Thank you very much for attending. This is our Second Quarter Earnings Report for our fiscal year 2024, despite your busy schedule. Today, we offer simultaneous interpretation service. On the bottom of the screen, please click on the interpretation channel and select the language of your choice. Please, speakers, please turn on your video. To this presentation, we have the CEO and Representative Director, Mr. Hidetoshi Shibata, and CFO and Senior Vice President, Mr. Shuhei Shinkai, and other members of the staff are present. Mr. Shibata will give us a word of opening, and then CFO Shinkai will talk about the earnings. And after that, we'll have a Q&A session. We are planning 60 minutes for this meeting. The presentation material that is going to be used today is uploaded on the IR site of our company. Mr. Shibata, please.
Thank you very much. Good morning, everybody. I am Shibata. Today's earnings. Oh, I think basically it's a, we have to reflect on our performance. In the second quarter numbers, putting that aside, the first quarter, at the first quarter, financial results, I think maybe our outlook is a bit optimistic. The reason I say this is mainly, one, the automotive business. There has been, we have been anticipating sustainable growth, but we have been robust, but I think we have been adjusting to a more cautious outlook. That's the current state, that’s number one. Number two is that, so the industrial, under a more wider sense of industrial demand, there has been adjustment.
Compared to our initial expectations, it seems that this adjustment is continuing for longer and in depth than our anticipation. Initially, we thought that the second quarter, third quarter, we'll start to see a recovery, but currently, the third quarter seems to be, continues to be tough. From the fourth quarter onwards, at some timing, the recovery will be seen, but we'll have to be very cautious about the outlook. We are thinking about controlling the inventory more significantly. In the third quarter, the channel inventory, so we control that, and to be able to manage that, the top line is going to go down. I think that is how we're going to manage our business. But that said, sooner rather than later, the market will recover, that’s our view.
Going forward, our theme is more than ever, growth. We are going to control the top line, the third quarter in terms of OpEx and R&D. In terms of the investment, we will not put on the brakes and go forward. So that means the operating margin, it will decline a bit in the third quarter, but even so, we will continue investing in R&D so that we will continue to conduct initiatives towards our growth. So in the second quarter, so unintentionally, we have increased the channel inventory in the third quarter. Quickly, we will re-adjust that. On the other hand, towards growth, we will continue to invest more R&D. So that will be our outlook for the third quarter. So first, let's go into the details of this second quarter.
I'll give you over to Mr. Shinkai about the financial results. Shinkai-san, please.
I'm Shinkai, the CFO. I would like to give a presentation about the second quarter of this fiscal year, utilizing the presentation material. Please turn to the next slide. Then to the next slide. On the very bottom bullet, on the 12th June, we have completed acquisition of Transphorm. So the balance as of end of June reflects the consolidation of Transphorm. After we complete the calculation PPA, we will retrospectively conduct a revision, but this PPA is expected to finish by the fourth quarter of this fiscal year. The third quarter forecast reflects the contribution of Transphorm. Next slide, please. This is the financial snapshot for the second quarter. In the middle, a darker blue column, please refer to that.
In terms of revenue, it was JPY 358.8 billion. Gross margin of 56.7%. Operating profit, JPY 110.6 billion at, margin will be 30.8%. Net profit, JPY 96.7 billion. EBITDA, JPY 132.8 billion. In terms of the, Forex, JPY 153 to $1 and JPN 165 to EUR 1 . Against the forecast, if you want to make a comparison, it's on the very right-hand side, side, but I would like to refer to that later. Going to the next slide. This page is about the second quarter, details. First of all, like, compared to the forecast, company total, at the very right-hand side, please look at the top box.
In terms of the revenue, compared to the median range, we have slightly over outperformed. It's a 1.1% outperformance. So basically, this is due to the currency impact. Excluding the currency impact, it is flat against our forecast. The automotive has increased slightly, and the industrial infrastructure and IoT has decreased, but in total, it was in line with expectations. In terms of the gross margin, it's 1.2% above our forecast. The impact of the foreign currency is basically flat. In terms of the product mix, the industrial infrastructure and IoT within the segment, the mix has worsened. But in terms of manufacturing cost, has gone down, so overall, we have been able to see a positive improvement. In terms of manufacturing costs etc.
The decrease, the cost of the ramp-up of the Kofu plant has gone down, and disposal and the inventory valuation losses has not shown up. This are the factors for this situation. Going to the operating margin is 3.3 percentage points increase for this quarter. In terms of the operating expenses, compared to the forecast, it has increased. However, the impact is coming mainly from the currency. In terms of their calculation of the currency sensitivity, there has been a underestimation, so there has a big impact coming due to this Forex. To talk more in detail on the cost side, to the non-major currencies, as has been impacted by the weaker yen, but we have underestimated this impact. So that is the reason why we're seeing this level of impact.
For R&D, basically it's in line with our forecast, and as a NRE milestone adjustment, has been transferred to that, so there has been some increase there. So going to the quarter-on-quarter comparison, in terms of revenue, it is increased by JPY 7 billion, so this is a 2% improvement. In terms of the gross margin, it has been basically flat. In terms of the operating margin, it is 1.5 percentage points worsening. So this is because of the increase of the R&D. The first quarter, basically, it has been at a low level. The second quarter, the R&D level has gone up compared to the first quarter. On the left-hand side, the price, the segment situation, I would like to give some more color there.
In terms of the gross margin, the automotive, due to the increase of utilization, it has improved. In terms of the industrial infrastructure IoT, the product mix has worsened within the segment, and the gross margin quarter-over-quarter has gone down. In terms of the operating margin, automotive, because of the volume increase, the gross margin has improved. Industrial infrastructure IoT, due to less volume, and the margin has worsened quarter-over-quarter. Please go to the next slide. So this is about the revenue of the quarterly revenue trends. The second quarter is on the very right-hand side. Overall, year-over-year is at 2.6%, and Q -on-Q, it is 2.6% increase.
Excluding Forex for automotive, year-over-year, 11.5% growth, and quarter-over-quarter, up 6.9%. As for IIoT, year-over-year, 24.5% decline, and quarter-over-quarter, decline of 5.5%. Going on to the next page. Here, we're looking at the financial indicators. Down below in free cash flow, in the second quarter, has grown. This occurs in the first quarter, there has been, interim corporate tax, paid, and also first quarter bonus, payment, which have had an impact. Here, we're looking at the inventory levels. Quarter-over-quarter, we are looking at the factors of inventory level change and outlook to the right. Now, DOI on a quarter-over-quarter basis, has increased to 103 days.
This is attributed to die bank expansion, which has pushed up work in progress. The same applies for the third quarter, attributed to die bank expansion. The 40 nm microcontroller will be the focus of the expansion. Now, for the channel inventory, Q-on-Q, it is increasing to 11 weeks. As for automotive, as expected, we have seen a rise however , the rise was minimal. Third quarter, in actuals as well as weeks of inventory, we have seen, we've expected growth. However, attributed to the prospects, we believe the pace will be slower. As for IIoT, second quarter, we expected a decline. However, expectations were betrayed, and we have seen a rise, and this is the impact of trade flow. Basically, the sell-through was weaker than expected, basically around industry mass market.
As for individual factors, infrastructure-related products, there has been a push-out observed, and therefore, overall, we have seen an accumulation of inventory. Third quarter and beyond, for the actual and also WOI, we're expecting a decline. We expect growth in sell-through, which will have an impact. And going on to the next page, here, we're looking at utilization. To the left, we have the front end. On a wafer input basis, the second quarter is as expected. We have seen an increase. However, on the other hand, in the third quarter, because of the summer vacation, we have front-loaded production, and therefore, in this quarter, as a reactionary trend, we expect utilization to drop QOQ 10 percentage point, a mid-10 percentage point range is expected. And to the right, we have the CapEx second quarter.
We have seen the EV purchase and also the integration of office, and we have decided on an investment. Next page, this is the forecast for the third quarter, and please look at the dark shaded area in the center. As to the revenue, the midpoint forecast is JPY 348 billion. And gross margin, 55.5%. Operating margin, 27.5%. Forex assumption, $1 at 157 yen, EUR 1 at 170 yen. As for gross margin, year-on-year, it's a -3.8%, QOQ, -3.0%. Expect, eliminating currency year-on-year, -12.4% QOQ, -3.9% is expected. In terms of gross margin QOQ, -1.2% is expected. The earlier numbers were for revenue.
As for the factors attributed to third quarter, we're expecting a decline in utilization rate. As for operating margin, 27.5% QOQ, that will be a three point decline. This is attributed to utilization drop, and also the size down of scale and other rise in expenses, and also Forex, working toward a weaker yen. These numbers are expected. As I mentioned, as for OpEx, we will remain R&D expenses. We do not expect to cut down on R&D investment. Going on to the next page. Let's turn to page 14, and here, we are looking at the balance sheet end of June. We have conducted a refinancing, working capital bullet, JPY 260 billion, commitment line, JPY 150 billion has been increased to that number.
And then moving to page 16, this is a non-GAAP reconciliation. To the second from the right, the non-recurring item. In the second quarter, the JPY 3 billion, this is, basically attributed to non-cash, mainly for expenses for reorganization of operating business structure. And then looking at the highlight, at the outset, we have mentioned we complete acquisition and Transphorm and also for Altium, closing July 1st. And with this, we would like to conclude the presentation.
Thank you very much. So let's go to the Q&A session. Shibata-san, would you please turn on your video? First, I would like to give you some information about how to ask questions. For those who have questions, please utilize the Raise Hand button. We will appoint you in order of your raising hand, and then please say your company name and name. So would you unmute yourself and then ask your question after you are appointed. Due to the time constraint, one person please limit yourself to two questions. First, from UBS Securities, Yasui-san, would you please ask your question? Please unmute yourself and speak out.
I am Yasui from UBS. Thank you very much for taking my question. I have two questions. First is about your free cash flow.
So according to your numbers, the first half is about +JPY 110 billion. This is on page seven of the presentation. On the other hand, if you look at the Transphorm, the free cash flow is -JPY 85.2 billion, so there is about JPY 200 billion. So I think the Transphorm acquisition was at JPY 50 billion. But this, to the, it seems that the additional cost has been used for the acquisition through your subsidiary. The second quarter question is about third quarter guidance. Shibata-san, you said that there has been some forecasts, in terms of forecasts you have to adjust.
So I think, but, I think it's very difficult to have a precise forecast for the data centers, is it the major smartphone companies that may have missed the mark, or is it the share has declined? Can you give us a direction in terms of what you're going to see going forward?
So, but for your first question, [Foreign language], I will answer the question. For the second question, I will give you the answer. So in page seven, so, we have a note on the models page. So the acquisition of a subsidiary, of the shares of subsidiary and will deposits provided to Wolfspeed . So we have to exclude that and the impact of the point I’m giving, so this will be $1 billion worth, and Transphorm acquisition funds , is what, is the difference that you're seeing between the two numbers you had just mentioned.
So towards your second question. So I don't, well, so the industrial market, including the mass market, I think we have seen a major gap there. I give you an example, and, so just give me an example. It was a specific customer at the smartphone manufacturers.
Is there a major change in our outlook?
No. Basically, in that matter, it's in line with our, our expectations. In terms of the infrastructure business, we have the AI that's growing strongly and this conventional data center business, so these two combined, be included in industrial segment. As of now, compared to the first quarter, we have reduced our outlook in this business.
But on the other hand, I think you can more or less have an image, but the number of customer base is small in this industry. And so there are some fluctuations due to a customer-specific, market-specific factors. So in terms of our adjustment of our forecast, it's not because the demand itself has weakened. It, so the other companies' devices that we and our partners use and the platform demand is going down right now. So that's the reason why we're seeing adjustment. So in this area, it's not that there has been some substantial readjustment of the substantial change in our fundamental outlook. So I think we have seen the gap is that the industrial and the multi-market mass market outlook.
In terms of industrial, we have downgraded our outlook substantially. Specifically, it's not a specific segment, if I'm pressed to say so, the so-called hard core factory automation. I think basically we have to downgrade our outlook substantially in this area. But overall, industrial business, more or less, we have reduced our outlook here. For the mass market business, it's not a great magnitude that we are adjusting our forecast, but overall, it's a bit weak. So that's the reason why we have made a downward revision in terms of our forecast.
In terms of the mass market business, as you have mentioned, it's not the case that a specific segment is, you know, performing worse, because there are small industries in here. But if by dividing the categories, Japan seems to be weak?
Well, in terms of geography, that is, Japan seems to be weak. China, it's rather, robust. It's not that different from our initial outlook. So overall, for the mass market outlook, we have downgraded the outlook. Well, I have talked about this, but let me summarize what I have just said. In terms of the content, we have made a downward revision for the industrial business and the mass market business, that's mainly where we have made an adjustment. With the industrial business, factory automation is, it's a major. I think that's the major factor, but overall, the industrial market is weak. For the mass market, not as much as the industrial, but it's still continuing adjustment. Japan, as a geography, seems to be weak. That's my view. Thank you very much.
Thank you very much.
Thank you very much. Within, from Goldman Sachs, Mr. Takayama, please present your question. Kindly unmute yourself.
Thank you very much. Just following up on the current discussion, automotive and non-automotive and also for other factors, the breakdown and also the growth is what I'd like to hear about. You are conducting an adjustment in terms of scenario, October and December, are you going to raise the utilization rate, or will there be somewhat of a recovery? And therefore, for non-use of, non-auto applications, we would like to hear. And as for auto application, will it remain brisk? Going, paying attention to the overseas market, it appears to be somewhat weak. I would like to hear about your, your thoughts.
As you have mentioned, it is as you have said, as for automotive, well, the variance is not that large. Even while the market is strong, we are conducting a downward revision. And hence, what I have just mentioned is in reference to the end demand. It's not about our revenue, but it's about demand in the market. And as we go into the third quarter as to what will happen, 2%-3% or so might see a somewhat of a decline in that margin in the fourth quarter. It’s very difficult to predict at this stage however , as of now, we are taking a more cautious look than before. And hence, for third quarter and fourth quarter, we will continue to maintain a cautious approach for the automotive.
But for the mid to long term, on a year-on-year basis, the currency on basis, you recognize that there is somewhat of a growth, and hence, the trend in terms of growth remains unchanged. And therefore, first quarter next year and beyond, we will put into shape the outlook based on which we will decide on the fourth quarter utilization rate. As of this point in time, I am not taking a pessimistic view. On non-automotive, on that point, as we have reiterated for industrial use, we have applied a rather substantial revision of the outlook. And as for the third quarter, from the second quarter, there will be a decline. The first quarter earnings, when we conduct a report, what we had envisioned was to, I do recall that I used the word U-shaped recovery.
However, more of a drop and then thereafter, an upward trend. However, we are seeing somewhat more of a mild U-shaped curve, and that is what we expect to see in the third up until the third quarter. In fourth quarter, we expect a recovery however , we cannot maintain an overly optimistic view, and therefore, for the fourth quarter prospects, internally, we will take a cautious approach. In pursuing operations, industrial in the third quarter, not to a large extent, but double-digit. Compared to double-digit expectations that we have indicated previously, we're seeing somewhat a cautious approach in fourth quarter 20%. We will be reducing our outlook, but that is how we will see the third quarter, and we expect there to be a gradual recovery into the fourth quarter.
Therefore, the fourth quarter, the expectations were that we will see quite a substantial growth. However, in the earlier earnings report, we have now changed our outlook to see a mild recovery into the fourth quarter. As a mass market, there's not been a dramatic change, but from the third quarter into the fourth quarter, we maintain the view that there will be a pickup. However, we are now shifting to a cautious approach. As for infrastructure related, of course, the outlook in terms of substance, it remains unchanged. However, depending on particular customers, there will be, of course, ups and downs, but the outlook remains basically unchanged.
In terms of numbers, July and September, will you be able to quote? I'm sure you'll be reading the data, numbers later.
To reiterate, what I mentioned is end demand. In terms of the numbers overall, second quarter into third quarter, somewhat of a pickup is expected. Hence, in terms of market situation, we expect a recovery, and we do not expect to see a downfall in the market situation. However, as we mentioned in this current earnings report, of course, the reflection is that we had expected there'd be a strong recovery in the second quarter, and we have made our channel inventory numbers. However, we have seen somewhat of a slowdown, and therefore, the channel inventory situation has changed. Of course, this is where we will apply adjustment. In third quarter, this will mean that there will be somewhat of a sacrifice in terms of revenue for third growth. And for the second item?
Broadly speaking, in the half year, I'm sure that your operational excellence is very strong, and you're conducting an adjustment earlier than the peers to register an outperform. And then, in the long-term perspective, with acquisitions in place, you will grow more than the market trend. However, I would be led to believe that you'll be impacted by the cycle in the six months to a year, or anywhere in between, the external impact could come into play. Are you going to be more or less trending on par with the market? Or, due to individual factors against your peers, how are you going to grow your top line in order to outperform? Or will you be able to put to see that?
Of course, I understand that it would be very difficult to, of course, overshoot in a very short term. However, six months or into a year, will you be surpassing the market? Is there something that you will be able to factor in? How do you see this?
As you pointed out, of course, really turning to the focal question in the short term, of course, we believe that it will be aligned with the market. Shall I say, idiosyncratic in terms of growth factor that is not, of course, shaken by market trends. And of course, we are looking towards AI, and we have mentioned a Capital Market Day. In terms of the proportion to the overall company revenue, it's still very small, and hence it will continue to grow on a secular basis.
But in terms of company, for cyclical, for say, industrial and overall, where there's a volume, say automotive, of course, we will be pulled by trends in these areas. But first, EV in the automotive, compared to the past, the proportion is growing, now topping 20% of overall. And with the growth factor against the overall revenue as it continues to grow, the issue of cyclicality can be somewhat subdued. But in terms of trend, we will be impacted by the market cycle trend, and this will likely continue. And internally, we are studying how we will be able to establish a growth factor that is not, and to operate so that we are not impacted by the market cycle.
In the Capital Market Day come next year, and we will do hope that we will be able to speak about the midterm prospects. As for the long term, the major theme is about the broad-based market, and how we will be able to grow on the digital platform. The market cycle, to begin with, of course, we are looking at the overall market, and hence, we will be looking at the margin that we can enjoy, so that we will not be impacted by a certain sector in the market. For the time being, and as we have seen in direction of the revenue, we will be impacted by the cycle. However, we hope to be able to reduce or mitigate the impact of the market cycle, and we hope to be able to tie that into growth.
Thank you very much.
Next, BofA Securities, Hirakawa-san, please. Please unmute yourself and ask your question.
Thank you very much. I'm Hirakawa from BofA Securities. So I have two questions. The first question is about the China-related business. For the FY 2023, the sales of China ratio was 23%, and the previous year as well was about 28%. It has gone down year-over-year. So currently, you talked about the China situation is more or less robust, but in terms of the economic situation and the competition, what is the situation of the China business? And in the long term, so looking at the semiconductor policy or the strategy of China, what do you think about your China strategy? So that's my first question. So if you look at the current situation, is it a slight growth in China?
Within China, I think things are kind of patchy. So some customers that are growing, they are growing smoothly and aggressively. So we will focus on customers that has potential to grow. So I think basically, our growth in China, compared to the market trend, is slightly stronger.
And going forward, we think, we are anticipating, is that going to be stronger than the market growth?
So I think that China, in China, we're going to grow slightly. In the mid to long term, there's nothing new that we are doing, but going forward, the local suppliers' competitiveness is going to become stronger. And our customers in an applications. So in the short term, they has, they tend to have excess capacity and go into very aggressive price competition, and we are continuously seeing that trend. The pricing pressure coming from that situation is becoming stronger, and I think going forward, it will become stronger than ever.
So from our point of view, in the China market, rather than trying to increase our share, we would like to focus on the strength and look, go into fields that we can leverage the strength, and then try to compete in other areas. And in terms of the other top line, we want to grow that steadily. In some cases, even if we lose some share to the local competitors, so we have to accept that. So in terms of top line profit, that will be our focus in China. In terms of, in terms of share in the China market, that will be our second priority. Specifically, about this view, there are new, there's nothing new that we're doing. So for the time being, I think that will be our stance in the China business. That's all from me. Thank you.
My second question is that under COVID, there has been some difficulty for procuring semiconductors. I think basically some companies are arguing that they are more competitive because they have the in-house capability to produce the semiconductors. But you, is your stance, the fab-lite strategy, is that becoming less an advantage? So, if that becomes a disadvantage, then how are we going to respond to that?
Well, basically, it's not the case that we are disadvantaged in any area. I don't think that we are in a disadvantaged position. Of course, in the foundry partners, China plus one, Taiwan plus one strategy. They are strongly aware of that type of strategy, and the foundry partners are taking necessary initiatives.
It's not the case that if we are at a disadvantage because we don't have an in-house fab. But as you know, during the pandemic, due to this situation, I think basically we have lost some position. That's the mobile share losses. But I think the situation has changed since then, and the foundries, you know, initiatives against foundries has gone forward, so we are not worried. Though this fab-lite strategy that we're taking, internally , do we have any concerns? No, absolutely not. We'd like to, I think we can go forward with our strategy going forward as well. Thank you very much.
Thank you very much.
Citigroup Securities. Mr. Fujiwara, please kindly unmute yourself and present your question. Thank you very much, Citigroup.
My name is Fujiwara. I also have two questions, first of which is the following: This may be a repeat for industrial. I have a question. Beyond expectations, sell-through has declined, and therefore, logistics, supply has increased, and therefore, you have had to conduct a downward revision. With sell-through being weak, what is the backdrop? How, what is your analysis? I would like to inquire. Customers have their inventory, was it more than expected, or was it that the end demand was weak? In terms of supply and demand, the demand, is it just being pushed out? Or on FA-related demand, the layers, are also increasing. The share of the customer, share might be declining. Is that because the demand is declining? If this is also a factor, we would like to hear about that.
As to the last point that you made mention of, as to the share, this is not a matter of much concern. Of course, as of now, of course, the proportion of Japanese customers is very large, and that's a fact. But not just restricted to the West, but in China, there are many clients that are globally competitive, and their business is growing. And just a little while ago, we have received a quite a large design and order. And hence, depending on the variance of the customer share, will this have an impact on the mid to long term? That will not be the case.
But of course, in the short term, say, on a quarter-to-quarter basis, that might be the case. However, for the mid to long term basis, this is not a matter of concern. However, when we look at the short-term demand situation for a certain specified, rather than for a certain segment within industrial, overall, demand continues to be weak, and that is how we see the situation. This might have been expected, however, when we look at the channel partners and together with our partners, we may have overemphasized some bright signs, or we do not want that to pass by, and hence, we took a rather proactive stance. However, that bright signal dimmed as the days went by, and that is the situation. And hence, overall, the market situation has continued to soften, and that will describe the situation.
And subsequently, clients' consumption of inventory has taken time. Under COVID, inventory has piled up, and of course, we had expected that that would, of course, be consumed and things would turn for the better. However, right now, we are finding that the demand is weakening, and which has also indicated that consuming inventory has taken more time than earlier expected. You might, of course, wonder if this has actually lagged to the future. Well, perhaps that could be described as such. Shifting to the future, some may have expired, they have been lost. Especially when we look at the market situation in China, it's not really that bright hence, we understand that we need to take a cautious approach, and therefore, internally, we have applied a rather, a large adjustment. I do hope that this will be a response to your question. Thank you very much.
As for the second question, you've also pointed out this out at the outset, for the third quarter guidance, SG&A is quite high. On a Q-on-Q basis, of course, the absolute numbers are really increasing. So what is your plan in terms of percentage and also the scale or scope, will this continue in the days ahead? I would like to inquire.
Our CFO, Shuhei Shinkai, will fill in on the details, but we do not expect this will expand in terms of percentage.
So this is to increase the top line, where the OpEx has continued in this manner. If the top line does not grow, naturally, we will have to cut down on the OpEx in terms of the percentage. But right now, this is being done for the sake of increasing the top line. And what is maintaining OpEx will somewhat taper down.
And now to you as for OpEx?
Basically, will be maintained because of maintained investment R&D. And on QOQ, currency impact has raised the numbers, and as a result, in terms of ratio, it appears to be very large. However, the impact of, of course, the top line will also drive this number. And therefore, in terms of the number, we expect the numbers to decline. Thank you very much.
Yes, next question. Morgan Stanley MUFG Securities, and Yoshikawa-san, please. Please unmute yourself and ask your question.
I'm Yoshikawa from Morgan Stanley MUFG Securities. Thank you for taking my question. So I think at the beginning, the Altium acquisition is going to end in the third quarter, and of course, it is not reflected in your guidance, I understand that. In terms of Altium, do you have any new updates that you can give us? And my second question is, duplication to what has been asked from the previous person, but the second quarter, SG&A is about JPY 4 billion increase compared to the midpoint of your guidance numbers. So at the beginning of the presentation, besides the currency situation that you explained, you have underestimated the yen, besides the key currencies.
Is it because it is currency or there are other factors? I think I think basically the JPY 7 billion increase of SG&A, but is it due to the currency between the third quarter and fourth quarter?
Yes, so I I would like to give a quick answer for the first question, and second question will be answered by Shinkai-san. Well, as Shinkai has explained, currently, next week, the transaction has been closed for Altium. If things go smoothly, at the August, September, these two months will be consolidated into our financial results. But that said, in terms of the numbers, it's not a big number, so it won't move the needle that much. But in terms of gross margin and whether it be operating margin, this will be accretive to our business, so that's true.
So financially, there will be a positive impact. Not no negative impacts coming from this. So, in terms of the substance of this acquisition, we will give you an update in a timely manner. But I'm doing, based on the discussions, the arm's length that we have initially anticipated, I think has been more, you know, trying to do it together. I think that's the direction they're looking at. So in terms of neutrality, it will be 100% secured. But on top of that, in terms of organizational initiatives, we will be more, you know, working together. So I think a more integrated management will be conducted looking at digitalization. I think at the right timing, we'll give an update. So Shinkai-san, please talk about the OpEx situation.
The second quarter forecast is about increase of JPY 4 billion. I guess the forecast, about JPY 1 billion is coming from R&D, the timing difference of R&D spending. Rather than spending, it's the incoming cash difference. The remaining JPY 3 billion is, half of that is coming from, so the minor currency sensitivity underestimation, and then, remaining half is that because of the weaker yen, R&D spending is gonna become bigger. For the third quarter, +JPY 4 billion, half is about currency, half is about non-currency factors. That's our estimation. In terms of the incoming cash, this is not finalized. We are taking a conservative view, and Transphorm is going to be contributing in the third quarter, so that's reflected as well.
Thank you. And Shibata, Shibata-san, you talked about, to be able to grow the top line, you are going to use your OpEx. But for example, as an image, for the next generation, are you going to increase the R-Car?
So, well, as image, I think, yes, the image is correct. Thank you.
Thank you very much.
For Nikkei Newspaper, Mr. Mukano, please unmute yourself and present your question. Thank you.
Mukano for Nikkei Newspaper. I also have two questions, the first of which is in reference to the acquisition of Altium. Semiconductor market is, of course, weak, and it comes at that timing. Once again, your expectations or any comments that you might have. And as acquisition is completed, ultimately, will the situation improve more than what is visible today? And the second question is about China. It is stepping up investment into mature segments, into mature nodes. And as we look at the future for Renesas in the mid to long term, is it going to be a risk? I would like to hear your thoughts. I do not have much to add from what we have discussed today.
As for Altium, as we have mentioned, in terms of a financial impact, it's basically negligible. As to whether it's plus or minus, it will work to the positive. But the scale is limited. It is very negligible to the extent that you have to study very hard to find where that is. We hope to be able to accelerate our movement towards digital, and of course, the momentum is building on both sides. The transaction has not yet come to a close, and hence, it is still early, too early to say, and therefore, I would like to refrain from speaking further. But after July, at the best timing, we will be able to update you, and you'll be convinced that more than before, we are working on integration with, for the introduction of a digital platform.
You will be able to see that we are working in that direction. There will be signs that will be visible, so please stay tuned. As for China, there is also not anything more to add. As of now, the Silicon IGBT will have the largest impact. From last year, the impact has already become visible, and hence, we are looking at the revenue and of IGBT in China. As for the outlook ahead, as to reiterate, we believe that is very difficult, and that is what we have said from the end of last year and conducted operations. Nothing really has changed, and we believe that we're still in a very tough situation.
Power Discrete, what is going to happen to SiC in mature node, Micron, Analog, what is going to happen might be the question in your thoughts?
As for Micron and also Analog, for the mid to long term, without we are expecting a large impact. But we believe that it is going to take time, and hence, we still have some time ahead. We will pursue digitalization so that we will be able to shift towards the upstream in the value chain, and that is, of course, one of, of course, the motivation of the, or the theme of the acquisition. As for SiC, it's very hard to say right now, because the situation is a mixed bag. Some will say that China SiC device quality is already up to par. Others will say that they're still not there yet.
A mixed view would be the right way of us referring to the situation, but the market overall will grow, and we are also ready to participate in that market. And of course, as a solution, it's important, and hence we will commit. But as we have mentioned, to continue to invest our resources in order to really scale up the size of the business, that is not the way forward. Of course, we hope to build our presence, but it will be a part of the total solution in our portfolio, so nothing has changed. That is all. Thank you very much.
Thank you very much. Next, Daiwa Securities, Okawa-san, please. Please unmute yourself and ask your question.
Thank you very much for your presentation. I'm Okawa. I would like to have two questions about the automotive sector. So I will said that, you have reduced your outlook in terms of demand. In terms of, is it about the sales volume or due to the component makers, component manufacturers, is there a change in how they hold the inventory? Can you give us more detail? The second question is that, you have revised outlook in terms of demand, but in terms of your sales on a quarter-on-quarter basis, I think, can we expect the quarter-on-quarter sales is going to increase? So is in our consolidated basis, the top line, decline seems to be large in terms of the quarter-on-quarter sales. So what is your outlook of your automotive business?
So for our automotive business, in terms of the sales, we are changed to take a more conservative view. So rather than trying to grow aggressively, we want to observe the market situation closely and control the inventory. Specifically, in the third quarter, we are going to reduce our outlook. In the fourth quarter, it's still early to say, but is whether we're going to take a more aggressive outlook, I think we're taking a more cautious stance. So the reason behind this is that, as you had just pointed out, so there's two factors that are playing. One, one is that the third party says that the worldwide unit outlook has been downgraded. We have had that type of information.
So if that is the situation, in even the Tier 1 customers, I think basically we'll have to be more cautious in terms of holding the inventory, and I think that's natural. I think in terms of the trend, I do not think that it has we have seen a major change in the trend. But there are some customers that they are controlling the inventory to a level for very minor products or the minor customers. I feel that maybe if you just reduce the inventory too much, maybe if the demand goes up and they'll be lacking this component. We do want to continue to confirm with the customers whether their inventory level is too low or not.
But I think basically from the customer's point of view, I think they have some internal pressure to reduce the inventory, and they want to control the working capital. I think that's a strong trend out there in the market. So for the automotive business, rather than us controlling the inventory, I think basically it's, I think the trend is that the inventory is going to increase gradually. But rather than trying to aggressively increase the inventory like before, I think our stance is that we look at the situation closely and be cautious. Rather than aggressively swinging from the positive to the negative, we are decelerating, and that's automotive. For industrial, I think basically we're going from the positive to negative in a major manner. I think that's the difference of the perspective that we have for these two markets. Thank you very much.
Thank you very much.
The time to close is drawing near. The last question, Semiconductor, Suda-san?
Semicon, Semicon Portal. So that's my name, thank you very much. I have two questions, the first is in reference to, in a growth market, one component is AI. And in AI, you have two, Edge AI is one. I believe you acquired some company in that particular segment, and what has happened? And as for data center, generative AI, for example, the NVIDIA chip, if we would look at their situation, not just limited to NVIDIA, but HBM, or there are also other microprocessors that around that, I'm sure that could be a potential target. What is the current situation for data centers? Acquire, if acquire IDT and the clock products, I think will be viable for the data center. So what are the circumstances for you? What steps are you taking?
As for Generative AI, in terms of value, we're expecting growth however, in terms of volume, the unit price is very high. In terms of volume, it will not really that grow. Possibly, it might actually be lower. And what is the implementation on, on our side? The system in the volume transistor system is not going to grow, but the Generative AI? Now, how can we capture the demand for Generative AI from our business? I think that's your question.
For what is particular to Generative AI will be GPU and HBM. For HBM, the increase will not really have a great advantage to us. It's not really positive, but with GPU growing, and also considering the timing, power, we will also be able to enjoy a tailwind in our power devices. Because of confidentiality, we are constrained from speaking further, but the number of customers is limited in that space with a single platform due to various factors. Platform A could go ahead and platform B could be delayed or the reverse, and that's what we're seeing right now.
As to which platform and with whom we are aligned, that will, in the short term, shift the situation. As of now, we're looking at the combination, and are we seeing a great tailwind in our favor? That's not the case, but we are seeing solid growth. In the fourth quarter, we have, of course, reflections, and hence I would like to refrain from making any optimistic comments. But as we look at the numbers within the company, fourth quarter and beyond, we can expect to see a good recovery, especially around GPU power products. As for the timing and also for the microprocessors, of course, that's an advantage, but with generative AI, it's. We do not expect to see a spike, and that is how we are seeing the situation.
For Edge AI, this is something of that is coming in. The Edge AI in its truest form as to whether it's going to really grow substantial, it's about, of course, it's indispensable. It's sort of like a similar to how we've viewed connectivity. It will gradually grow, and we need to take necessary, of course, steps to prepare ahead thoroughly. And as for PCAI, in the short term, there are specific set makers and application processor vendors that are not really visible in the market yet, but when they, their presence is there from GD T5, there'll be a push up and there will be a positive impact.
And so Generative AI, in short term, there'll be ups and downs, but fourth quarter, end of the year, we are expecting to see a growth, especially around power. So that's one thing. And before and after with client PC, there is also tailwind, although not directly felt, the impact will be indirectly felt. As for Edge AI, we need to take a mid to long-term stance. It's very difficult to capture specifically, but, I'm sure we believe that it will come to become indispensable. Thank you very much.
That is very clear. And as for your second question? If you look at the Q2 performance, the overseas ratio, for instance, in terms of geography, Japan, United States, Europe, Asia, China, if you divide it by geography, roughly speaking, what is your breakdown by geography?
So overseas, of course, it is increasing. So roughly speaking, less than 80% is about overseas sales. Japan is about around 20%. The remaining would be. Well, U.S. is stable, about 10%+, Europe, same as Japan, it's a soft market, maybe 50%, Europe going down to about around 50%. And China, which is relatively strong, going up to 30%, and others. That'll be the breakdown. But China, because they are strong, excuse me, China and the U.S., they are relatively strong. Japan and Europe is weak, and as a result, the overseas ratio has all in all increased a bit.
Understood. Thank you very much.
Thank you very much. With this, we would like to end the Q&A session. Lastly, Shibata-san, would you like to say a word?
So I think, this guidance of the third quarter about this earnings report, I think I made everybody disappointed, and this is the reflection I have. But, we will try to start up once again upon the fourth quarter onwards, specifically fiscal year. We would like to maintain a speed of growth. In terms of R&D, we will put in efforts to invest there, and even if we have to control our top line, we will adjust the inventory in the short term.
So the third quarter, fourth quarter, we don't know how this is going to trend, but I hope that we'll be able to satisfy you in terms of our performance and continue to satisfy you. And that is the reason why we have changed our tracks at the current timing.
Thank you very much for attending despite your busy schedule. I thank you for your continued support. With this, we would like to end the Renesas Electronics Corporation second quarter 2023-2024 earnings call. Thank you very much for your participation.