Hello, all. If you would like to hear this session in English, please click the globe icon on the bottom and select English channel.
Ladies and gentlemen, thank you very much for taking the time to participate in our 2023 first quarter earnings presentation. We thank you very much indeed. Today, we have prepared simultaneous translation channel. Please click the globe button at the bottom of the screen and select the language of your choice. The speakers, you are requested to turn the radio on. Today's session is attended by our President and CEO, Mr. Hidetoshi Shibata, Senior Vice President and CFO, Mr. Shuhei Shinkai, and other staff members. As we advertised, you will hear some words from Mr. Shibata, followed by the explanation of the first quarter results by Mr. Shinkai, followed by a Q&A session.
We expect to finish the entire session in about 60 minutes. All the materials to be used for today's session, it's already posted on the IR site of our homepage. Shibata, please turn your microphone on and begin your statement.
Good afternoon to you all. This is Shibata. I am assume that many of you have already seen the presentation, but for the first quarter, we have achieved some upside, vis-à-vis the guidance. As for the second quarter, we are expecting nearly flat revenue growth. On the other hand, the second half is very difficult for us to forecast. There might be some upside, so we'll be making preparations for that. Therefore, we will try to build up a little bit of our channel inventory. Overall, the prevailing situation is changing.
How to hold inventory over the mid to long term, we will explain that during our capital market update day, which is scheduled for next month, so that we can provide you with a comprehensive explanation during that occasion. There's nothing in particular for me to say, but I would like to have Mr. Shinkai, our CFO, to explain the details. Mr. Shinkai, please, the floor is yours.
My name is Shinkai, the CFO of the company. Regarding the results for the first quarter of 2023, I would like to use the materials that's posted on the IR site, then begin my explanation. On page 3. This is a disclaimer. On the fourth point, in October of last year, we completed the acquisition of Steradian, the numbers are reflecting the purchase price allocation of that transaction. One more thing is that a heads-up towards our next earnings call. Our company is currently in the middle of integrating the ERP system, which is expected to complete sometime in the middle of 2024. In the beginning of the fourth quarter, i.e., in the beginning of October, we are planning to switch over some of the ERP system.
Before the switchover, we are planning to conduct some advanced shipments, and therefore, this could have some, a certain impact on the results for the third quarter. We are currently scrutinizing the impact of this, the details will be explained when we announce the second quarter results the next time.
The next page, please. This is the actual, the financial snapshot for the first quarter. If you look at the middle columns, revenue came in at JPY 359.7 million. Gross margin was 56.2%. Operating profit, JPY 124.8 billion. The OP margin was at 34.7%. Profit attributable to the owners of the parent was JPY 107.5 billion. The number excluding the foreign exchange impact was JPY 106.8 billion. EBITDA, JPY 144.3 billion. Foreign exchange was, we used JPY 133 to the dollar and JPY 142 to the euro.
Compared, as for the changes, from the forecast, if you look at the far right columns of the table, I would like to explain them later in the subsequent presentation. This time again, in order to present the constant level of our profit, we have indicated the profit level without including the foreign exchange impact. The pool, cash pooling method of intercompany transaction was changed in the fourth quarter. There was no major changes in the forex exchange level as at the end of the first quarter and versus the fourth quarter. Therefore, the foreign exchange impact was insignificant. Next page. This is the quarterly revenue trends. The first quarter revenue, if you look at the far right, there, overall revenue achieved the year-on-year increase of 3.7%.
On a quarter-on-quarter basis, there was a decline of 8.1%. When the foreign exchange impact was excluded, which was significant, as you can see on the fourth page, that page before, on a year-on-year level, we recorded a decrease of 6.3%. On a Q-on-Q level, a decrease of 2.5%. For the breakdown between IIBU, automotive business and IoT business, those are already described below.
Next, I'd like to go over the revenue and gross margin, as well as operating margin for Q1. First of all, I'd like to go from the company total, and if you'd be able to look at the top right. Versus the forecast, the operating margin was able to do better by 2.2 percentage points. As for the revenue, it has been 1.3%, point above the midpoint level. However, almost half comes from currency. In other words, the remaining half comes from non-currency. Now, for both automotive and industry infrastructure IoT, we have been able to surpass our forecast. Now going into the gross margin, this has been better by 1.7 percentage points versus the forecast.
Major reason really is because better product mix. In terms of FX, it has been pretty much in line with our expectation. Product mix has gone plus positive, a slight positive coming from currency mix. As for the product mix, it pretty much has been in line with our expectation. There has been a bit of a decline in production recovery. As for R&D, SG&A, its operating expense, it has been slightly under our expectation. Now, bottom right shows Q1 Q trend. As for the OP margin, it has been flat Q1 Q. As for revenue, including FX, that has been a decline by 8.1%, but excluding FX, that's a decline by 2.5%.
As for gross margin, it has gone positive by 0.2 percentage points. Major reason comes from the decline in production recovery as well as increase in production cost. The mix of that has been offset by the mix, better mix. As R&D SG&A has gone down. Also, in addition to seasonality, there has been better cost control during this course of time. On the left-hand side, there is a table for each segment and for a Q2 decline, Q1 change for gross margin and OP margin. We know that automotive side relatively has been able to find a better mix recovery. As for industry infrastructure IoT, there has been some recording of a large inventory valuation allowance.
That is why you see some difference in the gross margin. Also for Industry Infrastructure IoT, there has been a decline in revenue size, and this is what pulled down, as you can see, OP margin decline on Q2 basis. Now please move to the next page. Here we look at our in-house inventory. Now, on the right-hand side, we have the DOI for the company total, it has gone up by Q2. It is now 107 days. Per segment, for automotive side, for work in process, DOI as well as the absolute value-wise, it has been increasing. In Industry Infrastructure IoT, the exact value has peaked out ever since Q3. DOI is pretty much flat. Please move on to the next page.
Here we look at sales channel inventory as well as the WOI. Now, WOI has increased, Q2 basis. Automotive and industry infrastructure IoT both is now marking at 8.5 weeks' worth. This slide is showing is using FX rate on the management accounting. From this fiscal year, in other words, from FY 2023, the forecast, the budget rate has been changed. So in order for you to make an easy comparison, we also have adjusted the figures from 2022 and before to the rate we are using for FY 2023. However, the impact of this FX rate to WOI is very minimal. Now, here we look at inventory analysis, starting with the in-house inventory. Value-wise, it is pretty much flat. The raw material for Q1, there has been a slight increase.
However, we are expecting a flat, flattish trend from Q2 and onwards. Work in progress, in Q1, there has been a decline as expected due to production adjustment. However, the wafer for the MCU wafer for automotive side, we have decided to purchase in advance from the foundry. That is why we're seeing more in the back end in, at the end of Q1. In the end, total in Q1 is pretty flat. In Q2, we expect value-wise a similar trend or similar level. In other words, work in process, will go down and the die bank will be expected to increase. As for finished goods, in Q1 was in line with our expectation, and in Q2, we expect there is going to be a slight decline.
Now moving into the sales channel inventory on the right-hand side. With the for both automotive and Industry Infrastructure IoT, we do find the level being as expected in Q1. Now, for Q2, we are going to pay close watch to how the trend would be in the second half as we try to adjust our shipment. As Mr. Shibata mentioned, we have to make sure that there will not be any opportunity loss. That is why we are going to be increasing slightly the level of sales channel inventory. As for Industry Infrastructure IoT in Q1, WOI as well as the value-wise inventory has increased. In Q2, in order to make sure we be able to prepare for the second half, we are going to be increasing, building up the data level of WOI.
As for the automotive, we find that Q1, there's been increase in absolute value of inventory as well as WOI, because we built up the inventory in Q2. We also expect these to increase as to make sure we be prepared for production increase in the second half. Moving on to the next page, this is about the utilization rate for the front end. For Q1, we expect so this ended in 70%, which is pretty much within our expectation. In Q2, we expect that this utilization is going to decline due to production adjustment. Moving on to next page. This slide shows gross profit and operating profit trends. This is a new slide that we have added. Moving on to next page.
Now here, we look at EBITDA, for Q1, which is JPY 144.3 billion. Also on the cash flow on the right-hand side, operating cash flow was JPY 71.4 billion, and free cash flow was JPY 53.8 billion. Now, in Q1, the difference of EBITDA versus operating cash flow would be JPY 72.9 billion. Some of the major items is, first of all, tax payment, which is almost JPY 81 billion, and bonus payment is a little over JPY 300 billion. There's also been some insurance proceeds. Some of the major cash out has been offset slightly. Now moving on to the next page. Here we look at a Q2 forecast. Please, look at the middle blue column.
As for revenue, the midpoint forecast is JPY 366 billion. Year-over-year, that would be a decline by 4.5%. Q2, that would be increase by 0.1%. Excluding FX, we have also indicated that at the bottom. Year-over-year, that would be -8.7%, whereas Q2, that would be increase by 0.1%. As for gross margin, this is 55.5%, which is a decline by 0.7 percentage points on Q2 basis. Major reason has to do with the decline in production recovery, which will be offset partially by products that are mixed. As for FX and production cost, we expect it is going to be flattish.
As for the OP margin, 32% is expected, which is going to be a decline by 2.7 percentage points by Q2. OpEx, it is going to increase due to seasonality. In addition to this, from April, there is going to be a salary increase to our people, and that is also something that is included in the figure. As for FX, the assumption is JPY 132 versus USD and JPY 143 versus EUR. Moving on to some slides in the appendix deck. If we can go to slide 18. Here we look at GAAP versus non-GAAP reconciliation.
Some of the major items under the non-recurring for Q1 would be somewhere like fourth row from the bottom is this is the Naka fire impact. In other words, the insurance proceeds have been recorded. The amount would be the amount is JPY 29.6 billion, this is the amount recorded as part of the non-recurring item. Next, page 21. This shows our CapEx. In the first half of FY 2023, there has been like license purchase and also IT investment. For example, ERP changes that I mentioned earlier. That is why we have we expect that we will be marking a little over 5%. Moving on to the next page. This is about Panthronics. This is an NFC solution company which we acquired. This slide has been included for your reference. This concludes my explanation.
Thank you very much. We'd like to move on to the Q&A session. Mr. Shibata, please turn your video on. First, let me explain how to raise your question. I myself will ask you to raise question if you have any question, raise your hand. Please press the raise hand button if you have any questions. From those who have raised their hands, we will like to call your name and your company. If your call number, name is called, you'll be enabled to raise your question, please unmute yourself and begin your question. In the interest of time, we'll limit the number of questions to two questions per one questioner. Are there anyone who has any questions? Daiwa Securities, Sugiura-san, please unmute yourself and begin your question. Please give us a moment, please. Sorry.
Hello, this is Sugiura from Daiwa Securities. I have a question. First question is about the outlook of the semiconductor market. I would like to hear your comment from the President. Also, vis-a-vis the market trend, which area do you think you will perform and underperform? Please also explain the context or the background behind your statement.
That is a very difficult question to answer. If I divide by segment, the PC, as we explained the last time, we believe the trend will bottom out in the second quarter of this year. After bottoming out, how strong will the recovery be is something that we have to carefully discern, because, first quarter and second quarter.
The inventory adjustment at the user level has made a significant progress in the first and second quarter. Therefore, in the second half, I think we shall be able to record revenues based on actual demand. We are foreseeing a slight recovery. I think this is an area that we are expecting sales growth in on par with the market growth. If we are on par with the market, then mobile and consumer also related. In these areas, there's nothing that we are going to act differently from the market in particular. I think we are also expecting comparable growth as the market. Towards the second half of the year, this will likely soften further, this market.
Against this, for smart meters and other industrial applications, in a broader context, there are still some sense of uncertainties and lack of transparency. In based on our current best guess, I think some level of strengths will be will continue, like, will likely continue. Therefore, we are expecting comparable growth as the market, and I think that is what we are foreseeing right now for this segment. Other than that, cloud, data center, these segments, this from before is an area that we have been having huge expectations, which is not really happening yet, is the upgrade of the server platforms.
In the second half of the year, if this happens, successfully, then we think, this will have an opportunity to achieve a content days higher than the market trend or the market average. This is one of the elements that, I talked about when I talked about the upside earlier in my statement. Maybe until next year, maybe the transition may be delayed into next year, but I think if things goes, smoothly, we shall be able to see the transition before the end of the year. That could be one of the drivers for us to achieve, higher than the market growth. The last piece for us is the automotive segment.
Overall, well, there are still a lot of lack of transparency, so we are not trying to be over optimistic. One of the tailwind factor for us would be the OEM in Japan. The portion is still relatively large, but the Japanese OEMs towards the second half of the year, relatively speaking in by global comparison, the production volume is forecast to be relatively robust. If that turns out to be the case, I think that will serve as a tailwind for us. The other factor would be China. Some time ago, economic stimulus has been speculated and discussed about, and we're not really nothing clear has been announced yet. If these are implemented in the second half of the year, that will also be a positive factor for us.
Maybe China be only on par with the general market, but this could potentially be a tailwind for us as well. Another thing is about ADAS and EV related. These things will be a tailwind for us to some extent. However, the proportion to the total automotive segment is still not that significant, only 15% in total. This could become a tailwind, but it is not likely to offset the overall trend in the automotive market according to our assumption. Also cloud and data center. I forgot to mention one thing about cloud and data centers. The generative AI. If things go smoothly and kick off, I think this will be a good level of a certain level of tailwind for us.
China and therefore cloud data center and the generative AI, those three things are the potential upside sources for us in the second half of the year. That's according to our assumptions right now. Besides that, PC flat or slightly higher than before, mobile consumers are continuing to decline. Industrial, a good, flat in a good sense. Those are the assumptions that we have.
My second question has to do with the pricing. You talked about increasing, so we see the utility cost increasing and you're thinking of the pricing level. You still do have uncertainties, to how the market would go. What is your thought in regards to the price strategy that you have in mind?
Yes. For price strategy or our thoughts behind price, basically, we want to think of this on annual basis. For example, for FY23, at this moment, we're not expecting for us to really start changing the price in a sizable manner. You mentioned about increasing utility cost. Now, in second half, we do expect there could be a further increase, which means we'd have to work on cost reduction on raw materials, so forth, so that we'd be able to absorb this increase. That's my response.
Thank you very much.
Thank you very much.
Thank you very much. Next? Hello, BofA Securities, Michael , please. Please unmute yourself.
This is BofA Securities. This is Michael. I have two questions. My first question, it's something that I know Mr. Shinkai did mention. This is about gross margin for automotive side, which is increasing. You talked about better product mix. If you could talk a little more about this product mix and how do you think this will develop into the future? What is your outlook? That's my first question.
Thank you. Mr. Shinkai, can you take this question?
Yes, I certainly will. For the product mix for the automotive. Now, within automotive there has been some slight improvement in the product mix. This is something that happens currently. When device price changes, this does impact the mix. That's one factor behind.
From Q1, we are seeing benefits from the pricing and which is also part of the better mix impact. Our outlook from here on, as for the automotive business, this is where we do have a large portion, where we do produce within our internal factories. The utilization rate does have an impact to our numbers. In Q1 and Q2, the input-based utility utilization rate, this is something that we're showing, but we're expecting this is going to go down. That means the production recovery will start to go down, which relatively speaking, is going to have an impact to the automotive side.
Thank you. In other words, there will be some negative sides. However, when it comes to the cost, in other words, pricing and the mix, will be the two factors that will give you positive impact from Q2 and onwards. Am I correct in saying so?
Well, this goes back to what Mr. Shibata was mentioning. It is not that we expect a Q on Q change because this is something that we look at this on an annual basis. There could be some change to the product mix.
Thank you very much. I'd like to move on to my second question. On May 19th, the Capital Markets Day, in, during that occasion, you were going to talk about the mid to long-term trends, inventory you're holding. We are expecting top line growth for the company. At the current moment, do you have any message that you plan to convey to the Capital Markets Day? Just give us a preview if you could.
This is every a year event, therefore, there's no major changes that could only happen in just one year timeframe. Basically the target model will be maintained for now. All the things that we have communicated to do to you until the last time, we'll talk about the progress thereof and also, and share with you the information as to the probability of achieving our medium term target so that we can enhance your conviction level.
All right. Thank you very much for that.
Thank you.
Thank you. We would like to move on to the next question. Fujiwara-san from Citigroup Securities, please unmute yourself and begin your question.
Thank you. Citigroup Securities, my name is Fujiwara. Thank you very much for appointing me. I would also like to ask two questions. One is that, relating to IIBU, which was covered by the previous questioner, WOI and also sales channel, the sales channel has come down to your target level by and large. Towards the second half, because of upside, you also talked about the possibility of an increasing inventory, and you said that there is, there might be some upside opportunities in the cloud area. In what other areas are you expecting some upside? T hat's my first question.
Well, if I talk about it by application, cloud, as I mentioned earlier, cloud and also slash AI, cloud slash AI would be the area. For China, is also the primary areas that we are focusing.
Thank you. On the contrary, are there any other areas where you have excessive inventory that will get a long time for adjustment?
I don't think we'll see that problem because both in-house inventory and the channel inventory, we have managed them very carefully, both of them. Right now rather, we are rather concerned about that we'd get too shy because of the past experience. Because this could lead to lost opportunities, we would like to avoid any supply crunch because of this. We would like to keep a little leeway there. Thank you.
Thank you very much. My second question, the second quarter utilization rate may come down on a Q1, Q2 level. That's what you mentioned, I think. If we are believing, you also mentioned that during last earnings re-release that the Q2 will be the bottom. In terms of utilization rate, the Q2 will also be the bottoms, and then can we expect that in fourth quarter you'll be able to achieve an increase in utilization? Will that be correct?
Yes. Second quarter bottom, as you rightly pointed out, that is our assumption. Yes. In the third and fourth quarter, whether there will be an increase and a pickup in the third quarter and stay there and remain flat, I think that's something for the future. It's very difficult for us to predict. We would like to make the second quarter bottom and achieve an improvement in the third quarter. That's included in our assumptions.
A follow-up question. Recently, your inventory level, there was a slight increase in automotive segment, but you're not really increasing your inventory overall. I think that when the demand recovers, your utilization will also recover. Is it right to consider that there's no significant deviation between your production volume versus the end demand?
Yes, I think that is correct. As far as automotive is concerned, there are some different changes in, when you look into the breakdown of it. Relatively speaking, Europe, those mega tier ones in Europe mainly, in these customers, the inventory buildup was too excessive, I think. It's according to how we see it. For those customers, the sales and the actual demand for them, will depend on the adjustment at the customer side. Therefore, there will be a deviation until that is resolved. When it comes to Japanese customers, the lean inventory holding has been continuing for some time. Right now, at the actual demand basis, I think, we are have been able to consume based on actual demand.
If there's any upside in the demand, there will be a deviation. We would like to be prepared for that. I think that we are making shipments according to actual demand. I think we can safely say that. Thank you.
Thank you very much. I understood.
Thank you very much. Next, Takayama, Mr. Takayama from Goldman Sachs, please. Unmute yourself, please.
Thank you. This is Takayama from Goldman Sachs. Thank you very much. My first question. I know this already has been asked to you today, but you are trying to prepare for a potential upside from here. Looking at you from outside, we know that there is server. I mean, it's not really going strongly. Of course, you are trying to make sure you'll be able to leverage on platform changes. At the same time, we also hear that Chinese automakers are not really being aggressive, strong. When you still say upside, you still do have visibility enough to increase your inventory. Is this the way to take it? I just want to confirm your nuance. Are you just expecting some optional opportunity, and that is why you want to make sure that you would not lose your opportunity?
Well, it's really about the second one you mentioned. In other words, it's really about the option opportunity that we might be able to find. In terms of inventory, yes, we have been increasing this on a absolute value, but then the baseline revenue itself is also increasing. We have tried to manage this in a quite a lean manner, as I feel. If we find some upside to the revenue, the trend, that means there could be a chance that we will fall short of our inventory. Even if there's an upside trend in the revenue, we want to make sure we'd be prepared.
The platform change in generation. Even if it does not happen this year, we expect that we should be able to find opportunity next year. That is why we want to be selective in trying to find where we want to be able to build up, so that we will not find any opportunity lost. With that said, it's not like we have this full visibility. We are trying to prepare ourselves for the possibility that we see ahead.
Thank you. I'm sure you have thought about increasing your inventory too much. In other words, even if you don't find that positive opportunity, you still will be able to manage with the current inventory?
Yes. We do want to be prudent as we try to manage our inventory at any rate.
Thank you very much. My second question. From July and September onwards, you don't have a forecast. What is your direction in terms of margin? Of course, it has to do with the product mix, utilization rate. These will all change the margin. Listening to you are seeing that things are bottoming out. In other words, is it correct to take this as your margin will not drop?
Thank you. Yes, as for direction, we are not expecting there is going to be a further decline in the trend.
Thank you very much.
Thank you. Are there any other questions? If you have a question, please indicate by the Raise Hand button in the, on the screen, at the bottom of the screen. Mizuho Securities, Yamamoto-san, please unmute yourself and begin your question.
Mizuho Securities. My name is Yamamoto. I have a very simple question. The second quarter revenue Q-on-Q level flat is your forecast. ABU and IIBU, what is the pluses and minuses for on a Q-on-Q basis that you are forecasting?
By and large, both of them are expected to be performing flat.
Within IIBU, if you break down by sub-segments, one, maybe infrastructure, you are expecting a Q-on-Q increase, there might be a decrease in the IoT area. What is the breakdown of that?
If I divide by sub-segments, on a quarter-on-quarter basis, there are so many ups and downs, so it's very complicated. For the industrial, we are expecting strong performance, quite strong performance. For infrastructure, so well for the second quarter. From the first to second quarter, I think, so strong. IoT and consumers, I would say, there might be a slight improvement, but nearly flat. That is how we see it. Of course, for many others, the mass market related, well, it's not that this is a general trend that we are strong, but when you compare first quarter to second quarter, there might be some strong momentum. It sounds like everything is, we are forcing a strong trend.
If you look at the individual level, it doesn't seem to be so unfavorable, but there is a general lack of clarity, so therefore we have to conduct a major share haircut and be prepared. That is the operation that we are undertaking. The automotive, we are focusing flat.
On the automotive side, without any haircuts on the actual demand basis, is that what you are assuming for?
Yes, that's the current forecast, yes.
Okay, thank you very much. That's all for myself.
Thank you.
Thank you very much. Next, Mr. Yamasaki from Nomura Securities, please unmute yourself.
Yes, this is Yamasaki from Nomura Securities. I have two questions, too. My first question is about your order backlog circumstance. I think it was from mid last year it has been increasing, but then you back then were saying that you don't exactly have the visibility there. It could just be a qualitative comment, but what is your view now? That's my first question. Also, can you give us some little more image for the automotive side? I think you were looking at a 47 micron or, you have the things that advanced MCU. You also talked about the European OEM inventory. If you have any like, little more details here, that is something I would like to know a little more.
40nm MCU. At this moment, we do believe it is, the circumstance is still very tight. Looking at the application and customer, we do find is areas where we still see the situation pretty tight, we also do find some customers being able to build some of their own inventory. Compared to the previous earnings result, we are finding more towards a better balance. At the same time, if I may speak on a little more pessimistic way, maybe the demand is still being weak. It is still tight, but compared to the previous earnings call, it is becoming less tight. That is what I feel.
Otherwise, it's really hand to mouth. The situation has already, it's something of the past. In other words, we don't really sense the situation being extremely tight anymore. What was your first question? I'm sorry. Mr. Shinkai, do you remember?
It's about the order backlog.
Yes, thank you. It was about the backlog. The circumstance really has not really changed. Looking at the revenue forecast, we do find the backlog is ample and enough to support our forecast, but the backlog itself is becoming cleaner. Our lead time, we try to shorten it, but still we do find orders more into the future. In other words, perhaps some customers still do want to make a little more orders in advance so that they feel a little more comfortable.
If the circumstance continues, that could mean that we might find some short-term orders are coming a little more, which could mean that our mix would become a little more fixed and normalized. Overall, again, overall, the feel that we have has not really changed from the previous earnings. We do find more solid backlog at this moment.
Thank you very much.
Thank you.
Any other questions? Nikkei Shimbun, Mukano-san, please unmute yourself and begin your statement.
My name is Mukano from Nikkei Shimbun. This may be a repetition. Allow me to ask this question. The OP margin after the second quarter is expected to decline. What is the major factor behind this? Can you elaborate on that point?
Well that be explained by Shinkai-san. Shinkai-san, please begin.
From the second quarter, or actually the second quarter, I'll explain the second quarter projection. For the second quarter, 32.0% is the projection, so there's a decline of 2.7 percentage point that we are currently is estimating. The operating expenses is the big driver here, so there will be some seasonalities. For example, in the second quarter and fourth quarter, you usually have a larger than usual expenses, and that's one factor behind this. Also in our cycle from April, we have a regular salary increase, and this salary increase this year had a significant size on a global scale. That is represented in the personnel cost increase, and that will have a kick in from the second quarter onwards. Inclusive of that, we are expecting an increase in operating expenses.
The second quarter will see a significant decline, but the personnel cost impact will not be so much, a significant factor in the third quarter onwards.
Yes, the personnel costs will remain flat and then other expenses because of seasonality and also, we may decrease or increase expenses based on the market trends.
Okay, got it. Thank you very much.
Thank you.
Thank you very much. Will there be any other question? If you have any question, please use the Raise Hand button. Tokai Tokyo, Mr. Ishino, please unmute yourself.
This is Ishino from Tokai Tokyo. Thank you for taking my question. Thank you. OEMs or the actual manufacturers, they would be designing semiconductor and could be sending their order to foundries directly. Do you think that could be possible in the future? Do you think of this as a risk or do you not? For example, we heard about Honda's new move. In other words, Honda's new move, how do you, Mr. Shibata, look at the trend?
Yes. Thank you for the question. Well, auto OEMs, will they really start developing, designing their own semiconductors? Even if they do, it's probably going to be really limited. That is my view. Semiconductor manufacturers oftentimes we probably will see more cases where OEMs would be collaborating together with semiconductor manufacturers more closely to design their semiconductors. That could happen, but that's an example by smartphone makers or for example, in auto side, we find Tesla trying to design their own chip. We hear of that, it's still, if even if this happens, it's really going to be just very limited cases. Because it is not exactly easy, and it also requires very large investment.
In other words, if you want to make sure that your investment would pay off, you have to make sure that you have a very good turnover or top line to make up for that. I think it is really limited.
Thank you very much. I have another question. SiC, like for example, Tesla, the likes of Tesla, they are saying that SiC is really costly. SiC wafer is really costly. I am sure Renesas is also thinking of SiC wafers. Before, I mean, I know that long time ago it could be different compared to today, SiC requires a lot of investment. If you really want to go into SiC wafer, what is going to be the process, procedures, that you might want to take in going really full-forcefully into power semiconductors?
Thank you for your question. The circumstance really changes, my message might change over time. The SiC doing this all on our own at this moment is not something that we have in our mind. The rule on the supply basis, we know that it is increasing and there could be a good ample investment there. We don't really need to go straight into there on our side. Now, as for the wafer substrate, the manufacturing technology on the SiC front, it is still in early stage, and so there's very poor yields. There's a lot of loss, as you may know. How to slice or how to manufacture, as the technology develops, then you should be able to really obtain much more substrates from the same seed.
When we go to that point of time, do we want to have this on our own? I'm sure there's a lot of way perspectives there, but at this point, I do not believe we need to do that at this moment. At the taxil wafers, this is something that, yes, it probably would be better if we'd be able to do this on our own. Not exactly the substrate itself, but otherwise, it might be better if we'd be able to internally develop.
Thank you very much for answering the SiC question.
Thank you very much.
Thank you.
Are there any other questions? We still have time. Since there are no further questions, we would like to finish the Q&A session at this juncture. Finally, to close, I would like to have some words from Mr. Shibata.
Because the questions were so limited, so that represents the case that we didn't really have something so much in particular to talk about this time around in this earnings call. Next month is we will share with you the progress of our medium-term plan, including members from the other representatives other than myself and Shinkai, who are responsible for the product line. If you all have the time to attend, we would like to welcome you to that event. Thank you very much for sparing your time for this session today. Thank you.