Earnings Call: Q2 2019

Oct 30, 2018

Thank you very much for your participation today despite your busy schedules. It is now the scheduled time to let us begin Adventist Corporation's fiscal year 2018 second quarter information meeting. First, allow me to introduce our attendees for today. Starting from next to the center screen, President and CEO Yoshida. Our Corporate Vice President, Mion Managing Executive Officer, Fujita. And I Nagumo will be serving you as your facilitator for today. To start off, our Managing Executive Officer, Fujita, will outline to you the financial results for fiscal year 2018 second quarter. This will be followed by our fiscal year 2018 business outlook by President and CEO Yoshida. We will then Thank you. I am Pajita. Now let me outline to you our results for second quarter FY18. This first slide depicts the summary of our results. Orders have increased by 7 point point 2,000,000,000. Sales increased by 2.4% quarter on quarter and 52.2% year on year, resulting at 1,000,000,000. Moving on to operating income, an increase by 13.4 percent quarter on quarter versus last year, an increase of 3.5 times resulting in 1000000000. Net income increased by 17 percent quarteronquarterandstands@1000000000 a 4.1 fold increase from the previous year. There have been no major fluctuations in the customer's tester investment and our favorable business environment continued. As semiconductor performance improves, test times are now longer and thus, Results have exceeded our original assumptions. High volume orders continued and combined with the improvement of our parts procurement initiatives, we have recorded a sales increase for 5 consecutive quarters, and we have maintained for 3 consecutive quarters and operating income above 20%. Our FY2018 second quarter quarterly net income margin was a record high. Let me now refer to orders Semiconductor and component test systems increased by 8.9percentquarteronquarter standing at 1,000,000,000. As for SOC testers, advanced application processor testers and display driver IC testers have propelled orders. Memory testers are revamp of orders, especially for DRAM. In the area of Micotronic Systems, an increase of 32 percent quarter on quarter, 12,300,000,000 was attained, Order growth was recognized in device interfaces and test handlers in conjunction with memory testers. For services and others, a decrease of 29.1 percent quarter on quarter, resulting in 1,000,000,000. This decrease is due to the seasonality Let us now look at orders by region. South Korea, 10,400,000,000 yen, In reaction to strong orders for display drivers, ICs and image sensors in the first quarter, we have recognized a slight decline. Memory testers have slightly decreased as well. For Taiwan, 34,300,000,000 yen and both SoC testers and memory testers enjoyed high orders. China, JPY 18,000,000,000, and we see an increase in display driver IC test and memory tester orders. As for sales by segment, Semiconductor And Components systems increased by 6.2%, giving us 54,100,000,000 yen. AssOC testers are progressing smoothly all in all and resulted in an historical quarterly high. Memory testers sustained high sales equivalent to that of the previous quarter. Parts procurement status has improved, allowing us to further expand sales. Nicotronic systems dropped by 3.6%. Landing at 1,000,000,000. Services, support and others, fell 11.9% to 1,000,000,000. This is due to a heightened demand for testers, resulting in a lack of secondhand products and this push down secondhand sales. Let us now look at sales by region. Sales continued to sustain high levels, especially in Asia, where semiconductor mass production sites are concentrated. Our overseas sales ratio in quarter 2 is now 95.8%, a record high. Next is sales gross profit and operating income. Gross margin was 53.6 percent, flat quarter on quarter. SG and A declined to JPY 20,900,000,000 despite our sales increase, the result of cost containment Operating income was 1,000,000,000, and operating margin improved by 2.4. To 24.7%. As for R and D expenses and others, R and D expense was 9,600,000,000, R and D to sales ratio was 13.1%. And CapEx 1,000,000,000. Depreciation and amortization 1,300,000,000. Moving on to our financial position or balance sheet. Total assets amounted to 290,600,000,000 yen, and cash and cash equivalents, 1,000,000,000, an increase by 1,000,000,000. For liabilities, current bonds, a reduction of 1,000,000,000 down to 1,000,000,000. The conversion rate of convertible bonds exercisable by February 2019 was approximately 80% at September end. Equity attributable to owners of the parent was 1,000,000,000. The ratio of equity attributable to owners of the parent increased by 9.5 points to 61.9%. This concludes my report on financial results for FY2018 Second Quarter. Thank you very much. Next, President and CEO Yoshida will explain our FY2018 business outlook. Hello, everyone. This is Yoshida. I would like to describe to you our business outlook for FY2018. This is our outlook for our 2018 calendar year with only a few months remaining. We have closely monitored the negative impact that may be opposed on semiconductor demand due to the U. S.-China trade friction, but up to this point, demand has remained steady. There has been no fluctuation in our customers' to store investment and things are progressing smoothly. We envisage an improvement in market prospects. For SoC testers, we had estimated the market to be in the range of 1000000000 to 1000000000, the same as calendar year 2017. However, we now estimate this to be an uptake of 9% year on year landing at 2,400,000,000 The memory tester market for last year was approximately $750,000,000, And for calendar year 2018, we believe that this will approach the $1,000,000,000 mark. And increase by 33% year on year. Various semiconductors used in end products such as smart phones, industrial equipment, automobile, and display are becoming more and more high performing and thus many customers are enhancing their tester capabilities in the SOC tester market. For memory tester, there have been adjustments in device supply demand balance as well as some customers are restraining their investments. Resulting in a concern that will hold steady until the end of the year, especially for high end memory. As stated in the mid to long term management policy that we announced in ability will present an opportunity for Advantest. I do believe that the 2018 tester market is evolving just in this way. We boast a vast range of products in our portfolio and have a broad customer base. This is an ideal situation for us to capture demand from all directions. If we sustain this With results exceeding our expectations in the first half, we have now revised our full year forecast. Orders and sales forecasts have been raised 1,000,000,000, respectively. Operating income and net income have been raised by 1,000,000,000 and 1,000,000,000, respectively. We plan to post an additional profit of 1,000,000,000 due to advanced test Corporation's transition to a defined contribution pension plan in the third quarter, including the sum, we forecast that full year operating income will be 1,000,000,000. Exchange rate assumptions underlying our second half forecast are to the dollar and to the euro. Full year rate assumptions are to the dollar, Regarding our foreign exchange sensitivity, annual operating income, will rise by 1,000,000 yen for 1 yen depreciation against the dollar and will climb by 100,000,000 yen for 1 year depreciation against euro. Our return to shareholders is based on a half year consolidated payout ratio of 30%. The dividend per share for the first half is and is it expected to be 25 yen for the second half. The dividend for the full year is expected to be 75 yen. Last year, it was making this an increase of from the previous year. Conditions in the fourth quarter are presently very hard to predict. But our new sales forecast is 1,000,000,000, which would set a new annual sales record for Advantes for the first time We anticipate and ROE will be almost 30%. Now I'd like to touch upon FY2018 key measures. Our market share in 2018 which is the 1st year of our midterm plan is likely to be good. We will push forward with our growth strategy so that we can Our midterm plan is focused on improving market share despite market cyclicality. To achieve this, we integrated our Tesla business globally in June. With one business organization covering the whole world, we have strengthened our ability to respond globally to dramatically changing customer test requirements. With this organization as a growth foundation, we will provide test technologies to support future innovations that will change societies such as AI, 5 g, and ADAS. Test needs for ensuring higher reliability are expected to grow further. Moreover, the ramp up of we intend to actively invest in boosting our competitiveness. As mentioned in ground design, the long term management vision announced in April, we plan to not only develop our current core business domain, but also the processes surrounding it, the design evaluation process, system level test, and cloud based test technology using AI. We will utilize the cash we have presently amassed to make growth oriented investments in these arenas so that we can keep up with their innovation. Regarding our production situation, capacity for some products is unable to keep up with customer demand. But it has been stable overall. Going forward, we'll shift focus to efforts to improve cost competitiveness. This page is about FY18 outlook by segment. First, SoC testers outlook. Smartphone unit growth is slowing down. But it is important to note that the increase in the number of semiconductor devices and end products using them is not the only driver for tester demand. This year, our SoC tester business has benefited broadly from Sinconductor Technology Evolution And Change. In 2018, Performance Improvement And Father Miniature of semiconductors used in smartphones and AI servers has progressed. As a result, reliability needs have expanded. Additionally, test complexity and test times have increased. Demand for display driver IC testers has been strong since last year, and it is also expected to sustain its current momentum As an example of change in the Tesla market, customers are taking test even more seriously than they did before. The background to this change is greater public demand for reliability assurance. Next is about Memory testers business. Demand for DRAM testers is expected to remain stable due to strong data center related demand. For nonvolatile memories such as NAND, demand is expected to decline in the second half compared to the first half. Nonetheless, this decline is broadly in line with our market estimate back in April July. We believe that adjustment of investments in memory testers due to memory market declines is inevitable but will be limited. We do not expect to see a big decline we experienced at certain times during the last 20 years. Multiple new memory fab construction projects are planned and will be completed from 2019 onward. Challenges around increasing the capacity and speed of various All of these are positive factors for memory tester demand. We also expect a certain amount of demand for tester replacement to improve production efficiency. Next, let me briefly explain, electronics, services and others. In a electronics business, a demand for test handlers and device interfaces which have close correlation with memory testers was strong in the first half we expect second half demand to continue at a similar level. In our services, support and other segment field services are strong. Our leasing and secondhand sales business is sluggish, but we anticipate that growth in service revenues will compensate for it. And sales in mechatronics systems and services, support, and others will be higher than fiscal year 2017 results. Last page is summary. The 2018 Tesla market has been robust beyond our estimates. Both SSE testers and memory testers delivered significantly improved results in the first half. As a result, we have raised our forecast for sales and earnings for the full year. We see a possibility of achieving a new annual sales record. Measures to strengthen our customer base and our product portfolio strategy are aligned well. To make it possible to increase strategy for the medium to long term. Although this year's business environment is favorable, the Tesla market will likely continue to go through phases of demand increase and deceleration as in the past However, the size of these demand waves has changed a year and a half ago, we stated that we saw signs of change in the Tesla market in this meeting, and those changes are now becoming a reality. We believe the reason for that is diversifying applications for some conductors in the past. PC demand fluctuations, re pulled through to the test market in an amplified form. Greatly affecting the demand for testers. That business structure is no longer existing. Also, the public is demanding and customers are seeking to provide greatest and conduct a reliability. Under these new circumstances, advanced test platforms, which can capture test demand from all kinds of semiconductors not only give us an advantage in terms of capturing growth opportunities, but also reduce the impact of fluctuations on our results as the ground design shows, we believe we can expand the fields where our company contributes to the same conductor value chain. Therefore, we still have many things to do. It is important to enhance our internal infrastructure to support further growth. We will invest in technology and human resources enhance our value creation capabilities and strive to sustainably expand our corporate value. That is all for my presentation. Thank you. Now we would like to open the floor for questions. We will call upon you This is Wadaki from Nomura Securities. First, let me congratulate you on your wonderful performance. Your memory performance is almost reaching the memory bubble level. That is my impression. So let me confirm first the breakdown of your revised forecast. You have increased SoC tester sales forecast by 1,000,000,000. What are the driving applications for this uptake and This way driver IC testers seem to be prevailing all around. It is also assumed that this will be strong next year as well. So how do you analyze this strong growth for SOC testers? So this will be my first question. For SOC Business, as I've mentioned previously, 10 nano products and 7 nano products are expanding and higher reliability is in demand, meaning more test items and longer test durations. Yield stability is required, and this demand far exceeded our initial expectations. Namely for smartphone application processors and baseband processors. In other words, embracing new technology such as AI has increased test items and business is striving as a result. For display drivers, as our President Yoshida just mentioned, growth has exceeded our expectations and currently, we are seeing strong growth in TDDI This market is expanding and applications are broadening, leading to stronger demand. This is not just limited to smartphones, but also for 4K TV, and we anticipate that this So how do you foresee this market? Now more and more Chinese companies are becoming anti America and OSATs seem to be breaking away from China because if tests are performed, they will be taxed. So again, how do you analyze the China market and are recent trends a business opportunity for you or a threat? In light of the trade war between the US and China, obviously, everyone is concerned and it will suppress global economy so that in itself is one concern. Now when we speak, to our customers in the Chinese market. Within made in China 2025, the intent of this concept is to enhance localized resources. But if the trade war heightens, there is a risk that manufacturing devices themselves cannot enter the Chinese market any longer. Which would be an extremely dire situation. And at some point, some kind of compromise hopefully can be made. Now the various activities of OSATs in China, one of these activities is about catering to the Chinese players themselves. They have begun to leave China, but it's not that they are returning to the US or perhaps going to Europe. Taiwan, Malaysia, Singapore, the Philippines, Asian regions is where they are headed. These are all areas that we already operate in, and so there should be no major impact for us. Thank you. Now for expectations for next year, how the markets will evolve and any quantitative outlooks will be difficult to ascertain because the markets are ever fluctuating. So I would like to ask you about qualitative expectations. Memory business will go through adjustments, but nothing significant. For associates, you have 5G along with TSB that will ramp up So where specifically are your expectations in preparation for next year? Forecasting the market and volume for 2019 is difficult, but for our business opportunities, for SoC, the expansion of 7 nano products and in light of 5G services starting, we can expect base station RF chip markets ramping up in 2019. We at Adventist have already developed a solution for this, and we do have strong expectations for this market. Now for memory, in one company, DRAM 1x generation is the mainstream, but they will migrate to 1y. And in another manufacturer, they are accelerating their migration from 2z21x For NAND, QLC 96 stack products, the original plan was to begin mass production in the second half of twenty nineteen. But this will probably be pulled in to 2019 Q1 or Q2. And this will mean longer test times and this will revamp demand for us as well. So can we assume that 2019 will be a strong year for you as well? That is the current expectation, although outlooks can be difficult. This is Hiroa Kawa from Merrill Lynch. I have three questions. First, you originally anticipated a decline for orders in Q2. So to what extent was the uptake in comparison to your original plan, and the breakdown along with the nature for SoC orders, and this is mainly for smartphones. An increase of approximately 1,000,000,000 versus our assumption is where we stand. Memory testers and mechatronics. I do not have the numbers with me now, but they also exceeded our plan. As for sales, this exceeded about 10% over our plan. My second question pertains to the fact that orders for China are growing by 1,000,000,000 in comparison to previous terms. So again, the breakdown as well as your views on the continuity of this growth trend. In driver new market distribution. And this was a question before, but a new memory fab launch. Now although this is a pilot launch, this derived a demand, Now Korea on the contrary has declined in Q2 in reaction to the strong demand in Q1. This fab pilot in China, is this for local players? Yes. Both NAND and DRAM are included, I believe. And your thoughts on continuity. 2 new fabs for DRAM are currently being planned in China, the pilot line is in operation and products are being manufactured. We understand We are seeing test demand as a result and believe that from the second half of twenty nineteen, activities will further stimulate. As for NAND, this has already been announced in the newspapers. 32 stat products have emerged and 64 stack products will wrap up production towards the latter half of twenty nineteen. And in which we believe will drive business demand for us. Thank you. And my third question, for year ending March 2019 for associate tester orders or sales, if possible orders, Can you please give me a breakdown by application? And if possible, an outlook for year ending March 2020 as well. For full year basis, We estimate communication and high performance computing account for slightly more than 50% of SOC testers. MCU, analog, and sensors would be slightly over 10%. And display driver, I see testers could be about 30%. SoC testers were a business driver for the previous fiscal year, and it is expected to increase market share It is difficult to make an accurate forecast for the next year at this moment, but we anticipate strong demand will continue Although the orders for Automotive And Industrial Equipment could be affected by Global Economy and decreased slightly, We anticipate the proportion will not be very different from this year. Thank you for your presentation. I'm Yoshida from Deutsche Bank. My first question is about mobile SoC. What is the ratio of chips with AI function in the total application processes? Do you expect the demand for mobile SoC testers will continue to be high in next year as such chips increase? I'd like to know what your expectation is and your market outlook. The answer should be separately provided between 10 nanometer products and 7 nanometer products. Function started to be applied to new 10 nanometer products in 2018. In 2019, 7 nanometer products will be the main stream. And based on this assumption, it is certain that they will carry AI function and become multi functional. We have high expectations for it, which will lead to more complicated tasks with more test items Tester demand has repeated 2 year cycle of ups and downs so far. And as this year is with high demand, usually, the following year will have lower demand, but as AI functions is becoming common, do you think such a regular business cycle is not applicable, and you don't have to worry too much about the demand or decrease and you can continue to grow the business. Demand cycle is related to process evolution, 28 nanometer products were launched 5 years ago, followed by 14 nanometer products 2 years ago. And 10 nanometer products became available last year. With such miniaturization, smartphone manufacturers are now making great efforts to introduce AI functions into processes for smartphones, and we anticipate this trend will continue. My next question is about 5G. Your competitors are commenting on expected market size of 5 g, and they say it would start to contribute to their business in 2020 or later. You're expecting demand in the area of 5 g base stations for next year, So can you share your current forecast on the 5 g market size from next year onward? Also, do you think your 5 g business will take off earlier than competitors can you tell me the relationship with your customers who will support your position in the 5 g market? To be honest, I have no idea about tester related 5 g market size now. Having said that, in the second half of twenty nineteen, 5g Smartphones or 4g5g dual mode smartphones will be launched. But base stations are needed to be built first to use 5 g smartphones. We expect to see such demand for 5 g base stations in the second half of twenty nineteen. Full scale market activities will probably start in 2020. We have already developed testors with solutions patients for growing market from 2019 onward. What is your market share in RF testers for base stations. For 4G system, our market share is over 80% in testers to test ships used for base stations. We intend to continue to be strong in the 5G market as well, with a large market share. Any other questions? I'm Damien Tong from Macquarie Securities. I have one question. I suppose the 3rd quarter is the bottom for orders and what do you expect for the momentum in the fourth quarter about SOC's testers and memory testers. In the 3rd quarter, SSE is expected to be strong. In the fourth quarter, according to the past trend, demand tended to increase because customers start to execute their new fiscal year budget. I'm not sure If such seasonality will be followed this year, but it is our expectation to see such seasonality, as usual, this year. How about memory's flat growth is expected? Our expectation is SOC will be strong in the 3rd quarter and memories will be strong in the 4th quarter. I am Hannahya from SMBC Nikko. I'm sorry if you already explained about it, and I just missed the information. But let me clarify one point about actual orders. I'd like to confirm if you received pull in orders. Can I assume the second half forecast is conservative because you considered the seasonality and the front end process of memories? I mean, after such strong order status in the second quarter, orders in the third quarter would slightly decline. The orders we received now are not pulling orders. This is simply because of longer lead time, some products take 4 months for delivery recently instead of 2 months in the past. Therefore, customers place orders early for such products considering the longer lead time. We do not see them as pulling orders. Rather, it should be considered that we are receiving orders early for longer lead time. Usually, orders hit the bottom in the second quarters and sales hit the bottom in 3rd quarters, but the recent situation is completely different from such a conventional pattern the reason for this is that Semiconductors are using wider variety of applications, and it seems there is less seasonality of demand for testers. Did I answer your question? Yes, thank you. Any other questions? I am Agata from UmJ. I have one simple question about production. Currently, your GoodMaths factory is operating at full capacity. And do you consider to build a new factory or as they read the newspaper report that you started to use EMS. Can they fulfill your production demand? Also, is there a possibility to increase overseas production? We have enough production capacity, which could support 70,000,000,000 cells in the 1st and the second quarters. Let me give you the breakdown. OLV 93,000 SSC testers are produced by overseas EMS. Memory testers and P2000 have been produced in Guuma area. But in order to address the increased production demand, we started active use of EMS in Japan as well. Therefore, even if we face production capacity shortage in the future, we do not have to rush to build a new factory. As we are able to address such situation with the help of various companies. As for overseas production, Assembly of some products and production of handlers are done in South Korea. It is a new factory so there should be enough capacity to increase production. Our intention is not to pay high fixed costs for production. And we will make full use of EMS. Thank you. This is the end of the Information Meeting of Adventist Corporation for the second quarter of scale year 2018. Thank you very much for your participation.