Hi, good evening everybody. My name is Jeff Ohlweiler.

I'm head of research at Macquarie in Taiwan. Very happy to be co-hosting Phison's third quarter earnings conference with Phison CEO, K.S.

Pua. K.S.

will do a presentation to go over the earnings, and then we'll go into Q&A. A lot going on in AI, in tech, in NAND and memory, look forward to hearing what K.S.

has to say. Thank you K.S.

for letting me join with you. Pass it over to you.

Thanks, Jeff. Good afternoon, good morning, ladies and gentlemen, to join Phison our C23 our earning call.

Let's restart. Okay.

This is our breakdown of our C23's revenue. In this chart, you can see by our definition, our so-called AI ecosystem module over 50%, 57% of our Q3 total revenue, and growth Q-o-Q 88%.

This to show the AI-related ecosystem, SSD, boot drive, aiDAPTIV, the demand is still getting very strong. The reason we show our embedded, ODM, and industrial, the Q-o-Q here, just want to-- some analysts they may write, okay, they say, "Hey, the consumer market, the embedded market, PC, smartphone, IoT..."

Yes, this market now they have a headwind, and the challenge is the cost increase too much, the consumer may not able to take it. Embedded ODM, our C23 we minus 7%, and the industrial module we minus 30% in the Q-o-Q.

If Phison we still stuck in the consumer or embedded market, then we may suffer. You can see some other module house C23 revenue dropping.

I think they're mainly stuck in this industrial. Again, we have our solutions in the enterprise, AI, and related business, okay?

The controller-wise, even though this year the smartphone declining, PC declining, retail SSD frozen, but our total controller shipment by unit we increase, by revenue it will increase. Means what?

Means Phison we win the market share in our controller business. The retail is, since early this year we already highlight, retail is not our focus at this moment, it's only 2% of our business.

Again, after the other two, three quarters, this declining in embedded, industrial definitely will bounce back. Why?

Because a lot of device, equipment, they still have to renew, they have to upgrade. We keep our R&D development in this two field to make sure after two, three, four quarters, we will back to this industrial to secure our share and our gross margin.

Let me have a Mandarin to explain since more Mandarin speakers here. 第三季呢，我們的營收是有顯著的成長。特別呢，在AI ecosystem相關的，我們的QoQ成長88%，占總營收呢占了我們的50%以上，這個符合我們當初的預估。那我們今天要特別強調呢，在embedded、ODM跟工業應用這塊可以看到吼，這個是手機、PC，其實整個銷量是下來的。我們也策略性的選擇呢低價的生意不做。那工業用呢是因為所有成本、缺料跟這個太高，這個單價太高，所以呢造成整個需求瞬間的這個減少。那對我們呢，看到有30%的一個衰退。消費類呢是更嚴重吼，40%。那我們要強調一個controller呢，雖然今年的消費性市場幾乎是冷凍，那PC銷退，然後手機下降，但是我們的出貨量還在成長，營收也在成長。這表示什麼？表示呢我們過去的努力，技術努力，我們的這個market share是在成長的。總個市場是衰退，我們出貨量還成長，表示我們的成長力挺高的。那這邊我要特別再強調一次，群聯電子呢如果過去沒有努力在AI的ecosystem、enterprise、aiDAPTIV這邊去著力的話呢，我們如果只在這個生意，那我們就符合某些分析師講的衰退。那我們同業裡面也出現這樣的情況啦吼。那我們從年初已經開始特別的強調，我們呢研發資源會往AI落地、企業級應用來這個加碼。那也因為有我們的這個過去的努力，所以第三季呢我們的營收還是有很顯著的一個成長。這邊我認為有必要呢做一個比較詳細的報告，讓免得說這個螢幕混珠吼，覺得這個評估來評估去沒有看到一個重點啦。30 minutes ago, we just released our earnings.

Our gross margin in the C23 is $51 billion, gross profit Q-o-Q 15%, and gross profit up 700% Y-o-Y. Revenue-wise, C23 $86 billion is all-time high, follow our expectations.

This part, we like to show you gross margin-wise. Since C22, we already highlight to maintain the 60, mid-60% gross margin is not reality because the market in the-- the cost increasing, but we still able to cross to 60% gross margin.

As a C21, I also keep highlighting that the gross margin rate will decline, but the amounts, total amount of gross margin, actually we are increasing. This is to show our business are configurations.

We move more into enterprise, even though embedded ODM, consumer, industrial declining, but our gross margin still able to increase. 這邊再強調一次，當然過去講說低價庫存，但這個我想講的在某個領域是對的吼，在消費類啦等等是對的。但是呢，雖然我一直認為說要維持一個高於60%的一個毛利率，以我們來講是一個很困難的工作。那我們努力呢會維持我們相對好的毛利率，但是呢我們認為我們毛利會增加，這個就是我們今天證明。那我想要往後的毛利率--毛利的成長呢是我們可以期待的，也是我們努力的，而且我認為是我們可以達到的。Earning per share 138 is our all-time high.

We have around 20 EPS growth from the C22. Back to the income statement, I need to share with you that at our C23 the whole quarter we are running with zero debt.

The whole market keep highlighting the AI ecosystem, the player, they are short of cash flow. Phison, we are running in the zero debt.

We didn't take the loan from bank. We still able to keep the free cash around 20-something-- here, I think we have a-- I think remember we have a 20-something billion cash on hand, okay?

這邊呢，單財務報表各位可以看到吼，整個產業從第三季開始呢都面臨這個資金的不足，那我們還是有能力維持在一個零負債的情況來經營，賬上還維持200多億的一個現金，那庫存水位呢也明顯的有所增加。So, this is to show you our balance sheet. I think you are concerned about our inventory.

Inventory is around $111 billion, okay? We are increased by $20 billion compared to the C22, and our cash flow, we have around $27 billion cash.

Overall in finance, we are still doing very healthy, okay? 在整個市場一直講說資金短缺對於這個產業的影響，那到目前為止，我覺得我們還是維持一個相對健康。庫存還是持續的增加，為什麼呢？因為我們要準備企業級的這個應用、AI的應用還有開集的應用，強--那個需求是非常強勁的。那我們呢，還是持續努力呢維持一個零負債的一個經營，讓公司呢的一個財務情況在最健康的情況底下。Okay, this is to disclose our non-TIFF result.

Here, not much different, okay, not much different, only a small gap. Just reason we have ECB and we have issue the stock option at a few months ago, we have to every month depreciate the cost.

The gap is very small. This is mainly for the employee benefit.

那個non-TIFF的差別不大啦吼，主要是因為我們前陣子有了一個幾千張的一個選擇權給了員工，所以每個月呢必須要做攤提。Revenue-wise, by October is $31 billion. Q-o-Q is 2.9%.

Demand in the enterprise still very strong. This page, we want to show you what is our next.

From first decade, we've been in the consumer controller, consumer module. Second decade, we move to the embedded, smartphone, PC.

We keep been high-- highlight we are in the cyclic memory business. We work very hard to enterprise, now we move to the AI ecosystems.

According to NVIDIA disclose the five-layer AI cake, Phison, we played a three role. In the chips, we develop every kind of chips, eMMC, SSD, UFS, retimer.

In the infrastructure, we are providing our whole AI server with aiDAPTIV, AI PC, enterprise SSD, boot drive, and customized solutions. Application-wise, we are developing a big group of our software team to provide our AI data platform, software, and aiDAPTIV solutions.

我們一直呢努力的在做一個轉型啦吼，那這個轉型的成果可以期待，很快很快就可以期待，OK？那怎麼說呢？We have investing huge amounts of new software engineers here, okay, mainly in the AI software developing and the AI software business development. We are now start to promote our solution to the banking, hospital, government offices, educations.

Later, I will show you our some achievements. This is to help Phison to migrate, to move to the next system business, which can ensure we are can have en-- enjoy the much better gross margin rate.

我們持續的努力在這個AI的生態圈的開發，最主要目的就是希望在未來可以維持一個相對好的毛利率。當然毛利呢我認為我們會很健康啦吼，但是呢投資人希望看到毛利率，那毛利率用模組來看不現實的。我們呢希望有系統的生意，這就是我們過去三年的努力，很快就要開花結果。So, we are keep mentioning our next Phison third decade. We from controller, now we doing the chip design, our in-house IP, our modules, now we providing our AI data platform as a systems, which able to gain the more gross profit, gross margin rate from this system business.

C23 we'd like to have a some business highlight. In this year, until end of September, the NAND company, three NAND companies, they release their TLC and QLC Gen 5 client SSD controller project.

Phison, we won 100%. 100% means the six program, we took six program.

Means in the coming soon, the consumer SSD for PC, Phison will become the key players, very key players, okay? With this our NAND flash partner, we also helping them to convert the future client SSD solution to the aiDAPTIV compatible solutions.

AI PC, within three years, every new PC, the new CPU, they are able to run the AI inference, but memory is a constraint. With Phison AI aiDAPTIV can help every PC convert to AI PC.

With this six design win with the NAND controller, means 100% hit rate, can help Phison by 2028 we will become very big player in this PC market. 今年，三家NAND的原廠放出了六個案子，Gen 6的--Gen 5的下一代的TLC跟QLC的controller的專案。群聯電子呢，我們六個案子100%命中都拿下來了。那同時我們會協助他們在未來的這個PC領域裡面呢，除了傳統PC儲存，我們會把方案做成相容於aiDAPTIV的方案。意思說在未來AI PC普及之後，群聯電子就是這個領域的一個非常非常大的一個提供者。Smartphone, even though declining, but Android phone Phison we gain our share in the unit shipment, special in the UFS 4.1.

We are shipping big amount of controller to almost every Android phone makers in the world with the TLC solution. We are the second company MP the QLC solutions.

First was Samsung. They killed the program, but Phison now is a key player in the UFS QLC solution supplier, mainly to the mid-to-high-end Android phone.

We also win several UFS 5.0 controller project, and get a four design win in the China Android players. 手機呢在下滑，但是呢我們的總出貨量還在成長，表示呢我們有一個很大的這個市占率的成長。那在這個UFS 4.1呢，我們也協助了夥伴呢把QLC呢導入量產，這個是僅次於三星。三星案子呢做了一段時間把它停掉，因為速度不夠好，我們這個案子呢持續的在放量當中。這顯示呢我們在技術的投資呢得到很好的回報。Enterprise SSD is a trend, mainly in the AI ecosystem.

Here we have a two part. One is a boot drive.

Our boot drive growth by unit, by revenue Y-o-Y is almost 20 times per year, okay? The demand is strong, we keep get the new design win.

You can read here we have many design win from different tier of players. Main drive-wise, main drive will consume more flash capacity.

We win a lot of new design win in the C23. More coming in C24 and C21.

Why? Because Phison will prove we are capable to deliver from controllers to modules and to system and service.

企業級AI應用不管怎麼說，未來一年半裡面絕對是這個產業呢成長最快的。那消費類呢是很辛苦的。我們在這一面呢攻城掠地，每一個季度都得到很多新的design win，而且呢這個成長的幅度越來越快，表示我們的技術能力、供貨能力、服務能力已經被整個市場所肯定。So, enterprise SSD, we also disclose our Gen 6. We are going to have a samples by end of November, and we are going to have a co-announcement with the CPU players in the Gen 6, mainly for the inference solutions.

Phison will become very earlier supplier in the Gen 6 solution by next years. UFS driver IC, retimer IC is a small kind of business, but Phison, our Gen 6 retimer already in the market, start to have a shipment, okay?

Even though this is niche market, but to show Phison capability in design. aiDAPTIV, we keep talking for almost two years, almost two years.

This was happened in the early August FMS, Intel's we have a co-announcement. Phison engaged with Intel to promote aiDAPTIV go to the AI PC.

Very soon, very soon, CES, you can see what is going to happen in this industry. We are become the really dominant key player here.

In just recently, we win the Micron two very historical award. First, we keep-- this is our third award in the supplier day in the semiconductor part, and we won also the quality award.

In the Micron last, all the events, Phison is the only company to won two award in the one supplier day. This is to show Phison our capability in design and also in quality.

這點呢要特別強調吼，美光是一個非常嚴苛、要求或者講直接點是非常demanding的公司吼，要求是很、很、很嚴苛的。那我們是第三次得到它的最佳供應商，同時也得到它的這個最佳品質獎。那從歷史上他們的活動裡面，我們是唯一一家在一個晚上得到兩個獎的，這個是對我們一個很大的肯定。Okay, this one to show you about what we so-called the Phison AI data platform. I don't want to spend more time here.

I just want to show you, this is a hardware layer, is a GPU server, cache server, with the Phison aiDAPTIV and our storage. On top of this hardware, this is a different layer of software application, and this is all delivered-- developed 100% by Phison, 100% by Phison.

We try to build a software barrier in the on-premise AI solutions. If so, we can make it, we are able to gain the more benefit from this business.

We keep investing, keep hire people, and more business are happening, and we are going to show more our output in the market very, very soon. This is to show you how we convince SME to use a Phison solutions, okay?

Every SME boss, they want to go to the AI on-premise. The consultant may ask $1 million, $2 million, $3 million.

With Phison solutions, with a small amount, $100K, $200K, to do a POC. After the POC good, they put online, then they are facing the compute shortage problem.

At the end, they need to keep buying the server. They have to spend the same amount of the day one what they've been asked.

With our solutions, gradually they buy the server, they can achieve to improve the efficiency, and they are willing to buy more servers. This can help the industrial.

We already have a-- this is our accurate data. We already have a 17 banking customers.

We ship our AI server with our service. We have a 85-plus SME in Taiwan, a little bit in Malaysia.

We have a 10-plus hospital in Taiwan to use our AI service. We have more than 18 school, high-- higher educations, university, to use our solution for AI training.

We have some government officers to use our solution to do their work log in their office. It's on-prem.

This to show you how Phison use our AI on-prem. We develop the solution for ourself.

What we gained? By October, we have 84% employee, means close to the 3,000-plus employee, using our AI on-prem service.

We save 333 headcount of R&D. Or we didn't hire this headcount, but we have a this headcounts output.

In here, we are saving close to $3 million a month in the salary, means we improve our cycle time and also efficiency. The server we use here, I want to highlight, once the server get to our server-- server room online, the server cost depreciate to zero within 4 to 6 weeks, weeks, not months, okay?

4 to 6 weeks, we gain the headcount, then the server value can direct move to the zero. Means what?

Means second month, the server we use is all free. 中文講解一下，我們努力用我們的AI方案，自己建置，然後自己內部解決掉很多問題。10月份使用率，全公司大於84%，產生300多位的這個工程師的output，等值呢將近900萬美--900萬，300萬美金、9,000萬台幣的一個薪資。同時呢，我們的server上線之後呢，4到6周就可以直接歸零了那個成本，剩下的第二個月只剩下電費。這是我們目前以這個成績呢來告訴所有的中小企業，我們的方案是可以協助他們得到這個效益的。And we also made a one simulation.

By our October, the token we use on-prem, if we convert to the cloud, the most cheaper cloud, the cost will be $2.1 million, but we didn't pay. We pay only our electricity cost, okay?

This to show on-prem is coming. You are the investor, I think you know more than me, a lots of industry giants, they start to limited the AI service to their employee because the cost is incredible, expensive.

We are now providing our AI on-prem with our AI data platform to help every company to save the cost in their server room, and we proved. We, I see the very good result in improving our design efficiency and also our the headcount saving.

We keep buying server. More servers coming, put to our server room.

Now, our server room run out all the power supply. Now, we move to the our outsource, to the AI data center, okay?

We are going to save, my target is a 700 headcount R&D by end of this month. At the end, we we also improve, strengthen our design capability in the very short cycle time.

Our R&D expense is still high, very high, 20% of our revenue. We keep flat in the last few years, and we are keep crazily invest to the R&D.

Why? Because we can see few years ago, we invest to enterprise AI, now we get the good return.

Coming years, I wish Phison, we still grow our profit. Means what?

I need to burn out my earning to engineering to increase more product line. This is to show you Phison's our hierarchy.

How can we make the good gross margin? Heavy R&D investment.

This is happening. By up to first nine months, we already spend $39 billion NT of R&D cost.

We keep training more product manager, more BD for our AI business. We still need to hire up to 250 engineers in the coming six months.

Why? Because we win every controller client projects.

Every. Coming months, we are going to gain more customize controller project for AI networking, for AI systems, for AI PC.

We need to hire extra 250. We now is going to appoint headhunter to help us to gain more R&Ds.

Last summary. We work hard to increase our value, our profit, return to the shareholders.

We want to make sure Phison we are able to influence in this industry, not only in storage, but also in the on-prem AI solutions. We keep investing in the market.

We also try to make more joint venture with a different territory, different kind of partner. In Malaysia, we already have a joint venture with a core banking developers.

Now, we are moving to the banking business with a core banking plus AI solutions. There a question here.

I want to share here, then we can go to the open Q&A. This morning, board member meeting, we just approved we are going to have a treasury share buyback, 2,000, 2 million share, okay?

This is going to be encouraged to our employee. Recently, the stock market has a some noise, but we want to show to the market we still have a good confidence.

We got a question from an investor, "Why Phison keep have a higher R&D expense?" I think a few reasons here.

We win almost every controller project, we need more people. We need more equipment.

We need more tools. Gen 5, Gen 6, now we are in the leading.

We need to have a more samples, enable more NAND flash. Fortunately, we win again many AI-related, not hyperscale, OEM, AI ecosystem, whatever.

We need to have a more people to in charge all those kind of business. Again, we need to have a headcount.

The on-prem AI is coming. We are developing more software application.

We hire more software engineers. We are hiring more, invest more.

Why? Because we can see the big return very, very soon.

Also, they have a some question about, "You keep saying about aiDAPTIV, cache. What this can help?"

After few years, this is number from our clients. We provide our AI server to the customer with aiDAPTIV.

Here is a simple few numbers, okay? Without Phison's solution, concurrent user can be 16.

With our aiDAPTIV cache, can improve to 100 concurrent users. Time to first token with a different concurrent user, you can see the improved times here.

The throughput, the SME more concerned about token per second. Token per second related to performance and also power consumption.

With aiDAPTIV, we can improve three to six times of a server's token per second output. This is what we can gain, okay, to help the AI on-premise.

They buy limited server, with aiDAPTIV they can create a more efficiencies with a token per second output. This is also some concept, okay?

With our Phison solution, AI on-premise, KV cache can help the efficiency. Actually, when the users read the efficiency is good, they are willing to buy more servers.

概念是這樣子的，他們用起來之後呢，本來以為費用便宜一點，結果好用，好用更多人用，更多人用就要買更多的AI server跟SSD吼。因為他得到的成果，就像群聯電子用幾台十幾台server就可以省下300個人，那我當然買幾百台server來用了，大概就是這個概念。 Our inventory breakdown still over half is our enterprise-related component, okay?

Embedded ODM, even the market declining, but we have our strong partnership with the OEM. We still have secured a big amount of orders we need to ship.

We just walk away from the low-end business, okay, because low-end business now is a very bloody. With the high quality products, we still able to get our gross margin rate.

This we go to the open questions.

Great. Thank you, K.S.

A reminder, you can either raise your hand or put your question in the Q&A box. Let me ask a few, I guess, to start here.

K.S., can you talk about the growth, the sequential growth in third quarter, rough breakdown between ASP higher and bit improvement?

Actually, it's a unit unit shipment increase.

Yeah.

Hello, Jeff. Can you hear me?

Yes. Mostly units.

Okay. Unit shipment, price increase actually C23 is quite flat, quite flat.

Unit shipment and some other new products, customization products, which means we can improve the ASP with the different functions.

What's your expectation for ASP over the next couple quarters for both straight up NAND and also module price? Is there any reason why they'd move separately?

I believe C24 till C21, now you can read a lot of noise in the market, right? Just because the consumer is so ugly.

We'll be the price potentially flat or a little bit increase, a little bit. My worry, my worry is after Lunar New Year, after Lunar New Year, the demand of AI will boom again, special from China side.

They have a some reason, I don't want to disclose what happened here, but just a highlight, after Lunar New Year, China AI demand will boom again, big boom.

Okay. In terms of sourcing NAND, how much are you able to get versus what you need or want over the next several quarters?

I'm talking about next year. I have a target for next year.

Until now, achievement of my target is around 70-plus percent, 70-plus. In November, I need to visit every different supplier in the every different area to us to fulfill what we need in the 2027.

I have a confidence I can make it. Why?

Because we can bring more value to the flash they ship to us.

Okay. We have a question from Charlie.

Charlie, you want to unmute yourself?

Oh, yes. Thank you so much.

K.S., I wanted to ask a little bit about your gross margin profile for your AI part of business and non-AI part of business, because you seem suggested that the kind of help from low-cost inventory can help your so-called non-AI side, but it seems like AI part of the business, there seems to be so-called a higher cost or lower markup. Can you let us know the margin profile difference for your AI versus non-AI business?

Thanks, Charlie. I just want to say I beat your report in February, right?

February, you forecast C23 we are going to suffer the low-cost inventory margin blah, blah, blah, but now we show to you we are here. Actually you are right, you are totally right if Phison we are only in this business, okay?

If Phison still stuck in the consumer, embedded, industrial, yes, I think some module house is going to disclose that C23, I read some gross margin decline two-digit, China module house decline more, okay? Again, you can see our portion, 50-plus percent of our revenue are enterprise.

This demand is very, very strong, and this business asking a lots of customizations. Our October breakdown, this AI ecosystem is 65% of my revenue, and I believe every month the portion of AI solution is increasing until maybe end of next year.

Now this NAND industry have a two portion. One is a AI, one is a non-AI.

Non-AI is really, really suffering, okay? Luckily, Phison in February I keep saying we are heavy invest to our AI solutions, now we are here.

What you keep asking the low cost eventually gone, okay? We are still able to have a some low cost, but we can't rely on low cost forever.

The value is coming from R&D investment to improve our gross margin, such as AI ecosystem and our AI data platform. Right now, after the US midterm election, the noise saying that the data center may be under limitation.

This can help to push AI on-premise going to popular. Phison now, we are providing not only a hardware, but we also providing the total solution including software.

If this happened, we are able to gain more income through the software business, which is a 100% gross margin. Means what?

Means I don't count on too much on low-cost inventory.

Okay. Hey, Jeff, may I ask a second question?

Sure. Go ahead.

Thank you. Thank you, since you're hosting this call, by the way.

K.S., I think another thing that people kind of worry a little bit is about the PC demand. You see that Intel's earnings was pretty poor, right?

Or don't even look at Intel, just look at those ODMs shipments Y-o-Y declined like 20%, 30%. I know you have a relatively very exposure to that market, meaning your AI PC.

Can you share with us what are the part of business that you're seeing kind of weakening demand? To combine what just answered for the first part of question, and this a second question, what should be the new norm for Phison's gross margin in 2027, 2028?

PC market since C22, we already foresee the demand declining, no doubt, no question. Everybody know.

If you read books, you read news, you know what going to happen. Again, show to this chart, we knew already, but at the end, we still grow the revenue, we still grow our gross profit, okay?

We agree regular consumer PC in coming eight months, they are going to suffer. Look to the market again.

NVIDIA, AMD, and Intel, they are strong pushing the AI PC. Every CPU from their new generation, they have a AI inference capability, but unfortunately, they're asking for low-power 5 128 GB, and the market price is $8 to $9,000 per device.

This is not going to be popular. Phison aiDAPTIV, now we are doing very hard to put SSD, aiDAPTIV cache, into the PC.

We have a few secret program ongoing. Let's wait.

You can see in CES, okay? I believe AI PC go to the commercial market is going to happen by '27 second half.

If so, means a PC industrial, they can recover from their so-called traditional PC with the AI functions. Second, you ask me what's the Phison gross margin coming from.

Next year, we are still good in the AI ecosystem modules. Here, you can see Phison will keep design win in many, many, many projects here, okay?

Every quarter, we have a three win, one win, anyway. Second, you smart, I'm smart too, right?

This is a hardware business. I buy NAND, NAND expensive, then you still calling about the low-cost business.

I agree, but again, this is our so-called AI data platform. If AI PC go on-premise, AI solutions, Phison, we prove we use our AI solution, we can improve this kind of efficiency.

The AI server I purchase can depreciate to the zero cost within 4 to 6 weeks. We believe a lots of SME owner that need this.

We are going to take this business as a service. We are able to get the annually income with the 100% gross margin.

Overall, I make it short. AI ecosystem will be my gross margin cash cow next year because we keep design win many customized projects.

Second, AI PC, we are pushing this going to happen. Third, AI data platform, we are going to make service.

We have a many program ongoing, but I keep deliver a lots of message. People only can believe when they see the result.

Let's wait to see the result coming soon.

Great. Thanks, K.S.

Thanks, Jeff.

Thanks, Charlie. Hey, K.S., just to kind of follow up on that.

I would say pre this recent upcycle, your normalized margin was like low 30%. Because of product mix change, do you think over time that gross margin will be significantly higher throughout the whole cycle, not just after the inventory is not impacted anymore?

In my whole life, I never imagined we can hit the 60%, and I don't think this is a reasonable one, okay? I don't think so.

I think coming quarters, if Phison can keep maintain above 50, we are perfect. We are perfect.

Overall, I keep saying that I want to improve gross profit, not percentage. Means revenue keep growing, dollar amount profit increasing.

The percentage may decline, but this force us need to increase more software business to help to maintain the number of a percentage.

Great. A question online here says, "In Q3, your revenue grew 27% from Q2, while Longsys grew only 3%.

Your gross margin fell about 6 points, but theirs fell 16.5 points. Is this because years of heavy R&D gave you a different product mix with AI products now 57% of revenue, or because you had more low-cost inventory?"

No, no. This Charlie already asked, right?

Charlie, February when he say something, actually he bingo. He bingo is a typical module house, but not Phison, okay?

Phison disclose we have our portion, a big pie in the enterprise AI ecosystems, which the module house at the last decade they enjoy good, they didn't invest much, but we are already working hard, okay? We are good just because we are now in the AI ecosystem business.

Without this business, you can see here, okay, minus 7% embedded, minus 30-- then Phison would same as a Longsys, and Charlie bingo what his report. Now, I keep saying, listen to Phison.

We are investing, we are smart, we are hardworking. Now, we enjoy our last seven years investing in the enterprise SSD AI.

Coming years, I hope we are going to enjoy the AI data platform bring the much higher value to Phison, and this is going to show to you by 20 2027.

Great. Here's another question here.

"Has operating cash flow kept pace with reported profits, or declining?"

Jeff, I want to answer they have a on the chat room Mandarin, okay?

Sure. Go ahead, yeah.

Talk about Kioxia release. NAND market is on the peak.

This is something strange, okay, very, very strange, okay. Kioxia release that their growth only 1%, 1%, 2%.

It's kind of a joke. Let me ask a question to everyone, okay?

If you have a clean room fully used with the current generation of a products, you don't have a new clean room, but you need to migrate your new design to the next generation, are you going to stop some portion of production line to upgrade your equipment, then after that you can increase the new output? You catch my point?

This is my personal study. Kioxia C24, most likely they are going to shut down a few production line to upgrade the equipment to the next generation, which has a higher output.

Means they lost some capacity, but they maintain their revenue, means what? Means they are going to increase the price.

Anyway, this too bad to me. I wish they are not going to increase the price, but this is the fact which is my perspective, my view.

Okay?

Great. Thanks.

Since you have the slide up, a quick question on industrial module. Advantech just reported a couple days ago, and they had pretty strong third quarter momentum, pretty strong fourth quarter momentum as an industrial PC player.

Curious, they're seeing very strong industrial PC-related momentum, but you're showing pretty strong industrial module decline. Anything worth mentioning there?

They are also my customers. My portion with them also increasing, but Phison industrial is a very big portfolio, okay, which including automotive, industrial PC, equipment, and a lot of traditional infrastructure.

Those portion due to the material shortage, many material shortage, they cannot put in online. Second, some player, they already accumulated some inventory in their first half.

Since the inventory high, they want to reduce their inventory risk, they are not going to pull in. Overall at the end, industrial infra is a slowdown.

Only few key player growth, the rest are slowdown.

Okay. Let me read some of these other questions here.

Number one, "Has operating cash flow kept pace with reported profits, or declining?"

Operating flow keep pace with reported-- I didn't get the study this one, but so far we are still running with the zero debt, I think I'm good.

Okay. "Has inventory turnover days decreased?"

I think flat. Why?

Revenue increase, but I keep accumulating more inventory. Why?

Next year, again, gentlemen, ladies, you can't believe. You don't know how tight supply in the flash after Lunar New Year, special in the TLC, because heavy cache is going to use every SSD.

I need to accumulate what I can buy.

Next one here. "So, when or have aiDAPTIV+ and Pascari produced commercial results that can be quantified?"

Pascari is our enterprise brand. Pascari aiDAPTIV is a AI.

We doing this design, promotion, development for two years. Yes, next year let me show you the number of aiDAPTIV, okay, next year.

We do a lot of POC. We are waiting POC mature, the market buy-in, the use cases happening.

Next year, Phison will have a special number to show you what is our aiDAPTIV business.

Next one here. "So, Kioxia seems to be making progress on a 100 million IOPS SSD for AI GPU servers.

Where is Phison on this? Do you have a controller or product for it, and when could you ship samples?"

This is very niche products. Need to have a special NAND flash.

The NAND company, they are not going to sell this NAND to third party, they're only for their own use. To me, like HBF, if I go HBF, to me is a nonsense, nonsense.

This 100 million IOPS, the controller need to go to 4 nm, investment will be like $300 million. I no want to spend this money, nonsense.

Phison, we develop our own controllers with traditional flash, we can able to go to 50 to 70 million IOPS. We are not going to hit 100 million, but we use a low-cost NAND, our current controller without R&D expense, we go to 57, 50 to 70 million IOPS, but not hit to 100 because that is not necessary.

Next one here. "For the CMX context memory storage tier, will the final design use TLC, pSLC, or a mix of both?

What is Phison's role in it?"

This all about Gen 6 TLC, and Phison, we are now play the role this so-called the KV cache offload SSD. Yes, we are there.

Just, maybe more of a question on your thoughts on demand trends going forward for new AI data center builds given the recent US elections. Anything that you're hearing or seeing or expectations change over the last week?

We are not going to give a comment on the macro political things, right? Again, I believe no matter government change or not, they need GDP.

They need to get the leading in the AI industrial. I don't think they are going to shut down or slow down the investment.

I don't think so. Again, second, no matter they are going to slow down or not, but AI on-premise is going to happen, okay?

If the new government ready to slow down the AI data center deployment, this will be helped me to push more go to the AI on-premise. This is our business.

Okay. We have another Chinese question here.

Do you want to read that one? The aiDAPTIV+ one at the bottom?

Yeah. aiDAPTIV適合朝向消費性PC？Yes.

Actually, aiDAPTIV, we aim to two market. One is a AI server go to the SME.

The volume-wise is a kind of a small, but if go to AI PC, can be few hundred million set per year. We win every NAND client controller outsource, we win.

This 100% will convert to the aiDAPTIV. So, 2027, please wait and see.

Okay. Obviously you have a great improvement product mix since your R&D investment over the last several years.

It's a very strong NAND market at least as where your product mix is. What's your base concern now going to 2027?

I need to hire extra 250 headcount. My executive blame me, "Hey, you go to us so many projects.

You win so many project. Now they have to work hard."

I said, "Okay, I give you 250 headcount. We need to hire more talent."

Phison also announced next year, we are going to pay high amount of bonus, really high amount bonus. Believe this can attract of course make our staff happy, and we can attract some more talent to join Phison.

How difficult is to find good engineers, and is that mostly Taiwan, or US, or combination of all over?

We still prefer in Taiwan because all our system here, right? How good depends on how much you are going to pay.

Now we are so profitable, I don't think it's a problem to me.

Okay. Another question online here.

"Many PC users now put MoE experts and KV cache on regular consumer SSDs. Is a normal consumer SSD durable enough for that, or do you really need an aiDAPTIV SSD?

What is the difference in endurance?"

You can buy the consumer SSD, then very soon the drive is going to crash. Trust me, okay, it's going to crash, okay?

At the past, right, they have a some automotive makers they use a consumer eMMC design into the car, then the car have to return after six months. How much damage is going to happen, okay?

You put any SSD, it's working, it's working, but at the end you will suffer with data lost.

Okay. Here's another question on inventory.

"How is the inventory situation in different types of end markets, and what do they see their customers doing? Number two is, what do you think is a potential impact from YMTC growing capacity?"

Inventory in the PC, retail, downgrade, quite big amount stuck in the China, okay? Those quality is bad.

Price is good, but you go there the armada coming back after six months, okay? In the industrial part, I think okay.

Enterprise is a far than okay because still very tight. Most inventory stuck in the consumer SSD.

By the way, you can't believe consumer SSD market decline 90%, 90%. When you just now asked me about Longsys, yes, they are suffering, okay?

Phison, we okay. Inventory to me, I move those component all go to enterprise and the boot drive, I'm okay.

What's your second question? Jeff, just now you got question, right?

Inventory and--

The second question was, what do you think is the potential impact from YMTC growing capacity?

Okay. My personal study-- [interruption in background] 喂，李瑩的李瑩李瑩，幫忙一下吼，幫忙一下靜音一下拜託。好啦。哎呀。Okay.

No matter what, in coming years, coming years, the flash will be very tight, very, very tight, including TLC, QLC. We wish we like to see YMTC improve the their capacity, they they they grow the output.

At the end, every players they have to invest. This will make the AI ecosystem much healthy.

If not, if not, the supply limited, the AI cannot move. At the end, the user have to pay much, much, much higher price to get the AI service.

YMTC output actually is helping to make the AI systems, the smartphone, the PC go to much healthy supply chain.

Charlie, your hand's still raised. Do you have another question, or is that from before?

Maybe before, I guess.

That is from before. All my questions were answered.

Thank you, and sorry.

Thanks. K.S., can you talk about your overall China exposure and how Hosun Global is doing given tough consumer market right now?

Oh, Hongxin is going to IPO public in the Hong Kong market by next Thursday, November 12. Congrats to them.

They're still doing quite okay, still profitable. Next year, of course consumer market is very challenging.

They also start to move some to the enterprise business. Other than this, we are going to help them to move more into the enterprise, hyperscale, and the AI solutions.

China, I believe consumer, PC, smartphone, '27 is challenging unless we are going to push aiDAPTIV into AI PC. If this is a new growth, can help the industry.

Got another question online here. "A recently popular view suggests that power grid capacity bottlenecks are effectively stranding hardware, including memory chips, resulting in a relative glut.

How do you assess this dynamic?"

Power, I agree. Power supply is one of concern, but we can do nothing, okay?

I believe a lots of ecosystem in power, they try to solve a problem. Memory, yes.

That's why we need the supply chain, the supplier to heavy investment, not only in NAND, but also in DRAM. If not, users have to pay more in the futures.

I just get the one more message. PCB is going to shortage from coming months, big shortage, material shortage.

Everything shortage. Now, the question is, if everything shortage, how Phison can secure every component what we need can deliver on time?

This we need to tell every supplier, Phison has a value in this business. We have a better positions.

How? We need to keep deliver valuable product and service to the market, such as aiDAPTIV go to AI PC, aiDAPTIV go to AI on-premise, and 2027, please wait and see how this going to be popular in the market.

Great, K.S. I don't see any more questions on there.

I think maybe pass it back to you for final comments?

Last. Since the last six months, we've been challenged, okay, low-cost inventory.

Please don't come to us to mention anything about low-cost inventory because low-cost inventory in the consumer embedded, yes, but not much related to Phison. That mainly to the module house, they are not consistent invest into R&D.

We are good because heavy investment for many years, enterprise we proved. When I start to talk about AI data platform to the market, they also ask, "Hey, who are you?

Why you have a confidence you can make it?" My answer is, sorry, I don't know if I can make it or not.

Enterprise SSD last seven years, we prove it. In the AI data platform business, we invest three years already.

We hire people. We keep investing.

We engage. I believe with Phison heavy R&D investment, our commitment, our smart, working hard, next year, please wait to see how we deliver our result to you not only AI ecosystem, but also AI data platform.

Please trust to us, not to blame us too much, not too much negative, please, because we are working hard. Today, we prove something saying six months ago, we prove we are good.

Give us more encouragement. We will deliver more back to you.

Thank you.

Great. Thank you, K.S.

Thanks for including me, and thanks everyone for joining today. Have a good night.

Thank you.

Bye.