Thank you very much for joining us today. If you have joined the meeting using your nickname or something similar, we kindly ask that you please enter your company name as well as full name before continuing to view. Please log out, go to the Zoom webinar registration screen, populate your company name and full name in the field, re-register, and then rejoin the session. Thank you for your continued patience. Thank you all very much for your patience. We will now begin Kioxia Holdings Corporation's financial results briefing for the second quarter of the fiscal year ending March 2027. I am Nishina from the Investor Relations Division of the Corporate Communications Department, and will be serving as the moderator. Thank you. First, I would like to introduce the speakers. Executive Vice President and Chief Financial Officer, Yoshihiko Kawamura.
Executive Officer and General Manager of the Corporate Communications Department, Toshiaki Fujikawa. These will be the two speakers. I will now go over the agenda for today's briefing. After noting some disclaimers, Fujikawa will discuss the NAND market overview, as well as enhancement of production capability to support growing demand in the AI era. Following, Kawamura will be presenting the results for the second quarter of the fiscal year ending March 2027, as well as guidance for the third quarter, and surrounding all of the initiatives for enhancing our corporate value. After that, we will move to the Q&A, and the event is scheduled to conclude at 8:15 P.M. This is going to be recorded for on-demand distribution in the future, so please do be understanding. Allow me to go over the disclaimers.
Please be aware that the forward-looking statements and explanations contained in today's materials and presentations are based on assumptions and beliefs formed by the company based on information available to us at this time. Actual results may differ due to various risks as well as uncertainties. Furthermore, the company assumes no obligation to update the forward-looking statements contained in today's materials, as well as presentations. For more disclaimers, please refer to the information displayed on the screen. Now over to Fujikawa. Allow me to begin with an overview of the NAND market. At a high level, we expect NAND supply-demand dynamics to remain tight, supported by AI-driven demand and data centers. First, on the left, is data center enterprise. AI-related demand remains exceptionally strong, driven by the growing adoption of agentic AI applications, while demand for KV cache continues to grow.
In addition, the explosive increase in AI-generated data is supporting the adoption of high-capacity QLC SSDs. Next, in the center, are smartphones and PCs. For smartphones, unit shipments of low-price models are moderating at a faster pace, while premium models remain resilient. We therefore expect no significant changes in NAND demand through calendar year 2027. For PCs, unit shipments are declining due to higher BOM costs, and NAND demand is also expected to decline through calendar year 2027. On the right is our NAND market outlook. Data center enterprise demand is expected to offset softer smartphone PC demand, with robust demand growth continuing in CY 2028 as well. We expect bit growth in the high teens percentage range in CY 2026 and the low 20% range in CY 2027. Kioxia's bit shipment growth is also expected to be in line with the market outlook.
Next, I will explain how we are enhancing our production capability to support growing demand in the AI era. To address growing AI demand, ramp up production of cutting-edge products, and ensure a stable supply, we have begun site preparation for Fab3, or K3, at the Kitakami plant. K3 is planned to produce advanced node BiCS FLASH, with operations scheduled to begin in fiscal year 2029. As we expand production capacity, we will first fully utilize available space at the existing Y7 fab in Yokkaichi and K2 fab in Kitakami. We will then expand K3 in phases calibrated to market demand growth. The photo on the right provides an overview of the Kitakami plant, including the planned K3 construction site, together with the existing K1 and K2 fabs.
In addition, the absorption-type merger of Kioxia Iwate Corporation into Kioxia Corporation, announced today, is intended to achieve sustainable growth by strengthening manufacturing scale for cutting-edge flash memory products, as well as by improving management efficiency and reinforcing our business through the integrated deployment of management resources, including personnel and technologies, and the optimization of our business structure. As such, alongside the Yokkaichi plant, the Kitakami plant is an extremely important site in our business strategy. We will continue to make strategic capital investments while carefully assessing demand trends, steadily building the production base needed to meet growing demand in the AI era. Now, over to Kawamura. I am the CFO, Kawamura. Thank you very much for your attention in advance. Continuing from Fujikawa's discussion, allow me to discuss the fiscal year 2026 quarter two results, as well as the fiscal year 2026 third quarter guidance.
I would like to be going along with the slides, so please follow the slides on the screen. First, starting with slide eight, please. This will be the financial highlights. For the second quarter highlight, as you can see from the left to right, you can see there is revenue adjusted non-GAAP gross profit, non-GAAP operating profit, or our free cash flow, as well as capital efficiency. You can see that revenue has marked record highs quarter-on-quarter. It has increased by 1.4x , and it is JPY 2,480 billion, and including the JPY 66.6 billion for JV-related sales as well. This is a record high. When it comes to non-GAAP gross profit after adjustment, this was record high as well. Quarter-on-quarter, it was 1.5x , and it was JPY 2,091.9 billion, and the margin was 84%.
After excluding JV-related items, the margin was 87%. Next will be the non-GAAP operating profit. This was also record high, and quarter-on-quarter, it was 1.5 times, and it was at JPY 1,988.3 billion, and the margin was at 80%. When it comes to net profit, it will be available in the next slide. It was JPY 1,348.6. So that was also record high. There was operating cash flow, which is going to be net CapEx spending. That was also record high. Quarter-on-quarter, it was 1.7 times. It was JPY 1,438 billion. By the way, all of the numbers were record highs. As a result of that, when it comes to capital efficiency, you can see that our ROIC number, return on invested capital, was 102%. In this world, this is something that is pretty much unprecedented.
If we were to look at the capital cost is 10% with WACC, the ROIC minus WACC, there is a 10%, which is 90%. It is an astonishing number. As a result of that, the net cash, so JPY 1,127 billion. The net cash, you can see the small numbers and the balance sheet on the left-hand side when it comes to cash, as well as cash equivalents. All of the borrowings have been minus, and that is JPY 812.7 billion. The share buyback that was completed back in August, there was JPY 800 billion that has been allocated, and that is a cash out. Another highlight to note here. You can say that there is revenue as well as non-GAAP operating profit after adjustments.
In the past year, for fiscal year 2025 in the 12 months, it is a full year's worth that has actually been posted in the three months from July to September. You can see that our profitability has been improving quite significantly. Moving on to page nine, slide nine, please. You can see the first quarter as well as the second quarter guidance as well, which has been announced at the end of July. This is a comparison sheet. On the left, we have all of the revenue, non-GAAP operating profit, non-GAAP net income, as well as non-GAAP EBITDA, as well as non-GAAP EPS, as well as exchange rates. On the left, you can see the results for the first quarter. The second quarter guidance is available in pink, and the very right will be the results.
All of the second quarter results have, of course, been above the guidance. Revenue guidance was JPY 2,390 billion, whereas the results were JPY 2,480 billion. This is in alignment with the previous slide. For non-GAAP operating profit, the guidance was JPY 1,900 billion, whereas the results was JPY 1,988.3 billion. As you can see, the margin was above 80% levels. The first quarter margin was 75%, therefore it is exceeding quite significantly at 80% levels. The non-GAAP net income, the guidance was JPY 1,280 billion, whereas the results were JPY 1,348.6 billion. The margin is 54.4% as a significant hike. Non-GAAP EBITDA, this was JPY 2,065.7 billion. The margin was 83% levels. As a result of this, the non-GAAP base EPS, the guidance was JPY 778.57, whereas this result is showing that it was JPY 833.94.
Change rate in the first quarter, we were expecting JPY 160 to the dollar. The second quarter is JPY 161 to the dollar, so the yen has weakened by a yen . When that happens, operating profit-wise, there is about JPY 14 billion worth of impact. It is about JPY 14 billion out of the JPY 2,400 billion, and therefore it is very minuscule as an impact. There are two things that I would like to note. One will be ASP increase, and the other will be bit growth. This will be the increase in our bit growth. ASP-wise, on average, it is the mid-20% increase. When you look at the like-for-like basis, it will be the low 30% increase. For bit growth, it is in the low teens, a percentage of increase.
In the second quarter, ASP has risen, and bit growth has also risen. Moving on to slide 10.
We have the sales by application here, and you can see the different colors on the slide. The pink part would be SSD and storage. The blue would be smart device. If you take a look at the right side of the slide, we have SSD and storage. It's JPY 1.616 trillion, and blue smart device is JPY 788.9 billion. On a QoQ basis, and also on a YoY basis, we have been able to grow, but it is a substantial growth. The reason behind this is on the right side. For the smart device, the sales price significantly increased, and it drove the majority of this quarter's revenue growth. We have been able to achieve an all-time high in sales revenue. On the bottom, we have the SSD and storage results.
For PC and others, the mix was 65%, and for data center and enterprise, it is mid-60% range. The SSD shipment driven by strong AI server demand combined with higher ASPs, and this contributed to a record segment revenue. As a result, on the very left, in pink, the SSD and storage accounts for 65% of the total. Smart device is 32%. We mentioned that it will be about 60% give or take, but it has elevated to 65%. The BiCS FLASH, which we call BiCS8, this would be our core product now, and we have been able to have this product to drive the sales. Please turn to page 11. We have the results by application. We have the figures on a quarterly basis and also on an yearly basis to see the trend. For all applications, the quarterly revenue was a record high.
You can take a look at the bar graph on the bottom. The third from the left would be the Q1 - Q4 figures for FY 2025, and we have the Q1, Q2 figures of this year, and we also have the full year results of FY 2025 on the right side. It's very obvious, is on the right. When we look at the Q2 breakdown, the pink is SSD and storage. It's JPY 1.616 trillion. The blue smart device is JPY 788.9 billion. If we compare this with last year's figures, SSD and storage for last year was JPY 1.3626 trillion, and this accounted for 58% of the total, and now we've been able to reach 65% in the second quarter. So, you can see that we have been able to steadily grow the SSD and storage business.
The annual results of FY 2025 was JPY 2.3376 trillion, but when we look at the Q2 results, it is JPY 2.48 trillion. This quarter alone has already exceeded last year's full year results. SSD storage is the driver of the performance. On the other hand, if you can take a look at the foreign exchange rate on the very bottom, if you take a look at the left, we started off with JPY 145 in Q1 last year. The yen has depreciated, and this has an impact of a couple billion JPY. Compared to the revenue of JPY 2.48 trillion, it is a limited impact. Please turn to page 12. I would like to have you take a look at our cash flow results for the second quarter. On the left, we have the bar chart.
We have JPY 791 billion on the very left. In the small font on the bottom, this would be the cash balance as of the end of June 2026. On the very right, for the end of September 2026, the cash balance is JPY 1.3973 trillion. I will be referring to the balance sheet afterwards, but cash and equivalents is this value, and the ups and down. On the very left, we have JPY 791 billion. That's the balance. The operating cash flow is added onto that, JPY 1.5132 trillion. From there, we have the net CapEx of minus JPY 75.2 billion subtracted. We have the core free cash flow of JPY 1.438 trillion. This would be free cash flow affiliated to our business operation, and we track these figures. Going forward, we will be using this core free cash flow as a key indicator.
We have the adjustment, and we have minus JPY 827 billion. A majority of this would be the JPY 800 billion coming from the share buyback. We have the adjustment of minus JPY 4.2 billion, and we get to the cash balance of JPY 1.3973 trillion as of end of September. On the right, I have the explanation of operating cash flow, as I mentioned. Due to the increase in selling price and the increase in sales of data center and enterprise SSDs, the operating cash flow had improved. We also have the production expansion of generation eight BiCS FLASH. Operating cash flow is 1.7 x on a Q-on-Q basis. It's a record high. When we look at the investing cash flow, the gross CapEx is JPY 84.6 billion. The government grants is JPY 9.3 billion included in here.
If we net these figures together, we get to the JPY 75.2 billion on the left side. The generation eight and generation 10 BiCS FLASH would be subject to our investment. A lot of the investment is coming from this production of gen eight and 10. The financial cash flow includes the share buyback of JPY 800 billion. What do we do with this cash? Towards the second half of the year, we will continue to spend on CapEx, and I will be talking about this in the end, but we have been able to build up this much cash, and so we would like to use this for interim dividend. Turning to page 13. This would be the balance sheet. Let me go into detail. We have been able to significantly improve our financial soundness. The equity ratio has improved to 50%.
On the left side, we have the assets. We have two bar graphs here. The left would be FY 2025 end of the year figures, and on the right, we have the end of second quarter FY 2026 figures. What I would like you to take a look at first would be the total value of our balance sheet. FY 2025 was JPY 3.6901 trillion, and now it is JPY 5.8839 trillion. If we subtract this, it is about JPY 2.1 trillion. Basically, 60% of our assets has increased. Even if our assets expand this much, when we take a look at the ROIC, the investment efficiency is improving, and so the assets are enlarging, and whether the investment efficiency is going down, it is actually going on the opposite direction. If you take a look at the right side, we have the liabilities and equity.
There are two bar graphs here as well. The left would be FY 2025 figures, and we have the second quarter of FY 2026 figures. What I would like to mention here is, we have an increase of equity ratio. It used to be 38% as of end of FY 2026. It is at 50% in second FY 2026. We have JPY 100 billion. This is profit that we have increased, and therefore, there are higher income taxes payable that we have added into the chart. On the top, we have bonds. FY 2025 was JPY 3.9 billion in the second quarter. A little more than JPY 400 billion of senior loans have been paid in quarter one. It is a full repayment. On the right side, I have the days of inventory. I think 100 days would be the cruising speed, but as you can see, as of FY 2026 quarter two, it is 94 days.
The days of inventories are in line with the cruising speed. If you can take a look at the next slide, please. We have the third quarter forward guidance for FY 2027. We have the Q2 actual on the left, and we have the guidance on the right side. Revenue, the Q2 results was JPY 2.48 trillion. Q3 guidance, we have set it at JPY 2.5 trillion. It is a 1% increase. Non-GAAP operating profit, the second quarter was JPY 1.9883 trillion. Margin is 80%, and we want the margin to be flat for Q3, and the value is expected to be JPY 2 trillion. Non-GAAP profit before tax is JPY 1.9612 trillion for second quarter, and the Q3 guidance is set at JPY 1.985 trillion. The margin is flat.
Non-GAAP net income is JPY 1.38486 trillion for Q2 results, and Q3 guidance is at JPY 1.365 trillion, almost the same. On a QoQ basis, everything is pretty much +1%. Non-GAAP earnings per share, Q2 was JPY 833.94, and this is an increase of 2% for the third quarter guidance at JPY 854.24. The EPS is increasing, and even with this much of the balance sheet, there is the buyback impact, and this 2%, for example, if we look at the 1% increase of the profit, the earnings per share of non-GAAP is increasing. This would be the financial highlights, but if we can go back a page, please. It is not on here, but first half is something that tend to look at. I think you can easily figures, but to talk about the first quarter, the revenue was JPY 1.671 trillion.
If we add the JPY 2.48 trillion, you can get the sum. The operating profit Q1 of non-GAAP net income was 887, and we are JPY 1.3486 trillion. If we add that, it would be JPY 2.6 trillion. Financial highlights. Now I would like to talk about how we plan to include value. We are examining these measures, to enhance to grow with investment, and including contingency. If there is any excessive cash, then we want to make sure that we return that to shareholders. If you could take a look at the bottom of the slide, investment and spending required for growth. Obviously, future CapEx will be included in here, and we also have R&D investment that will support CapEx. We also have investment in human capital, and as strategic investment, we obviously will be eyeing the M&A opportunity, and we also have other future expenditures.
These will be defined as necessary cash. In the middle, we want to make sure we secure financial soundness. We want to make the net cash position. We want to make sure that cash is higher than interest-bearing liability. We need to take a look at the capital market, and the debt equity cost does fluctuate, so we will be looking at the cash balance. We want to ensure that cash will be higher than interest-bearing liability. On top of that, if we have excessive cash, then we will be returning to shareholders. We would like to return percent of it to shareholders. To be more specific, dividends as a guiding policy with flexible share. On the next, I have specific shareholder return. Conventionally, we can pay interim dividends.
We were not able to really clearly state, but our cash flow is very strong at the moment, so we would like to boldly pay interim dividend. The shareholder return, if you take a look at what we have done so far, the JPY 800 billion of share buyback, which was complete in August 2026. We still have been able to net cash. You can see, back is improving the capital efficiency. Expected to be JPY 48 billion, as you can see on the bottom, JPY per share. In October, we have split it to three, so the post-stock split base will be JPY 30. Year-end dividend, we will be looking into this. This is still TBD. Please be progressive dividends as the guiding policy. Additional shareholder return, such as share buyback. That is what we have in mind for shareholder return.
If you take a look at the right side, we have the thoughts and resource of shareholder return. We will prioritize growth investment, but if there is any excessive cash, then 100% of that will be allocated to shareholder return. Dividend and buyback would be the means of shareholder return. This would be the first dividend since being listed, and it is very fortunate that we are able to pay this dividend, so we would like to use this opportunity to thank you very much for your support. Lastly, I would like to summarize the key takeaways of the second quarter earnings call. There are three points. One is AI demand continuing to accelerate. The Q2 exceeded total FY 2025 revenue with SSD. The Q3 revenue, I did report this in the guidance.
Revenue and profit is expected to reach record high for the four consecutive quarters. The demand is so strong. It was pushed forward to second quarter. Product mix has changed, and there is data center sales that is increasing. So, usually, because of the longer lead time, some of the Q3 orders that should have been recognized in Q3 has been split into Q3 and Q4. So, that is impacting how Q3 results look like. But all of that will be coming in in the fourth quarter, so we are expecting a boost in the fourth quarter. So, that is why the growth momentum will further accelerate through Q4. Kioxia's FY 2026 bit shipment growth year-on-year is expected to be in the high teens. This is the growth that we are expecting. Two is the structural demand visibility extending into CY 2027 and 2028.
Data center and enterprise demand is going to offset the softer smartphone and PC demand, with robust demand growth expected in CY 2028 as well. Both short-term, midterm, and long-term, we have been able to grow, so I am being very repetitive. Micron is in calendar year 2027, the market bit growth is expected to be in the low 20% range. Our bit growth is also expected to be in line with the market. For calendar year, the multi-year LTA covers over 50% of the gigabyte shipment volume. The remaining 50%, what do we do with that, is still under discussion. At least we have been able to reach 50%. For calendar year 2027, the allocation has already been finished. It is rolled out. So, we are enjoying and we are continuing to work on value creation driven by our strategic priorities. We also want to maintain financial soundness.
We also clarified shareholder return. We will aim to return 100% of excess cash to shareholders over the mid to long term. We also will be paying an interim dividend of JPY 90 per share. Year-end dividend is TBD, but we are expecting a slight increase in dividend. Share buyback has been completed in August 2026. The prior one was JPY 800 billion. Our strength, I think there are three strengths. One is the technological advantage from BiCS8 to BiCS10. Number two would be our long-established relationship with our customers. We are able to provide products in a timely manner that meets their technological demand, and we also have a very strong financial soundness. This would be the three key strengths that we boast. That is it for me. Thank you very much. So, we will now go into the Q&A session.
Mr. Menju from the finance department will be joining the stage for the Q&A session. Please ask your questions to either Mr. Kawamura, Mr. Fujikawa, or Mr. Menju. If you have a question, please use the raise hand function. When your name is called, please unmute yourself and speak. Please use the Q&A function for questions in text. You can ask your question either in Japanese or English. Questions are limited to two per company. We will take further questions if time allows. The Q&A session will end at 8:15 PM. Japan time. Due to limited time, we may not be able to take all questions, but your understanding is greatly appreciated. If you have a question, please raise your hand.
Yoshida-san from CLSA, please unmute and click. It will be one question and one answer. Therefore, if you have two questions, please start with just one answer. This is Yoshida from CLSA Securities.
This is surrounding your guidance and how we should be observing this. I think there is an increase in revenue by 1% quarter-on-quarter, and bit-wise, I do understand that this is going to be split between the second and fourth quarter. So, this 1% revenue increase quarter-on-quarter, and apart from Forex impact, especially for ASP, we do understand there is a blended situation and there could be an apple-to-apple comparison difference. If so, please explain. LTA is probably going to start from the fourth quarter, and with that start, what kind of an impact could we be expecting?
Can we try to understand exactly how we should be understanding the fourth quarter and extension to the third quarter? Please excuse me that I skipped explaining this. We are seeing a strengthening of the yen, and as you can see on slide 14, the Forex is JPY 157 to the dollar, and right now, the yen is strengthening. Therefore, it is about a four-yen movement, as you can see in the caption at the top. It is about JPY 55 billion negative impact. We are going to be absorbing that in the guidance. As for what we do in the fourth quarter, Menju will be mentioning some numbers. First starting with bit volume. There are some that we sold in the second quarter, as mentioned. The demand was extremely strong, therefore we decided to cater to that. Secondly, the product mix.
The data center enterprise area shift is starting to happen in terms of product mix. Therefore, for the third quarter, heading into the fourth quarter, and we have a longer lead time when we engage in production. Therefore, fourth quarter, we will be seeing a very big hike in volume. But for the third quarter, there are quite a bit that is shifting to the fourth quarter, therefore it is remaining pretty much unchanged. So that would be for the bit volume. When it comes to ASP, up until the second quarter, we were seeing a rise in ASP, and like for like, it was about the front half of the 30% levels. Our data center and enterprise is faring very well. Coming into the third quarter as well, this is still continuing. Therefore, data center enterprise ASP increase most likely could be happening.
On the other hand, when it comes to mobile PC area, ASP increase, it could be a little moderate. That is how we observe the situation, and that would be for the ASP front. We did say that there is a yen strengthening by four yen in terms of Forex, and together with this, it is a 1% increase in our revenue. In terms of volume as well as ASP, when you exclude Forex impact as a whole, there is a plus in total. When it comes to ASP, it is a positive that we are expecting. I think bit volume rise, we do not think it will change much. The second question, this is surrounding shareholder return. That will be on slide 17.
I think that was excess cash that you were discussing, and you are going to be returning that in the medium to longer term, 100%. When it comes to investments as well as some spend to determine the excess cash, how do you define that? Exactly how much excess cash do you think you will ultimately land with? When it comes to dividend payment as well as buyback, exactly what is the breakdown? We do understand there is a progressive dividend that you are considering, but at the end of the term, exactly what kind of a balance between share buyback and dividend do you think is suitable?
Allow me to respond. I think we should be on slide 16.
When you look at the left-hand side, when it comes to our growth investments, when it comes to CapEx spend in the future as well as R&D investments, as well as investment in human capital. We do have a budget, it will be within that budget, and we will be allocating these numbers within the three-year medium-term management plan period. Strategic investments will be M&A, so there will be a counterparty. We do have plans, but we do not know if all can be materialized, and it could slip. There are other contingencies that we need to account for, but I think if the strategic investment does not happen in line with the plan, then what happens? It will have a big impact on excess cash.
If the M&A does slip and we have more excess cash, including that, it is going to be a 100% return that we are considering. When it comes to the breakdown between dividend as well as buyback, we just started paying dividend, or we are just starting to pay dividend, therefore we need to see exactly what the balance will be looking at our evolution of the stock price as well. We went for an JPY 800 billion buyback, and therefore the buyback is definitely bigger than the JPY 800 million dividend payment. I do believe this trend will continue for a while. Depending on how our stock price evolves, we are going to be determining the dividend based on exactly how our landing numbers will look like.
We look at EPS as well as the market environment to consider buyback in a more, I think, agile manner. I do believe that based on dividend, we will be considering buyback as well. Nothing is decided, but this is our thinking. Thank you.
Thank you very much.
Hello, this is Virginia from Nomura Securities. Can you hear me?
Yes, we can hear you.
I also have two questions. One, regarding shareholder return, I would like to clarify. AI will be penetrating going forward, and CapEx itself will probably be going up and down. I know, I understand that. Your competitors are also saying that they are returning 100% of their excess cash to shareholders, but prepayment and financial guarantees excluded. For LTAs, I do not think you are requesting for prepayment. In case there is a downtrend, I think you want to save room. Will you be having a certain level of reserve?
Yes. This is Kawamura speaking. Yes, we do have that thought. The market is extremely strong at the moment, so rather than withholding cash, the cash itself does not have returns. Basically, we want to use it for investment.
Having said that, as a contingency, we do want to have some cash on hand. Basically, the thought is to use it for investment. We do want to have some cash reserve. I cannot tell you how much we are talking about, but that is the thought. We want to make sure we strike the right balance in how we hold cash. Okay, thank you.
My second question is ASP, how we think about the bit price. In the fourth quarter, you mentioned that the growth will further accelerate, and as it was mentioned earlier, you have a multi-year LTA agreement that will start, so the bit price, will you only be able to get that from mix improvement, or depending on the market conditions, will you still be able to raise the bit price? Can you tell us your thoughts around that, please?
Menju will be explaining that.
The demand is extremely strong, and we are expecting this to continue for CY 2027 as well. So the opportunity for ASP to increase, I think there is enough room for it to actually happen. But from the April quarter, the ASP has increased significantly. So the end product, or the customers of that, depending on the demand for that, I think it will be different by application on how much the ASP will increase. So, for mobile, the ASP spread, we believe, will be moderate. But overall, I think there is room to increase, but there will be difference by application.
Thank you very much for the comprehensive answer. That is it from me.
Nakamura-san from Goldman Sachs Securities, please.
Thank you. The first question is surrounding the third quarter guidance prerequisite. In your briefing, you were mentioning that from the second quarter to third quarter, the volume is going to be flat, and then it is going to be -2.5% in terms of the forex impact, and therefore net-net, ASP is going to be a couple of percentages of increase. When it comes to like-for-like ASP evolution, as well as a product mix impact that we could be expecting in the third quarter, that is my understanding. From the second to third quarter, can you maybe share with us exactly how those numbers should be moving?
I would like to invite Menju to speak.
When it comes to ASP, data center enterprise ASP going into the third quarter should be rising continually, and that is how we are observing.
On the other hand, when it comes to mobile PC area, it will be more gradual and moderate, and that is something that I did mention in my previous commentary. When it comes to product mix, data center enterprise, it will continue to increase. But in the second quarter, normally, the mobiles area as a volume is usually larger, and that trend is continuing into the third quarter. When we look at second quarter and third quarter, is there a big fluctuation in mobile? Not really. As a result of that, it is the 1% increase that we were mentioning in terms of profitability. When it comes to mobile PC, you said it was going to be moderate. Does that mean that ASP is going to decline? It will not decline.
However, when it comes to how much it will increase, it probably will not be increasing as much as before. However, we do not think it will decline. Most likely, when we look at the overall ASP, it is maybe dollar-based, it is only going to rise by 3%-4%, and mobile PC is very moderate, and data center is going to rise solidly. It seems like the numbers really, the math does not really work. So what we are considering right now is that it is going to be a very moderate ASP rise. But depending on the application, we are considering some areas will be flat. So we are about to start negotiations, and therefore, we do not know what the landing number will look like yet. By application, there could be quite a bit of a variance in terms of the ASP projection. Thank you.
When it comes to the third quarter bit that you are expecting to ship out in the third quarter, how much has already been decided in terms of its pricing?
Fujikawa will be responding. Thank you.
Right now, I would say about 50%. 50% is still under negotiation, and so that is yet to be decided. Thank you. The second will be how to think about excess cash. People have been asking surrounding this excess cash. In the previous IR day, you said that three years of CapEx spending is going to be JPY 470 billion on average per year, and there is Kitakami area three investment that you have announced as well. When it comes to CapEx spend scheduled for this year or maybe for the next three years, exactly what the level is going to look like?
You did explain about within your balance sheet, how much cash you would like to have on your balance sheet. That was a question as well. So, is it going to be how many months worth that you have in mind? If you have something, please explain. This is coming up. When it comes to CapEx spend, we are currently in the midst of our medium-term management plan. Each year, it is about JPY 470 billion -JPY 480 billion that we are considering, something a little less than JPY 500 billion. We do need to continue to have a CapEx spending within the three-year budget. We may be front-forwarding what we were supposed to use last year, so that is going to be above JPY 480 billion. So, it is maybe a little less than JPY 600 billion, a little more than JPY 500 billion that we are expecting to use.
Across the three years, based on our current medium-term management plan, we are currently thinking maybe JPY 450 billion to maybe times three. We have no intention of changing our CapEx spend significantly across the three years. When it comes to how much cash we should have on our balance sheet, for one quarter in the three months, it could be in line pretty much with our revenue. I think that is something that we most likely should have, and that is sort of like a reference that we do have, but it does depend on how we consider R&D spend as well as CapEx spend. It will be relevant to that, and therefore, exactly how much cash we should have will be relevant to these discussions. So, it will be about three months' worth of revenue that we are hoping to have in our hands as cash.
Thank you.
Hirakawa-san from BofA Securities. This is Hirakawa from BofA. I have two questions. I also have a question on ASP. This morning, your competitor had said that the ASP will continue to increase on a quarterly basis in FY 2027 ending June. For CY 2027, can you tell us what the ASP trend is going to be from whatever it is visible at the moment?
Menju will be answering your question. The demand and supply balance is going to impact the ASP, and that demand and supply balance for CY 2027 is also expected to be tight. We will probably be in short in supply. We are pretty sure about this. As the ASP has increased to the current level, even if the increase is moderate, whether it will permanently continue to increase or not, we do not know. Recently, the data center and enterprise segment is very strong, and we do believe that the ASP will go up to an extent. There can be some applications where the ASP will continue to increase, but at this point in time, we do not have that much visibility.
Thank you very much. My second question is what you mentioned in the beginning. You mentioned that the demand is increasing for QLC. The QLC revenue mix is how much at the moment? Kioxia QLC, what is the competitive advantage, and is that tied to the revenue growth at the moment? I know that the supply is tight, and it may be difficult to increase share, but if the QLC revenue is going to continue to expand, then would that impact the margin and share?
Fujikawa will be answering that question.
Generally speaking, within the AI system, TLC is mainly for KV cache or high-speed SSD. On the other hand, QLC is for data lakes, so it is a large-size storage that is used in data centers. That is the rough definition. As data storage, the data storage is also increasing, and I think there was, I guess, some rumor about a replacement with the HDD. QLC SSD is also increasing for warm storage, and TLC is also increasing as well. The customers will be deciding which they want to use depending on what use case they want to go forward with, whether it is TLC or QLC. TLC and QLC both are growing. For Kioxia's case, as we have mentioned, we have the 240 TB, which is LC9 QLC SSD.
We have already started mass production, and we are able to progress with certification, which is something that makes us in a very advantageous position.
The 2U server alone, that is 98 PB, which is a very large capacity. With that system will be available, and enterprise and hyperscalers together, we are trying to further penetrate and expand into these areas. For CY 2027, I would say about 30% of bit will be going to QLC. That is the CY 2027 outlook. For CY 2028, that is expected to increase to 40%. TLC and QLC, we want to promote both. That is our current position. Thank you very much.
Thank you. Yasui-san from UBS Securities, please. Please forgive me. Fujiwara-san from Citigroup Securities, please. Thank you.
This is Fujiwara from Citigroup Securities. We can hear you. Allow me to start with the first question surrounding shareholder return. You have updated your shareholder return policy. At this timing, you are not going for a buyback. Is there a reason why you decided to forego buyback this time around? Previously, I think you were mindful of the stock price. Furthermore, when it comes to the current excess cash level, exactly what is the backdrop to the current level? That is question number one, please.
Thank you. The reason why we did not forego buyback this time around, there was JPY 800 billion buyback that we went for back in August.
Therefore, we need to look at how our stock price is going to be evolving and going to the second half. We need to be monitoring and observing exactly how our investments are going to happen. That is why we decided to just temporarily hold a buyback, which is going to be in continuation with August. That is the reason why I decided to go for a dividend payment. There is really no specific reason apart from that. We are going to be accounting for strategic investments as well, and in conjunction with that, we consider buyback. That is going to be something we will be considering, but we do not know at what timing that will happen. Thank you.
I would like to learn as a follow-up. When we look at the current balance sheet, your excess cash is not that large. Is that the correct understanding?
I did mention before, there will be tax payment that will be happening going forward, and that is going to be a significant amount that we are expecting to need to pay. In the second half, we will see some profitability ramp up as well, and that will be another round of tax payment. So that is something that we need to account for at the moment. Therefore, we are increasing cash on hand at the moment due to that tax payment that we do need to anticipate. Thank you.
Moving on to the second question. There are LTAs. For 2027, it is sold out, and then 50% plus coverage is already there for 2028. From 2029 and beyond, you are discussing what is going to happen. For when it comes to 2028 and 2029, how far are you in discussions with your customers?
How far are you in negotiation with the customers? Because your peers are probably discussing 2029 already. I will have Toshiaki Fujikawa respond.
When it comes to long-term demand visualization, as well as exactly how much growth investment we need to make, I think the key enterprise hyperscaler customers. When it comes to business engagement for the future, we want to deepen that relationship going forward. Based on that, multiple LTA is something that we are discussing at the moment. As Yoshihiko Kawamura mentioned at the outset, CY27 is sold out, and CY28, 50% plus is pretty much decided already. So exactly how much are we going to be increasing? That will be the upside flexibility and how that is going to be looking.
Please give us a moment to fix this technical issue. I hope you can hear me. Yes, we can hear you. Great. Wonderful.
Allow me to continue. As for 2028, it is a little above 50% already. Are we going to be increasing this further, but for upside flexibility? Are we going to keep it as is? So that is something that is under consideration, and dialogue with customers are proceeding. Furthermore, when it comes to 2029 as well as 2030, 2027 and 2028 is pretty much fixed. Therefore, there is quite a bit of demand coming from the customers as well. Therefore, for 2029 and 2030, for long-term scope, there will be business schemes that we will be developing from here on, and we are starting to engage in dialogue with the customers. Thank you.
This is the final question. Yasui-san from UBS, please. Let me just ask one question then. I know I am being persistent, but how should we look at ASP? Let me just reconfirm. The guidance is pretty much flat Q o Q, so even if it were to increase, it is 0% to 0.5%, but the demand is very strong. It is still strong until next year. So on a Qo Q basis, in the previous quarter, it has gone up by 35%. On a Qo Q basis, that is suddenly going to be flat. I think that is actually difficult to realize. So what you are saying and the figures do not seem to match. Akira Menju mentioned that towards next year, the demand and supply is tight, but you mentioned that it is unclear, it is difficult to see.
We kind of expect that it will continue to increase by 5%-10%. If there's uncertainty, I mean, is the ASP too high that it's difficult to further increase, or are you just simply being conservative? Mr. Menju will be answering the question again. Regarding the price, when we look at the third quarter, we are about to go into negotiation with our customers. How that's going to unfold, we don't know. Compared to the current assumption, there's a possibility that it may be higher. Maybe the way I worded it, I mentioned that visibility is not clear for CY 2027, but this is not referring to the price going down, or the price is something that we need to monitor because there's a possibility that it may still increase.
The ASP increase and the level of how much it will increase is something that we are carefully monitoring at the moment. If I can add onto that, FQ3 guidance, what's happening is, as Mr. Kawamura mentioned earlier, there are long lead time products, and the mix is changing due to customer demand. From a bit output perspective, from FQ2, it's pretty much flat with FQ3. We are going to catch up in the fourth quarter. Fourth quarter is expected to be very strong. The ASP for CY 2027, the ASP will be fixed depending on the demand and supply situation. If there is a shortage, which we believe there will be a shortage, then we believe that it will be in an increasing trend. At least at this point in time, there are no signs of a price decrease.
It's just that from early this year to mid this year, the ASP has gone up significantly, and therefore, we believe that it may be difficult to grow in the same pace. That's why we believe our image is that the increase is going to be moderate.
With this, we would like to end the Q&A session. The questionnaire screen will appear after exiting the session. Your feedback will be referred to for future IR activities. We very much appreciate your cooperation. We will now end the Kioxia Holdings Second Quarter FY 2027 Earnings Call. Thank you very much for making time despite your busy schedule.