Earnings Call: Q1 2020

Jul 24, 2019

Good afternoon. Thank you very much for your patience, and thank you for participating in Advent Test Corporation's fy 2019 first quarter information meeting conference call. There are 4 attendees today, President and CEO Yoshida, CFO Fujita Sacamoto Sales Group EVP and myself from the Corporate Relations Group, Nikashi. For today, Fujita will report to you our financial results for FY2019 First Quarter followed by Yoshida explaining the outlook for FY 2019. Then we would like to answer questions from the participants. We are scheduled to conclude at around 5 pm. Presentation materials for today have been uploaded to the TD Net as of 3 pm. We have also uploaded these materials on our homepage. However, I believe that due to some network glitches, some of you may not have been able to access. If you enter our homepage and access the IR library tab, you should be able to see these materials. We appreciate your understanding. Prior to this conference call, we would like to state that this presentation contains forward looking statements based on our current projections. These statements are all subject to risks and uncertainties and therefore actual results may differ. Let us now begin the presentation. This is Fujita. I would like to outline to you our FY 2019 first quarter results summary. Please turn to the next page. I am on page 4 and this is the summary of our first quarter results. 3 months ago, we anticipated that orders, sales and profits would all decline. However, Thanks to steady demand for SoC testers in 1Q, we were able to achieve higher orders, sales, and income than in 4Q of the previous year. Year on year, all figures other than gross profit decrease due to the downturn in the memory market compared to 1 year earlier when the market was more robust. Backlog was 74,600,000,000 yen. Despite uncertainty regarding the semiconductor market and the future of the global economy, this was a positive start towards achievement of our full year forecast. There were no major changes in the foreign exchange environment during 1Q. On the following pages 5 to 7, I will explain the details of our order and sales results. Please turn to the next page. This depicts orders by segment. As for Semiconductor And Component Test Systems, an 8.3% increase quarter on quarter standing at 49,900,000,000 yen. Demand of testers for application processors and other semiconductors used in smartphones grew lifting SoC tester orders to JPY 43,600,000,000, a record quarterly high. 1 of the drivers for this new record was growth in demand for 5 g related devices. We had originally anticipated some 5G investment in the first half, but in fact, several semiconductor manufacturers accelerated their development or preparation for mass production of 5g devices. Orders for memory testers was JPY 6,300,000,000. For mechatronics systems, there was a 22.1 percent decline quarter on quarter, resulting at JPY 7,200,000,000. This decline was due to the sluggish growth in memory related investments and a rebound decrease in nanotechnology product orders following a robust 4Q. In services, support and others, JPY 8,800,000,000, a 15.1% decline quarter on quarter. Orders for annual maintenance contracts increased last quarter leading to a rebound decline in 1Q. Let us now proceed to the following page. Page 6 shows sales by segment Sales in Semiconductor And Components test systems increased 2.1percentquarteronquarter to JPY 50,900,000,000. As with orders, fairs of smartphone related IC testers grew leading SoC testers to a quarterly record high of JPY 44,800,000,000. Serso memory testers were JPY 6,100,000,000. Serso mechatronics systems were JPY 6,600,000,000. Sales of services support and others grew 18.5 percent quarter on quarter to 8,600,000,000. Sayers of dissegment increased from the previous quarter due to the full consolidation of the system level test business for 3 months which was acquired from Astronics Corporation in February. Please turn to the next page. As for orders by region in Taiwan, test demand for 4G and 5G smartphone associates implemented on the latest process news increased. And orders from Taiwan increased overall as a result. On the other hand, There was a stronger sense of wait and see among Taiwanese display related customers and orders for display driver IC testers decreased compared to the previous quarter. Of Chinese domestic Semiconductor Supply Chain, but in these first quarters, orders were not very substantial. As for FY 2019, fast growth of sales by Vision in South Korea, although memory tester demand was sluggish, smartphone related SoC tester business in the nation has been robust for the past few quarters. First quarter saw steady series of testers for high end associates using advanced process nodes. In addition to testers for smartphone related devices, such as image sensors and power management ICs. Please turn to the next page. This slide shows operating income and profitability in the first quarter. Gross margin was 59.5%, it grew to almost 60% due to a positive change in our product mix. The ratio of sales for high end devices using advanced process notes increased. SG and A expenses were JPY 24,200,000,000, staying flat from the previous quarter. Operating income was JPY 15,200,000,000 and operating margin improved 7.0 points from the previous quarter This slide shows R and D expenses, CapEx and cash flow. R and D expenses were JPY 9,800,000,000, flat quarter on quarter. Depreciation and amortization was JPY 2,400,000,000, up JPY 1,100,000,000 quarter on quarter. As Adventist began to apply the new IFRS lease accounting standards in the first quarter. In addition, from the first quarter, we began posting amortization of intangible assets, including the acquisition price of the SRT business we acquired from Astronics in February. As for cash flow, In the first quarter, there were seasonal demands for pants following the end of the corporate financial year holding free cash flow to only JPY 1,800,000,000. Please turn to next page. This is a balance sheet as of June 30, 2019. Total assets were JPY 310,800,000,000 and cash and cash equivalents were down JPY 8,600,000,000, from the end of the previous fiscal year to JPY 111,400,000,000. Property plant and equipment was up 9,500,000,000 from the end of the previous fiscal year to 40,300,000,000. In accordance with the new IFRS standard on leases, 9,900,000,000 in right of use assets is classified under property, plant, and equipment from the first quarter. Goodwill and intangible assets were JPY 25,100,000,000. The allocation of the acquisition price of the SRT business wired from Astronics in February is not yet complete. It is expected to be incorporated at the end of September. Equity attributable to owners of the parent was JPY 199,400,000,000, and this ratio went down JPY 1.0. From the end of the previous fiscal year Next, President and CEO Yoshida will illustrate our FY 2019 outlook. Thank you. This is Yoshida. Allow me to explain the outlook for FY 2019. Please refer to page 12. In April, we explained that we expect the company's performance a decline in FY 2019 compared to FY2018 due to the sense of uncertainty in the global economy as a result of the trade dispute between the United States and China and a slowdown in demand for end products and demand for semiconductors. The deterioration of the semiconductor market is in fact proving to be severe, especially in memory testers. However, although semiconductor test volumes may not increase, demand for testers will increase due to the higher performance of semiconductors. This factor emerged again in first quarter. Thanks to the technological enhancement of smartphone SoCs, which boosted SoC tester demand, our results in 1Q exceeded initial expectations. However, it is difficult to predict demand with regard to whether this positive performance will continue since the future environment is still uncertain. Therefore, we feel that there will be some risk in reflecting this positive performance of 1Q in our full year forecast. Therefore, the full year forecast announced in April will remain unchanged at this time. We will carefully review our forecast once there is greater certainty around the outlook for orders in 2Q and 3Q. As described at the beginning of the fiscal year, we plan to increase investment in SCs and other personnel and increase development and capital investment aiming to retain and expand our share gains in the previous fiscal year. Next, I would like to explain Please move on to the next page. Page 13 depicts our full year SoC tester business outlook. The general trend of advances in performance of the semiconductors underpinning the level of demand for SOC testers will continue unchanged in FY19. Sales in FY19 will continue to depend mainly on testers for semiconductor ders facilitating the increased performance of smartphones such as application processors. But demand for end products is by no means strong, and our outlook is that business for display driver ICs may be less than expected at the start of the fiscal year. However, growth in demand for testers for advanced process notes are exceeding our initial plans. We have increased our revenue forecast for SOC tester business this fiscal year by 1,000,000,000 and it is now 1,000,000,000. While 5 g related test business made a gradual start last year, more orders than anticipated were received from several major emiconductor manufacturers during the first quarter. This is only a foretaste of the expansion of 5g demand expected to ramp up in calendar year 2020 and we expect a larger positive impact from the growth of commercial 5G services and the ramp up of 5gsemiconductor mass volume production projected to occur in the future. This slide describes memory testers. Due to adjustments of memory inventory, demand for memory testers has declined. As demand is expected to stay weak for longer than initially anticipated, we have lowered our sales forecast for memory testers this fiscal year. From the initial sales forecast of JPY 40,000,000,000, we reduced the forecast to JPY 30,000,000,000, down by JPY 10,000,000,000. We had originally expected recovery in the second half, and this remains unchanged. But at present, we expect the recovery in demand for testers to come in FY19 fourth quarter from January to March. However, regarding DRAM, there are clear technological drivers not easily affected by memory market conditions such as a shift to DDR5 and an increase in demand for high speed products for HPC. We believe that high speed DRAM tester demand will continue to support tester orders for the foreseeable future. Page 15 shows remaining 2 businesses. With the prolonged slowdown of tester investment by memory customers, we have lowered our forecast for the megatronic systems segment to JPY32 Billion, down by JPY 4,000,000,000. With regard to services, support and others, we expect solid sales in field services. Unfortunately, however, due to the slow recovery of data center investment, we have revised our sales forecast for the existing SSD system level test products. And our focus for this segment was lowered to JPY 38,000,000,000. Down JPY 3,000,000,000 from the initial forecast. However, we expect sales in this segment to increase year on year due to increasing the assertive business acquired from the Astronics in February. Astronics system level test products are expected to reinforce our SRT business by targeting SoCs. We have already received inquiries from many companies, including global leading telecommunications and automotive application companies. And we are looking forward to the development of this business. Trade disputes stemming from protectionist policies are escalating and there is an increasing sense of uncertainty in the same conductor market and the semiconductor production equipment market, supported by the increasing SoC tester investment. The first quarter results exceeded initial expectations despite the memory market slowdown. Increased activity in the Semiconductor Industry toward Maureen Production of 5G Semiconductors also made this positive quarter in terms of medium to long term trends in the test market. Although we have expectations for recovery in the market in the second half of the year, We are keeping our earnings focused unchanged at this time, pending confirmation of the order trends for the 2nd and third quarter. The Tesla market is leveling off, but Adventist customers are moving ahead with the government of a wide range of advanced devices and technology is evolving. We will strive to achieve the goal set forth in the mid to long term management policy defined under our ground design by increasing our market share. This concludes my presentation. This will conclude our explanation of financial results for FY 2019 first quarter and FY 2019 outlook. From here onwards, let us move on to the Q And A session. First, from Nomura Securities, Mr. Wataki, please. Thank you for the opportunity and thank you very much for the encouraging statements today. I believe I can ask 2 questions. So my first question pertains to the memory tester outlook. The anticipated major investments into memory by Korea and Japan have been postponed, which is more or less dampened expectations, I believe. So can you elaborate on this outlook? And also in China, I also believe that you have plans to make large investments into local players, but are things tight. So the first question is considering these factors, what is the outlook for memory testers? This is Takamoto from sales, and let me respond to this question. As for the memory market, as Yoshida explained, it has declined based on our initial expectations. Front end memory tester demand has declined quite dramatically. So I would like to highlight this first point. And as you have just pointed out, this trend is observed both in Korea and China. As for backend investments, this is ongoing and especially for high speed products, ddr4, LPDDR4, and investments in these areas are continuing. Our strengths are in high speed products, and this business is on an ongoing trajectory. Now for FY 2019 Memory Tester outlook, I believe, is the question. So may I first respond by saying that for calendar year 2019, as of April, TAM was disclosed to be $550,000,000 to $650,000,000 and this number remains unchanged. But depending on the future competitive landscape and market conditions, which we will closely monitor, we plan to announce a tentative updated forecast in 2Q. For NAND, we believe that the tester demand globally has declined. And the full year forecast projected in April So we do realize that such a risk is in the horizon and TAM will also decrease at this scale. Now as for China memory testers, aside from the actual demand, in order to expand their business, The intent is to make strong investments, but needless to say, we will keep close watch and embrace business opportunities as well. So I see. So for the postponed investments into flash memory in Korea and Japan, around when, do you think these postpone investments will start? So our fiscal year 4Q That is 2020, January to March timeframe we hope to see a start. Thank you very much. My second question This regards market conditions as well. Taiwanese OSATHS with locations in China are now impacted by the U. S.-China trade friction and plans to transfer sites elsewhere are underway? What is the level of demand expected from such trends? May I clarify the question? OSATs located in China transferring elsewhere What would be the expected demand from such a trend? Would that be the question? Yes. So let's say power tech they have plans to move their production site to Taiwan. And Taiwan needs high-tech manufacturers with sites in China there are dozens of such companies that are planning to move their sites away from China. So I'm assuming that you may benefit from this trend. So I believe that you're asking whether we benefit from a change in the supply chain. Exactly. Regardless of the production location we assume that there will be no major change in demand. An expected uptake in Testers in China, this demand shifting to Taiwan, the Philippines, or Malaysia, We do not penalized OSATs that move out of China. So I'm assuming that the OSATs will leave their testers as is in China and newly procure equipment or test outside of China which may lead to a promising dual investment. You may not have any leads yet As of now, we do not have such inquiries. I see. So thank you. Next, from Merrill Lynch Japan Securities, Mr. Hidakawa, Thank you very much for the opportunity. My name is Hira Kawa from Merrill Lynch. I do have two questions. Now my first question regards the Q1 orders for SOC testers. And I understand that the smartphone is contributing to the uptake, so can you cite the actual increase in order numbers? And also in orders, the 5G smartphone, both for development and mass production, What was the ratio versus your overall financials? So SOC overall uptake, if I may? For SOC orders, a 6,000,000,000 uptick versus our initial plan. But to what extent is smartphone related is extremely difficult to Dean. But I can say that for 1Q, there has been a major fluctuation in our supply chain And there has been shifts in the supply chain as well. So for instance, litigation settlements and the US entity list are some examples. But based on this backdrop, I believe I can say a large portion pertains 2 smartphones. But let me add that the industry has yet to reach 5 G NAS production level. So 5 G related investment is on the rise, but the mass production level is for the future. Thank you. And let me state my second question. For 1QSOC orders, again, This is on the increase versus last year. So for 2019, when we look at the onset for this year, SSC testers, I believe, will further grow even more. And I think the orders give us this expectation. So for 2019, share outlook How do you deem this? And in relation to the share outlook, at the beginning of the year, you did mention a more fierce competition. So I believe that you set a significant buffer for gross margin. Now has your gross margin shrunk due to the severe competition. As for market share, for FY 2019, according to tester type market trends, And if you look at our outlook, we did grow our share during FY18 and we stand in a position where we can sustain and improve. For gross margin, I believe back in April, I explained that we had increased our share dramatically and hence there may be heightened competition as a result. However, it does turn out that SoC did not have major clashes. And as a result, gross margin level has not deteriorated all that much. Now Mr. Hiroawa, you questioned the SOC order uptake, and I did respond that it was 6,000,000,000. Let me amend this number. Compared to our initial SoC outlook, there has been an uptake of JPY15 Billion just in Q1. So for the first quarter, the order level has increased dramatically. Thank you. So let me confirm. So although it may be difficult to deem the exact portion related to smartphones, a large amount within this 1,000,000,000 is attributed to smartphones. Is this understanding correct? Yes. I do believe so. Thank you. Next from SMBC Nikko Securities, Mr. Hanaya, please. Thank you for the opportunity. This is Hanaya speaking. Let me state my first question. For tester full year sales outlook, I believe that the semiconductor test systems have been revised upwards. However, overall profit outlook remains the same. I understand that 2q, 3q, you have taken a conservative approach keeping an eye on order level. So amongst testers, SOC demand will rise, I believe, and that has been reflected in your numbers. However, overall profit outlook remains unchanged. So does this mean that cost wise you will utilize allocated costs, however, amortization, CapEx, R and D, labor costs, unchanged, or perhaps other cost increases are occurring, hence, no change in the profit outlook. That is quite a tough question for the lack of words. So our investment for developments and CapEx are on schedule, and there are no major changes in our expenses as well. So simply put as you have just mentioned. If the SOC ratio increases, a gross margin should rise as well, I believe that this will be the rule of thumb. However, I have mentioned that price competition has yet to emerge And at the same time, there are still uncertainties of ForEx impact. So for now, the full year profit outlook remains unchanged. There may be comments saying that perhaps this is a conservative approach and perhaps it is. But again, we will not change our outlook at this point in time. Thank you. Now my second question is more of a confirmation The memory tester recovery timing that you illustrated for fiscal year 4Q, the January March period, I believe, was cited Now previously, I think you mentioned it should be around October. So there has been the shift in timing? Yes. So 3 months or perhaps more, there has been a shift in timing. So order recovery, will begin in 4Q. However, on a daily basis, memory prices fluctuate depending on the Japan Korean relationships and it's very difficult to forecast, but we do believe that orders will be recovering in 4Q. Thank you very much for that confirmation. Thank you very much. So next I would like to ask mister Siguuta from Daiwa Securities. This is Siguuta from Daiwa Securities. Thank you for this opportunity. So a similar question, if I may. My first question pertains to SoC testers, and I believe that underpinning the surge is a smartphone. But nature's smartphone manufacturers have now been included in the entity list. So perhaps this was a one time surge in demand for this quarter. So for 2Q and onwards, there will be a curbing in demand or regardless is the demand base strong and 2Q and onwards? There should be no curve in the demand. So I do realize that this is a short term perspective, but again, for smartphone tester outlook, if you can, give us a short term outlook, please. Let me take your question. With a major smartphone company that we referred to, We do have some businesses, but actually not much and with semiconductor design companies and affiliated companies, we do not have Dialaged Businesses in particular. Therefore, we are indeluxury affected by the turbulent move in the smartphone market. But our affairs are not affected neither negative nor possibly. I'm aware that you didn't have dialect business with them. Your business is through test house and all set. Do you think the current demand is coming from surge happening at the test house and all set? What do you think that the surge will continue and the strong orders are sustained in the second quarter and onward? Would you comment on the perspective and the entire supply chain? I don't think that strength is supported by the surge. But the key driver for the upside of SLC series in the first quarter is 5G. We are receiving orders from our major customers for engineering applications. But at this moment, we don't think the upside will be sustained in the second and third quarter. However, around the end of the year, they are proceeding to the phase of device volume production going through engineering applications. Therefore, throughout the year, I think that we can expect considerable orders for 5G related SoC at this point of time. Inclusion in entity list happened in May. So we didn't observe the search related to that. Orders in the first quarter was strong across the board, not simply boosted by the single company. Expecting that momentum throughout the year will be too optimistic. And we think SoC might slightly fall in the second quarter and onward. Secondly, as for the recovery in memory testers, you said that it will be in the 4th quarter. Out of NAND and DRAM, on which we have higher expectation. We refer to South Korea and Japan, then you might expect more on NAND. And I'd like to have the confirmation on that point. And if you see recovery, we'll be driven by smartphones or data centers. How do you see the background of the recovery? Thank you. As for recovery in DRAM and DRAM NAND. As explained before, Recovery in the high end DRAM would come first for us in the fourth quarter. High end DRAM products, including DDR5, and LP DDR5 as mentioned and HBM2 will be growing from the 4th quarter and onward. There will be backed by the bit growth of memory for smartphones and high performance computing. As for NAND, as of today, we recognize that recoveries of GAFSA and other major server businesses are slow. Therefore, the recovery from the fourth quarter will start with DRAM followed by NAND. So just for confirmation, are you talking about the recovery in orders or are sales picking up from the fourth quarter? Orders will come back first. Definitely, orders will come first. Will orders be picking up from the 4th quarter? Yes. That's all from me. Thank you. Mr. Sugira. Next question is from Mr. Miyamoto Mitsubishi UFG Morgan Stanley Securities. Thank you. I'm Miyamoto Mitsubishi UFJ Morgan Stanley Securities. Firstly, gross margin in April to June improved notably from January to March. Would you give us a breakdown by factor for improvement? Gross margin in the first quarter was strong due to better product mix, as explained. With more of the better margin products, I understand that SoC testures strong growth, but does it explain all For example, when there are any one off or special factors in January, March period due to fridge the April June apparently look better comparatively. In January, March quarter, Since this is the fourth quarter of the year, there was an inventory variation loss for the end of the fiscal year. But in this first quarter, equivalent inventory variation loss was not posted. That said, the impact of product mix improvement was larger. Is that right? Exactly. Secondly, You made corrections on the orders upside, 15,000,000,000 yen. You might have thought that first half would see some upside and how much of your expected upside is already materialized? Quotative comment is also welcome. As mentioned before, as for the upside JPY 15,000,000,000 in SoC, it was above the initial plan by JPY 15,000,000,000. Was all the upside expected in the first half already materialized in the first quarter or will we expect more to come? Let me check for a second. There was some shift for the entire first half upside over the plan will be about JPY15 1,000,000,000. So you mean that upside in the first quarter is almost the same as the In other words, you are not revising the initial focus for the second quarter at this moment. Is that right? Understood. Thank you. That's all from me. Thank you, Mr. Miyamoto. Next question is from Mr. Mikeawa Credit Suisse Securities. Thank you. I'm Mikeawa, Credit Suisse Securities. I have one question on 5G. Trying to put things in perspective, I'm slightly confused. In the Q And A session regarding SoC, on JPY15 Billion Upside. For the question from Mr. Hiroawa, you said that investment for 5G is not so substantial. And engineering application of 5G has strong demand. The upside is 1,000,000,000. And for display, you made downward revision, presumably by about JPY 20,000,000,000 is all JPY 15,000,000,000 upside relevant to 5G? Or was there any contribution by the front loaded demand by the entity listing of high silicon of Huawei. I'd like to have more of the quantitative comments on 5G. And you commented on engineering applications, but in your company's track record of demand growth drivers we seldom saw the contribution of R&D phase, but rather involving production phase of same conductors, testers tend to grow. But this time, unlike the previous cases, with engineering demand growth, so notable to deserve description as a key driver. Sorry for causing some confusion. Regarding 5G related businesses, the most advanced 5G baseband and APU products, which required a 7 nanometer based on the latest design rules, are not yet in the volume production phase. But in the engineering phase on the side of customers. And as Yoshida explained, is the technological evolution. Is growing increasingly challenging, and we share that sense. Engineering application require more testers than before. Then you may wonder whether that explains all of 15,000,000,000 yen upside. And actually, that is not the case. Inquiries from high performance computing related customers onborium production nodes have been on the rise. And that makes parts of JPY 15,000,000,000 upside. Then can I take it as majority of JPY 15,000,000,000 is from 5G demand, but it is also supported by HPC? Yes. Borrowing production of AI network related products make contributions as well. You didn't see major growth in LTE Reated Products Digi. Excuse me, what we created, LTE created. Are you asking about the additional businesses in airty related products? Are you referring to the last surge? That was question before? Yes. We don't see the direct impacts, but among smartphone makers, and chip makers who are supplying to smartphone makers. Intensified competition might have pushed up demand. I'm not sure whether that should be regarded as search. South Korean American and Chinese makers are striving to increase their respective market share and seem to be expanding production and accelerating development. I see. As a follow-up question on 5G, in the previous information meeting, you said that net growth of 5G market would be from 200 to $400,000,000. But given the upside of 5G orders this time, though it is an initial stage, Are you going to revise up the previously mentioned $200,000,000 to $400,000,000 of 5G market expansion? Or do you think that this is a growth of short term and the long term market perspective remains unchanged? I said that only in the initial stage, 5G market growth will be $200,000,000 to $400,000,000. As the industry is in the initial stage, our perspective remains almost unchanged from the initial forecast April, but we see some acceleration of the investment, and that was reflected in the first quarter results. 5G related devices will continue to grow steadily over the long term with the expansion of applications. It will continue to grow over years. Industry is not in the volume production phase, but in the production sample stage, we are seeing that demand. Therefore, with device diversification in 20202021, we can expect strong volume growth of device. And we are feeling customers' needs for the reinforced engineering support. Thank you very much. We are So we'd like to close Q And A session with this. Thank you very much for joining us. For FY 2019, the first quarter information meeting despite year busy schedule.