
Speaker #2: So , so many variety different model is on the discussing . I think the main purpose for customer is it's a cost is a cost saving .
Speaker #1: Yeah . So without those being the case or the , the facts back to this core core questions , right ? Why El chip can be a better choice for customers .
Speaker #1: Sealed business model . If I can . Name some Eurasian competitors , one of them very aggressive in pricing . I think they got one CPU projects at a very low margin .
Speaker #1: You're another Asia peer . Things have their own proprietary studies . IP help this customers to migrate to this
Speaker #2: System capability gathering schedule control and quality control is is on is our gift . Yeah . You hardly find any service provider has more efficiency , has more doing .
Speaker #2: The more efficient than us . If you look at the track record , LG pretty much is one of the most common design in the industry .
Speaker #2: And talk about the track record , talk about the Design , turnaround time and customer satisfaction . We have . A I have a confidence to outperform us .
Speaker #2: The multiple competitive . Yeah . And and also the pricing . Yeah . We consider even our customer consider we are the we have a very competitive price .
Speaker #2: Yeah . I don't think in the short term , any HP vendor can come closer to us if another story , if a customer capable to do everything by themselves , they only add only require a customer provide service provider to doing the manufacturing only type of business , then I agree with you .
Speaker #2: So many competition . This kind of model will be very bloody for us . It's not what we are concentrating . We still .
Speaker #2: I still thinking about . We need to provide the value to our customers in order to make this business sustainable and more sticky .
Speaker #2: Yeah . If if I'm only doing the manufacturing service , I don't think we provide too much value at the end will be the pricing competition .
Speaker #2: Yeah , we will be a lot . Very bullish . Oh , okay . One thing from me , Charlie , I would say by comparing algebra with the industry peers , I understand that many other companies , not many the other companies probably addressing the IP or another company also address their Excellency in 2.5 D advanced packaging .
Speaker #2: But please note until today in Taiwan or in Asia , not too many companies have not too many companies have . The track record to do the correct production or design .
Speaker #2: I would say until today probably is the only one in Asia who has the experience of doing the advanced 2.5 or even 3D packaging .
Speaker #2: So if you are talking about the expertise within the design and the advanced packaging , I would say algae probably should be ahead of anyone in Asia .
Speaker #1: Yeah . So just very , very last appendix question . You seems to suggest that you're very good in cohorts , right . But what if the next generation TPU might still want to stick with the FP ?
Speaker #1: Would that change the dynamic ? And then I'll go back to the . Q thank you .
Speaker #2: Okay . For me , I , I actually I talked with many investors for Emmett . We have experience for our seven nanometer as accelerator , who's high volume shipment in 2024 .
Speaker #2: Actually , the last few batches of the , of the seven nanometer accelerator , we applied em . So if the customer wants We can support it without a problem .
Speaker #1: Okay , okay . Thank you .
Speaker #2: Thank you . Charlie . And next one , Goku , please . You can unmute .
Speaker #3: Yeah . Hi , Daniel , can you hear me ?
Speaker #2: Yes , yes , I can hear you . Clear .
Speaker #3: All right . Thank you So first question for your follow on two nanometer project for your current big customer . I think as Johnny mentioned , it is a heterogeneous kind of design project .
Speaker #3: Could we talk a little bit more about all chips level of involvement ? Like , are you also involved in the I o die process or that will come from external vendors ?
Speaker #3: It looks like there are multiple I o interconnect options and secondly , for the final packaging integration , including the compute die , etc.
Speaker #3: , would also be the primary back vendor for all of these interconnect options or the final packaging vendor would be different for different interconnect options .
Speaker #2: Okay . Yeah , hopefully your statement is correct . Yeah . Like I mentioned before , we are the sole design partner for this design .
Speaker #2: And as you know , whoever , if there are any party doing the I o die or whatever the , the chip die , they need to work with the main die all the interconnect need to line up .
Speaker #2: Yeah . Unless another party doing everything by themselves . Otherwise whoever working on the I o need to work with us . I think that's a common sense .
Speaker #2: But right now scheduled . So time we don't . We don't even have a chance . We don't even have a time to deliver the original scheme No way .
Speaker #2: This a customer can walk in with the other vendors to do it . Any of this solution at this moment . So you're thinking of you're asking for the possibility .
Speaker #2: If our chip table and after the photo typing , are they consider about using other I o triplet to apply for CPO or for other solution .
Speaker #2: That's possible , but definitely not . Not at this moment . Both of us do not have any bandwidth to taking care of any other approach .
Speaker #2: The design . I think in the final implementation phase , the all the resources are very concentrated on the current implementation .
Speaker #3: Understood . So , John , if I may clarify a little bit . So the final package design , including 2.5 D packaging , etc.
Speaker #3: , will all be still all chip , not really going out to
Speaker #2: Correct . You're correct .
Speaker #3: Okay . All right . So compute die back end design and final packaging . I o die could come from other vendors depending upon the integration options .
Speaker #2: Everything is done by us .
Speaker #3: Oh , okay . So even interconnect IOD will be done by chip .
Speaker #2: Now you are right .
Speaker #3: Okay , okay . That is that is that is interesting . Thank you . Secondly , on this new major Hyperscaler customer that you now are sounding a lot more confident , how does this business model Are you , like you mentioned earlier to Charlie's question , are you happy to be a CGD provider in in this business model for the compute die or do you think that you can have a chance to engage in the packaging ?
Speaker #3: The final packaging design as well
Speaker #2: Okay . Goku , if you are referring to the production only , which means in the industry we call it GDS E if the projects are comes from the CSPs , we will support the project .
Speaker #2: We will compete for the project . However , we will actually . However , we want to provide a value . The G project .
Speaker #2: Usually the value . We can provide it to the customer is low , so it could be a very bloody battlefield for us .
Speaker #2: We will consider the g d , e project to be a knocking door project for us to penetrate into the . We call it the PD one design class production project .
Speaker #2: And if you are referring to a . We are sharing Accelerators . Different parts with others . Yes , we are interested in .
Speaker #2: As long as we can provide visual design value or others to our customers .
Speaker #3: Understood . Just to follow up on that , I think earlier , I think Johnny mentioned the packaging capability , which obviously is much better than most of the companies are you , let's say the IP still is proprietary from one of your competitors .
Speaker #3: Are you able to still apply the packaging side ? Is that is that kind of a supply chain possible where the 30s can still come from a proprietary vendor or typically the 30s needs to be third party services if you want to do the kind of more disaggregated COT kind of models .
Speaker #2: Yeah , we still believe there are many third party vendors . They are working on the service . Yeah . The yeah , we all know that the reason people consider some competitors can sustain a project because of IP .
Speaker #2: Yeah , I think we've been working with our customer very closely . We are we are looking for variety of solutions . Yeah , we can sourcing the IP to the integration by ourselves .
Speaker #2: We can even by the we are even consider using the CGD model like you mentioned about . So I think starting from the next generation and generation beyond , I think this will be become a lot of new working model .
Speaker #2: Yeah , I believe it's not only happened to our customer , but also often to other CSP . Yeah . As you know , if you look at the low kind of expensive IP , most of the high speed interface IP is all implemented in the I o triplet , but the , the area contribute the most expensive part .
Speaker #2: Still , the compute die . We are starting from last generation computer in for radical I o maybe one , maybe one quarter of the size .
Speaker #2: I think . Maybe customer is willing to pay higher margin for the I o chiplet but for the compute die I think go to the COT is the market trend because there will be very limited dependency , pure logic , and architecture .
Speaker #2: Maybe only use E for the interface . So there are very variety of a business model . I think all of them we can adopt
Speaker #3: That's very comprehensive . Thanks , Gianni . Just one last clarification for your N2 project . That will go into production . End of next year .
Speaker #3: Will that be using 400 gig service or it is lower speed than that .
Speaker #2: Yeah . Go go go . We can talk . We know the answer inside out , but sorry , we can .
Speaker #3: No worries . Thank you . I'll go back to the queue .
Speaker #2: I see . Okay . Next one . Laura , you can unmute microphone .
Speaker #4: Yes . Hi . Good afternoon . Can you hear me ?
Speaker #2: Yes , yes .
Speaker #4: Hi . Thank you . Johnny and Daniel . I just want to follow up . I hear that Johnny . You mentioned that CPU you got the two projects .
Speaker #4: Can you share more with us ? What kind of the like a spec and the schedule would that relate to that ? The new customers or existing .
Speaker #4: The major customers ?
Speaker #2: Yeah . In in the earnings call , we intend to to not disclose the names .
Speaker #4: Yeah , sure . Yeah .
Speaker #2: Yeah yeah . So I can share with you one for several , the other for kind of a consumer type of CPU . I think both of them are doing well , very well .
Speaker #2: So CPU .
Speaker #4: Yeah , sure . Also , maybe from technology perspective , can you also share with us like process node or going forward ? Are you also seeing that this projects on on based CPU may also require advanced packaging .
Speaker #4: Thus our chips may have a better chance to get more of that kind of business .
Speaker #2: Yeah , I , I believe so , yeah . The current generation I can share with you is it's not so advanced and , and nowadays , I think the CPU design to be honestly , the design complexity is much lower than CPU .
Speaker #2: If you look at the CPU flow plan and the . And also the interconnect is pretty much each of generation about the same .
Speaker #2: Similar to application processor , it doesn't . If a customer have a . Enough design resource , multiple customers can do it by themselves .
Speaker #2: So for the Hyperscaler , if you look at the current generation , versus cell 2D implementation , most likely the CPU opportunity will be the GDS in only .
Speaker #2: Yeah , because customers do not need . So so powerful design resources to do the implementation . But CPU . Now . A days .
Speaker #2: Also consider about using 3D . Yeah , if a 3D technology . So it's become popular . I think it will become our strategy will be our strengths to implement the CPU .
Speaker #2: Yeah . Our customers also discuss with us on on this area as well .
Speaker #4: Sure . Thank you . And my second question is also about our two nanometers . The next generations . I accelerator . I think Johnny , you mentioned many times that the the design complexity is substantially increasing and the die size is also getting much bigger .
Speaker #4: So can we assume .
Speaker #2: The same ? It's a four . Oh , okay .
Speaker #4: A radical sorry . Yes , yes . Yeah . Radical is getting much bigger . So can we assume that for the next generations , the two nanometer projects we are doing right now , we'll see that the multiple ISPs comparing to this generation .
Speaker #4: So how should we look at the potential like the revenue scale in , say , like a 2 or 3 years perspective ? And also because of the capacity supply chain management is getting more important .
Speaker #4: So is there any like a restriction in terms of the capacity or even like a working capital requirement to secure the next few generations accelerator .
Speaker #2: Okay . I Laura , I cannot talk to you into the specs or floor plan of the next generation into accelerator , but I can provide you some clue .
Speaker #2: First of all , nowadays , starting from the entry accelerator , the die size is into the . Full article . So the die size for N2 , n3 remains the same at the same for 800 millimeter square .
Speaker #2: However , the die . The number of the compute die are different generation by generation , and the . The . The architecture of the chips generation by generation are different , like 2.5 D or three de la chip architecture , something like that .
Speaker #2: But for sure , for the end to an accelerator , we are designing the pricing will be much , much more expensive than the N3 .
Speaker #2: The N3 one , and the the bottom of the chip shipping will definitely be higher than the N3 . So no matter the price or the potential treatment will be both of the both of them will be bigger than the previous generation , which is N3 currently in chip .
Speaker #2: Yeah , sure .
Speaker #4: So can you give us a rough idea how you see that this potential in terms of the business scale , say like in maybe 2 or 3 years
Speaker #2: I would say if TPU is to be told the serviceable market scale is 80,000,000,100 billion , I would say probably for the M2 project , the , the , the , the scale could be , could be at a similar range
Speaker #4: Okay . And , and following question is that in terms of the working capital requirement and the supply chains capacity demand , and also since the market is getting so big , we are also seeing that more of the .
Speaker #4: Like a participants in in this business with these customers .
Speaker #2: Okay . For capacity , I would say this way , as , as we mentioned , it , is it is a model .
Speaker #2: Actually , our customer receive very , very good support by the supplier , such as TSMC for both wafer and packaging . So for now , for the next generation , M2 , I believe in 2027 , 2028 m2 capacity will also be very tight .
Speaker #2: However , we are very confident that our customers will get really , really good support from TSMC . Yeah , and also in terms of competition .
Speaker #2: Yeah . Like I mentioned many times , we have we have a car confidence , high confidence . Yeah . To sustain the design position for this car , I think because the relationship we've been doing for multiple generation and customer did try other vendor then come back , they already they start to realize how reliable we are .
Speaker #2: And they are days , you know , literally only two companies produced a good AC volume . And whoever has a plan , or competitor , whoever claim they have a high volume , they all share the , the , the part from the other customers .
Speaker #2: Yeah . But for our end customer , we are the sole design case
Speaker #4: Yeah , sure . Thank you very much . Very clear . Thank you .
Speaker #2: Thank you . And next one , Jerry from UBS . Jerry , please . You can unmute your speaker
Speaker #5: Hi . Can you hear me ?
Speaker #2: Oh , yes . Please .
Speaker #5: Oh yeah . Thank you . I you for taking my question . I just want to follow up on previously , I think Laura and also others have asked about the end to projects because apparently Johnny and Daniel , mentioned that the SP could be , you know , pretty , pretty high compared with N3 .
Speaker #5: So my question is that , you know , how will this impact your margin ? You know , going forward ? Because , you know , n2 , N3 project , mentioned that the gross margin are blended can still maintain somewhere around the low 20s , but as we go into N2 , if the ASP , you know , of the , the , the , the wafer or , you know , the , the overall design , further increases , how should we think about the margin once we move on to N2 ?
Speaker #2: We are just into the commercial terms discussion with customer . I cannot give you the answer , but overall the feeling right now is we can feel that the the the customer customer really , really appreciates our design efforts .
Speaker #2: It is a very , very difficult design . As Johnny many times . So with the value We provided to the customer and I would say we we keep on have the .
Speaker #2: We kind of have the consensus with the customer that is this no matter . You call it ASIC model or CO2 model , we are partnership relationship .
Speaker #2: We are in partnership . Kind of relationships , customer kind of agree with that . When we when customer success we we succeed .
Speaker #2: We follow this kind of spirit . So we don't worry too much about the , the , the , the gross margin for the next generation and for the working capital .
Speaker #2: We do have ways to talk with the customer , to talk with the supplier , and in the same time , after the GDR , we offered like one month , two months ago , our balance sheet is getting better with all of those things .
Speaker #2: We think we don't worry too much , at least at the current stage , about the working capital for the end to accelerate .
Speaker #2: Yeah , for gross margin thing , which is we just describe our the current generation design is N3 is much more complicated than our previous design .
Speaker #2: So our gross margin in a bit . Yeah . For the next generation , the design complexity , I think is a increased a lot .
Speaker #2: Yeah . I . Hope I think I believe we can maintain or improve the gross margin accordingly . Yeah . I think the gross margin thing can be very dynamically .
Speaker #2: I think it depends on the competition . It depends on the overall size . But I still believe L3 provide the most reasonable margin compared to most of the competitors
Speaker #5: Okay . Got it That's pretty clear . And then follow up question on the I think you mentioned about another CSP customer based on your discussion .
Speaker #5: Can you give us some , you know , indication about likely time frame for this business to kick in ? Because apparently the , you know , the customer is already working with us and also the Taiwanese fabulous .
Speaker #5: There are some product is already ramping or , you know , for this year and maybe for next year , it's pretty much finalized .
Speaker #5: So I'm just wondering when , you know , if you're going to get involved . When should we , you know , to , to , to start to see this , to contribute on your PML
Speaker #2: Jerry , again , we cannot , we cannot discuss the scale , the , the schedule here . It's those are really , really sensitive things .
Speaker #2: And , but I really want to provide you some some thinking . First of all , if low CSP is want to do COT in order to reduce their costs .
Speaker #2: Actually they have to be capable . And everybody knows by now that for the major for in North America who are capable and who are capable of doing their own front end design .
Speaker #2: So if the if the if the if CSP is capable of doing their own front end design when they look for the physical design partner , obviously they will talk to almost everyone who are capable to offer this kind of services in the market .
Speaker #2: Actually , we are one of them But before you can consider . Ng is a place , a very important role during entire budget budget .
Speaker #2: But nowadays you can see all the CapEx , the Ng become totally insignificant . So , so customer are willing to have a multiple suppliers .
Speaker #2: I think that's their strategy . Once have a capability to do the chip , they will they going to invite more and more vendors .
Speaker #2: I think that's what they do . So everybody has a piece of that company . That's a reality . Then that's what that's what they plan to do .
Speaker #2: Okay . Jerry , because we have really limited time . So we want to go on with for
Speaker #5: For okay .
Speaker #2: We want to go on for the other investors , for the question . Sure . Okay .
Speaker #5: Thank you . Thank you so much . Thank you .
Speaker #2: Okay . Next one . Lucas , please . You can unmute your microphone .
Speaker #6: Hi . Can you hear me ?
Speaker #2: Yes , we can hear you .
Speaker #6: Okay . Thanks , Johnny . Thanks , Daniel , for taking my question . And the first question is that given that your revenue concentration from your largest customer might exceed maybe 60 or 70% of total revenue , does have maybe a specific strategies in place to mitigate like single customer risk ?
Speaker #2: Okay , let me give you a very quick answer . The reality is if we want to diversify this customer , there is only one customer .
Speaker #2: We have to pursue . We we are going to pursue . Otherwise , no , any given customers in the world can diversify these customer .
Speaker #2: I guess you , you , you you knew who is the potential customer for diversification and we are working really hard on it .
Speaker #2: Yeah , I think all our competitors . We are facing the same question and same challenge . We are starting from next year .
Speaker #2: You will find out for the revenue majority of the revenue coming from customer . Yeah . For me , just like the one planning of , say , if you want to diversify .
Speaker #2: Diversify this our business concentration , we have to win another . But I , I'm thinking about this way . To sustain the current customer , I think is the most important task I .
Speaker #2: That's why I keep emphasize emphasizing our position is market stronger than most of our competitors because of the relationship . Yeah . I don't think I think we have a I have a confidence to continuously provide our service .
Speaker #2: We know each other for all levels . So I think that's one of our value . Yeah . To diversify . And honestly , I have so many people , about 20 people a year in terms of customer count .
Speaker #2: We can say we pretty much diversified , but if we talk about the revenue , I think it's no chance . Only two company produce the highest revenue
Speaker #6: Okay . Got it . Yeah . Very helpful . But . I think the industry is also observing , growing demand for like custom ASIC among Chinese automakers .
Speaker #6: And like I see design firms specializing in like auto autonomous driving and maybe smart cockpits . So with applications , even expanding in companies strategically positioned to capture these opportunities
Speaker #2: Yeah , literally every single EV car maker in China think about the robotics . Yeah . Robotics can be all kind of form .
Speaker #2: Yeah . I think our we discussed with our end customer like a human . Yeah . The human type of a robot or industry type of robot .
Speaker #2: I think you can discuss the chip is about the same . So the , the beautiful thing is the design . We are doing .
Speaker #2: First of all , they put in the car . Eventually they can put on the robot . I think the . Everybody , our customer and also they are competitor are thinking about this as well Okay , so can we move to the other because we really have limited time .
Speaker #6: Okay .
Speaker #2: Thank you . Sorry for if you have further questions , you can you you can you please feel free to call me directly ?
Speaker #2: Thank you . Lucas . Sure . Okay . Next one . According to the team secret sequence , Charlie , please .
Speaker #1: Oh , okay , I can let James go first . If we time , I can do the second round . Thank you .
Speaker #2: Okay . Okay , then . James . James . Roda . You can unmute your microphone . Thank you , thank you .
Speaker #6: Thank you .
Speaker #7: Yes . Can you hear me ?
Speaker #2: Yes .
Speaker #7: Yeah . Just in terms of next generation , next next two generations chip for the major customer , how do you think of You know , mix shift between those customers , between , you know , your product and the GPU ?
Speaker #7: How , how , how can it change ? And then a follow up question , which is sort of related , how do you think about total or how does the customer see total TCO of the ASIC chip versus the GPU Thank you
Speaker #2: I would say for me , I cannot give you a very detailed answer , but based on our knowledge , the customer is working on increasing the percentage of their own asset usage for their AI data center .
Speaker #2: But I cannot offer you the , the , the , the exact percentage or number of the chips or number of the machines .
Speaker #2: But we knew the trend that the asset usage is getting up . Because of the cost . Yeah . And that's public information .
Speaker #2: They CEO also mentioned in the conference the saving is quite significant , like 3 to 4 X . Saving compared to their previous their current supplier So James , do you have a further question .
Speaker #7: Yeah . 3 to 4 X . Is that on what basis . That's chip chip level chip level basis .
Speaker #2: Which means from the cost perspective to get the similar TCO , you pay only 25 to 30% , 30 something percent of the money by comparing with the you paying for the GPU .
Speaker #7: Yeah . Do you have a sense of how that translates at the at a rec level or full , full TCO to , to serve tokens ?
Speaker #2: No , we are just doing the chip design . We don't we do some work with rough calculation for fun , but its not preventable .
Speaker #2: Sorry about that . Yeah , it's probably you have to ask the loss system providers right
Speaker #7: Thank you .
Speaker #2: Okay , so for the last one , Charlie , thank you . Please unmute and questions .
Speaker #1: Great . Daniel . So just to clarify , the Q and A . From from Laura , you mentioned that the two nanometer ham could be 80 to 1 billion users .
Speaker #1: Was that your comments regarding the scale of this projects ? Was that your comments
Speaker #2: Can you repeat again
Speaker #1: The the scale of the the two nanometer . No matter volume or revenue . Did you provide any comments on that one ?
Speaker #2: No , honestly , we don't know the scale because we don't have that information yet from the customer . And even we even we do we , we , we cannot share with you today , but you have to if you really want a number , because the end project , we can fill the ambition , the ambition from the customer .
Speaker #2: So if the customers , competitor or peer has $80 billion in for the . For each market scale , I don't I don't think our customer will be very , very far away from the number .
Speaker #2: Oh , yeah . Overall , I think they still maintain the highest in the industry . Yeah .
Speaker #1: Okay . So so now I got your point . So you said like life cycle ten or is it annual annual ten can be that much
Speaker #2: I don't have I . It's a fair question , but I don't have an answer . Yeah .
Speaker #1: Okay .
Speaker #2: And and we don't have the and honestly , we don't have the position to answer this because it is customer decision and the strategy .
Speaker #2: Right now . But in terms of specs , in terms of schedule , I think our customer has a very high confidence .
Speaker #1: Right ? How about the your expected allocation ? I'm not sure if I get this right . Right . But I , I feel like you're production allocation given , you know , Marvell , Qualcomm , get into provided the production service , I guess your your three nanometer production market share is probably 30% to 40% .
Speaker #2: Chow . Charlie . We are just entering the discussion with the customer .
Speaker #1: Right ?
Speaker #2: The customer will definitely listen to the audio video content of this . Okay , okay . Yeah . So , so that's . Jupiter discussion later .
Speaker #2: Not okay in the earnings call . Right . Okay . That's exactly why we are focused . I , I , I hope to deliver a very good news in the near future .
Speaker #1: Okay . We look forward to that .
Speaker #2: Okay . Thank you . And thanks for everyone joining our second quarter earnings call . We do appreciate your participants . Thank you .
Speaker #2: And we will see you all again , probably three , four months later . Okay . Thank you . Thank you very much .
