Earnings Call: Q1 2019

Jul 25, 2018

Thank you for attending our meeting in your busy schedule. It is at the appointed hour and we would like to start the Information Meeting for Adovantas Corporation for the fourth quarter of fiscal year 2018. Let me introduce attendees from Adventist here. In front of the central screen, you'll share Tiyosidah, the Deputy Director, Director, President and CEO, I'm Mion, Corporate Vice President and Executive Vice President. And Fujita Managing Executive Officer and Executive Vice President. And I am Nagumo, the M3 for today, At the end of turn, I took the Office of the Head of Corporate Relations Group, nice to see you all. And first, our Managing Executive Officer, Mr. Fujita, will talk about the financial results for the first quarter of fiscal year 2018, followed by the full fiscal year 2018 business outlook by Mr. Yoshida. Then we plan to entertain your questions. We scheduled to end this meeting at 5 pm today. Mr. Fujita, please start. And this is Fujita, nice to see you all. I would like to talk about the financial results for the first quarter of the fiscal year 2018. In the fourth quarter, the semiconductor market continued to expand across a wide range of fields and performance improvement trend especially in high end products, also progressed laboratory. Against this backdrop, semiconductor manufacturers continued actively invest in testers, creating a favorable business environment for Adventist. Our strength is our customer base, utilizing the strengths, we continue to receive many orders from a wide range of customers in the 4th quarter. And we achieved 17,600,000,000 in orders. Also, this is a decrease of 1,000,000,000 against the fourth quarter of the fiscal year 2017, However, it surpassed 1,000,000,000 year mark. The readout is very strong. And excluding the previous quarter, this is a first time since the third quarter of fiscal year 2005 that we have suffered 70 and we continue to receive robust orders. Sales was 1,000,000,000, increasing for our 5th consecutive quarter since the fourth quarter of the previous year. The gross margin was 1,000,000,000, and the rate was 53.9%. While this was a 1.8% decrease quarter or quarter, it remained strong. We controlled the total SG and A to achieve billion in operating income. The operating margin exceeded 20% at 22.3 percent for a second consecutive quarter. Our income before tax was 1,000,000,000. Net income after tax was 13,900,000,000, and net income margin was close to 20%. At the Bantest adopted IFRS 15, leaving you from contacts with customers in fiscal year 2018, and the adjustments were applied at the beginning of the fiscal year and the impact on our backlog was negative 1,000,000,000. As a result, the backlog has the end of the 4th quarter was 1,000,000,000. Foreign exchange rate applied were 8 to the US dollar and to the euro. And here, I would like to touch on the remaining of the business domain. Until now, we lastly divided our semiconductor test equipment business, into 2 domains based on the types of device supported, non memory and memory. In consideration of the university of the names, We renamed these domains in fiscal year 2018 for Xi and Memory. There's no change to the target market for our SOC tester products and memory tester products, respectively. In the narrow sense, it's for CE refers to systems on chip devices, integrating various types of IPs. But we will use it as a acronym for non memory. In advanced usage, it source sheet is broadly defined to include logic ice sheets such as MPUs and GPUs communication devices such as baseband processes. MGUs, analog ICs, sensors, optical devices, display drivers and so on. Memory tested, specialized in testing DRAM and known volatile memory, such as NAND. The first quarter orders by segment, the total was 1,000,000,000. And the breakdown The semiconductor and component test systems was 1,000,000,000 When we break them down further in green and yellow on the right hand side, FOC testers 41,800,000,000, our memory testers was 11,800,000,000. So she testers at 1,000,000,000 posted record high quarterly orders. The background to this achievement was the qualitative and quantitative changes in the semiconductor market. Particularly in application processes, which are the core component of smartphones, miniaturization and incorporation of AI Chips. Is driving performance evolution. This leads to enhancement test complexity and longer test times, boosting demand for testers. And orders for SoC testers who are also driven by customer investment in a wide range of areas including Automotive, Industrial Equipment And Consumer Products. Memory test orders appear to have shrunk due to a large number of advanced orders posted in the previous quarter. There was no sense of deceleration in reality, and we received solid orders for both DRAM and non brought our memory. For mechatronic Systems, it decreased 34 percent quarteronquarter@9.4000000000 device interface orders for instead with memory testers and non technology product inquiries was sluggish. For services and others, we saw 31 percent decrease at 1,000,000,000. As many maintenance contracts were renewed at the end of the previous fiscal year, this quarter saw a decline in contrast. And orders by region, in Taiwan, where the test demand for application processes using smartphones increased we saw increase of JPY 9,800,000,000 to JPY 33,900,000,000. Meanwhile, in South Korea, there was a decline in memory test orders in reaction to a large number of advanced orders received in the previous quarter, and it was down by 1000000000 to 1000000000. On the sales by segment, the total sales was JPY 70,900,000,000 for the 4th quarter, While the trend is for the 4th quarter sales to fall below the previous quarter, however, this 1st quarter showed great strength as sales increased quarter over quarter. And the semiconductor and component test systems increased from 1,000,000,000 to 1,000,000,000, of which a source of testers accounted for 1,000,000,000. SOCI testers maintained high level of sales of the previous quarter, principally in the application process and high end logic IC segment. For memory tester cells increased overall. In addition to continued high DRAM tester cells, Sales of non brought down memory testers increased even farther from the previous quarter, and the sales was 1,000,000,000. For mechatronics Systems, with 11% increase quarter over quarter, it was at 1,000,000,000, for service and others, it was JPY 8,900,000,000 with 5% increase. And the sales by region Sales were high, primarily in Asia, where the semiconductor volume production processes are concentrated And as a result, Adventist overseas sales ratio in 4th quarter was as written at the bottom. It was at 9 t3.5%. On the sales growth profit and operating income, there was a change in product mix. And the gross margin was negative 1.8 points quarter over quarter@53.9percent However, we continue to maintain high level. For SG And A, was a negative of 1000000000 quarter over quarter. And at JPY 22,400,000,000 and administrative expenses such as R&D expenses were low because this is the beginning of the fiscal year. And operating income was 1,000,000,000 yen@22.3percent. And decreases in SG And A compensated for the decline in the gross margin. And next is R And D Expenses CapEx Depreciation And Amortization. And R and D expenses for the first quarter was 1,000,000,000 accounting for 12.2 percent of the sales. And CapEx was 1,000,000,000, and depreciation and amortization was also 1,000,000,000. And the balance sheet for period ending June, Sardin, the total asset was 1,000,000,000, Cash on cash equivalents with 1000000000 increase from the end of the previous fiscal year at 106,400,000,000. Bonds and current liabilities was at JPY 24,700,000,000. Conversion of the convertible bonds maturing in February 2019 progressed and reduced by JPY 5,300,000,000, and the conversion date was at 17.17%. Equity attributable to owners of the parent was JPY 142,500,000,000. And the ratio of equity attributable to owners of the parent increased by 3.4 point to 52.4% and that is all for the financial results for the fourth quarter of 2018. Hello, everyone. This is Yoshida. I would like to talk about business outlook for fiscal year 2018. First, regarding the tester market, which is a foundation for our business, our figures from 3 months ago remain unchanged. And half of the calendar year is over and semiconductor demand is steady, we estimate that there will be no significant change in customer investment schedule. While the media has shown concern for modulation in Semiconductor equipment investment, We believe that tester investment will have no impact and as originally anticipated, it will materialize within the year. The associate tester market in the first half of the calendar year saw booming demand for testers. For high end logic ICs used in AI servers and testers for smartphone processes. Associ tester demand typically declined somewhat in the second half of the calendar year. We expect to see the same seasonal trend this year, but a Sochi tester investment is expected to hold steady in areas such as smartphones, industrial equipment, automotives and display related devices. Our outlook for memory manufacturers investment ranges and schedule is not greatly different from what it was 3 months ago. Demand for premium DRAM and non brought out memory used in servers is solid and we expect investment in testers will be carried out accordingly. Although we cannot yet predict the size of the Tesla market in 2019, we expect that the 5G smartphone market to start ramping up. Regarding 5G Smartphones, baseband Processors and RF Components that managed communication processing will be enhanced. The impact of 5G also goes beyond that. In order to handle massive high speed data processing and data generation inside the smartphone, all semiconductors used in 5G smartphones will need to cope with higher speeds and shorter latencies. And there will need to be more semiconductors in each device. And in addition to associated semiconductors, memory device will also need to have greater capacities and higher speeds. We see the possibility of a new wave of demand in the tester market from 2019 to 2020. Next, I would like to touch on fiscal year 2018 forecast. As stated in our new meet and long term management policy announced in April, higher demand for semiconductors that require better performance and higher reliability, aiming an overall expansion of the semiconductor market present an opportunity for Adventist. We believe that the progress of our orders and sales is a sign that the tester market is moving in line with our predictions. Under the mid- and long term management policy. In the fourth quarter, we progressed was our full year forecast as follows, sales, 30.8 percent and operating income 45.8% and net income at 50%. If these trends are sustained, we believe that our current year 2018 market share may improve considerably year on year. However, there are certain factors that could have a chilling effect on the global economy such as trade friction between the US and China. Therefore, we need to keep an eye on those trends as we have concerns. Therefore, the progress has been very strong But considering the second half of the year, we are keeping our earnings forecast for full year unchanged. And there certainly some lack of visibility for the future. But for the present, our business environment is vibrant. And if the world economy and the same conductor industry do not undergo significant shocks in the future, we think it is possible that we will achieve our current forecast for the year. We will aim for further business growth with the goal of revising our forecast upward. Next is fiscal year 2018 Key Majors. And first, we need to improve supply capability to support the business expansion. Although our product supply capability has been improved considerably compared to 1 year ago, we still see some issues with component procurement where we cannot deliver products as fast as customers would wish. And we will continue to make efforts to secure enough components. As I made a long term growth initiative, Our business related to semiconductor testers were reorganized or concretely integrated after the General Shareholders meeting in June, and it formed 1 global organization called ATA Business Group. Looking into the future, new devices going beyond conventional concepts, combining various technologies such as memory, SOCI, AI and software will be launched. We will make a company wide effort in providing test technologies to complement such trends. By taking this bold move with our development resources around the growth, including Japan, Germany, Americas and Asia, we have built a framework to provide new solutions. This framework will be the foundation of our growth over the next decade. Our investment outlook, such as CapEx, R And D And Amortization, remains unchanged. From our initial plan. And fiscal year 2018 outlook by segment, fast about associate testers. In 2018, Semiconductors used in smartphones and AI servers are gaining higher performance and becoming more meteorized. Extinct test times are making test more complicated. This is boosting demand for associate testers. Although smartphone unit growth has slowed, handset performance is consistently improving in all segments from high end to low end along with that performance evolution of the semiconductors used in smartphones and increase in the number of semiconductor device continues. Let me emphasize this point again. Advante's strength is our base of customers in every tier involved in the semiconductor market. Regarding smartphones, we are in a position to capture tester demand regardless of which products take off. This has led to record orders for associate testers since the fourth quarter of the previous fiscal year. And will continue to deliver results in the future. The environment is also favorable for automotive and Disparated Semiconductors. Especially in the Disparated segment, in addition to higher power definition, testing is becoming more complicated as display driver ICs continue to incorporate touch sensors. These factors contribute to maintaining the momentum of the massive wave of demand. And about the memory testers, sales prospects for memory testers remain unchanged at 1000000000. Earlier, the market size for memory tester for the current year was shared as 900,000,000 US dollar or about 100,000,000,000 yen And while our self outlook is about 1,000,000,000. And in DRAM, due to strong demand for Saba DRAM, demand for backend DRAM testers is increasing and investment is expected to hold steady. Tester investment for volume production of 3d NAND for 64 layer and 72 layer fresh and investment in burn in testers to ensure the reliability of NAND are also expected to hold steady. And even if there should be adjustments in memory Chester investment, we believe these adjustments will be short term and growth will return in the medium to long term. For megatronics, service and others, outlook in our megatronics business, demand for memory handlers and device interfaces with high correlation to memory testers is expected to increase. In our services, support and other businesses, the leasing and secondhand sales business will decline. Due to a shortage of secondhand testers and abundance of customers with ample funds. However, we anticipate that the growth of SSD testers can compensate for this. And in summary, 2018 tester market outlook remains unchanged from the initial plan, as I mentioned. And the technology will not stagnate. In addition to 5G, there are many other events likely to expand the semiconductor test star market in the future. And semiconductor applications are also expanding. Even if the Tesla market should hit a stagnation phase in the future, we have confidence that that adjustment will not be prolonged and that advanced test will continue to grow as semiconductors become more complicated. And sophisticated and the semiconductor supply chain evolves. I personally believe, and I'm proud of the strong results for the fourth quarter. And in order to capitalize on the above growth opportunities, we will continue to execute necessary measures with short term, midterm and long term perspectives. Now, Siba, not least, We believe that it is also necessary to be aware of the rise of prosecutionalism and trade friction between the U. S. China and other countries. We have adapted to rapid market fluctuations as a company that in the event of change in demand or unfavorable direction of politics, we will continue to be poised to react to such changes. Therefore, we will manage the company with that in mind. And start all from myself. And thank you for your patience. Now we would like to entertain your questions. Please raise your hand and I will name the person and also please can Kindly state your name and company name before asking the questions. Thank you. My name is Wadaki from Nomura Security. Thank you for sharing the information today. Despite the strong first quarter results, the full year outlook remains unchanged. Your message was that you are being cautious, but I need some assurance. It was a good result to anyone's eyes, What was the driver for such good performance for the 4th quarter and any concerns you may have for the 2nd quarter and later? And you think that the performance too well to raise a concern for the future? Yes. If you say that we are being conservative for not changing the full year outlook upwards, yes? And it may sound like that. But the announcement was made just in April and the backlog was about JPY 80,000,000,000 at the start of the fourth quarter. The progress was, as we expected, and the second quarter will go as we planned. Any concerns we may have other than the slowdown of the global economy from the trade friction between the China and the US? We have not been able to address all of our customer demands due to shortage of components. Therefore, posting of sales may be delayed However, the final numbers will depend on the performance of the SAAR and the Fourth quarters. Therefore, after the 2nd quarter, By the time we meet again, we should be able to give you more concrete outlook. And the driver for good performance in the fourth quarter, what went better than you expected? Than the memory continued to perform well since the fourth quarter of fiscal year 2017. We have continuous business and saw orders above 1,000,000,000 for the last two quarters. In addition to that, you may think that the memory business has lower profitability but actually, that's not the case. The backend testers can generate higher profitability rate. The ratio of the back end testers has been increasingly greatly against the front end since the fourth quarter. And the trend will continue until the end of the year, but it's a reason. And I would like to challenge you with a risk factor. For example, Samsung pushing out DRAM investment has been a hot topic in the industry. It depends on the timing and your orders were probably not affected by this. But do we not have to be worried about this? There may be some impact later and also about B93,000 for China smartphones. The market is placing a lot of orders to make quick money before Apple launches a new smartphone. There has been a concern that it may slow down moving forward. Are you taking any measures for this? And we will be able to handle this. As explained earlier, for DRAM investment in wafer tester is completed in the last fiscal year. The demand is now towards packaged testers. Our main product T5833 can be used for both core tests. And wafer test. The delivery date issue are mainly with those key products. But we do not have a sense of decline in the demand. Premium DRAM are performing well among our customers. We see a trend that the number of testers is going up because of longer test time and higher reliability required in such premium products. Therefore, we are not worried too much about the future and believe that the demand will continue to increase throughout 2018, including system replacement. Next is about China Smartphones. Yes, and the reason why our business boomed is because of the increase in production of high performance APs. Demand will increase for testers for high performance APs used in smartphones. Those APs require longer test time and still have room for yield improvement. Therefore, we foresee favorable board condition for the 2nd quarter and the full year 2018 despite some slowdown in the start When you expect that high speed, fresh memory and non volatile memory business will have a kick start as you have been talking about for quite some time? And some vendors are about to launch foldable smartphones into the market. Do you see any new demand emerging such as driver IC related to this? I think you're talking about 3 d cross point Looking at the device road map, the pace of acceleration was faster than expected, and the requirements for 6 gig or DDR5 or above level speed. Our key product T5833 can support the speed Therefore, we see the demands. We do not know if the wafer for 3 d cross point has actually increased or not. But there is an upward trend, and we anticipate that the electronics devices, including PCs, integrating this technology will increase from the second half of this year. And this will lead to stronger increase in demand. In testers, including burn in testers. For display driver ICs, we foresaw this 2 years ago, one chip support, including the touch sensors, has advanced and the demand increased roughly. The package type has also changed from COG, Chipon Grass, to COF, Chipon film. COF is taking over COG, and disgenerates need for packaged testers. The main product has been used in the bumping process. Front end process. But moving forward, the transition to COF generates demand for packaged testers. Along with one tip, with touch sensors, require longer test. 20182019 will continue to have good demands more than we expected. Thank you, and that was very helpful. Thank you. My name is Mauryama from JP Morgan. Mr. Yoshuda mentioned that the first quarter was as expected and so would be for the second quarter. It is about orders on Page 5. How about the sales and operating income? Since operating income was so low, it was better than your plan. Could you please clarify Are you asking if I meant the orders would progress well for the 2nd quarter? Yes. And it was more about sales in relation to operating income. Backlog was over 1,000,000,000 at the beginning of the fourth quarter, we had 1,000,000,000 of orders for the first quarter. In order to address this, the delivery target is somewhere around September October. Therefore, there are many orders to September. The concern is if the production can catch up with the orders. Thank you. That means sales was as planned. 1,000,000,000 orders was good against the plan probably around 1,000,000,000. And for orders, it overachieved the plan for the 1st quarter, Since we received over JPY 15,000,000,000 of advance orders in the fourth quarter of the fiscal year 2017, we did not have high expectation, but we had orders above 1,000,000,000. Thank you. And for orders, you always have a breakdown on the right hand side of the page 5 to help our understanding. Can you help me understand which ones had more fluctuations? The memory testers in green changed from 30,900,000,000 in the 4th quarter. To JPY 11,800,000,000 in the 4th quarter. What other ratio for DRAM and Flash for the 4th quarter? And if there are any other major changes, Comparing the 4th and the 4th quarters, it may look like a huge shrink. As it was mentioned in the earnings call last time, memory manufacturers who have concerns over the delivery date pressed or advanced orders. It was about 1,000,000,000 back then. And this could have cited to 1st quarter. Despite that the first quarter had additional 1,000,000,000, which is greater than the first quarter of the previous year. And the breakdown for orders was about 50 to 50 up to the 4th quarter, but we currently see the stronger DRAM. Thank you. And how about SOC testers that saw increase from 1,000,000,000 to 1000000000. What was the biggest contributor for this? The greatest driver is believed to be APs for smartphones. So she has a wide range of applications, and it is not just about B93,000. We have T2000 platform that can handle automotive semiconductor test and display driver test. These all performed well in total. As Mr. Hojita mentioned, Esokim marked the record high orders as Adventist. Thank you. Lastly, DRAM TESTA T5833 is expanding. How about T55 or CHS? They are speech test and cordest. And the core test takes the most time. That is pushing up the unit of T5833. The unit of T55 or 3 HS for speed test has not increased greatly. But profitability per unit and the unit price are high. Therefore, it is contributing to our sales and profit. This is Hilakawa from Merrill Lynch. Thank you for your time. I have three questions. The first one is that the gross margin for the Q1 was 53.9%, a reasonable level. Concerning the good performance for testers for smartphone APs, it was low. Could you tell me the reason why the gross margin went down against the fourth quarter of the fiscal year 2017? And if possible, please share the outlook for the 2nd quarter. Comparing the 4th quarter and the 4th quarter, Associ itself itself did not change much, and you may find it all that the gross margin dropped so much. The memory went up in terms of ratio. Therefore, the overall margin goes down. Also, profitability default by Esoc testers. Within Esocs in yellow, some have better profit and others do not. How I see the gross margin of 53.9 percent is up. This is just a comfortable level with the volume of memory test systems now. As you see in the table, on Page 9, the first quarter 2nd quarter of the fiscal year 2016, We hardly see any sales for the memory. Rather than setting our target at a specific rate, sales multiple by profitability results in absolute number, and this is more comfortable for us as a company. And how about the 2nd quarter? For the 2nd quarter, sales ratio for memory and SOC will stay the same. Therefore, the same level of gross margin can be achieved. Thank you. And the second question is that It is rather repeating one of the earlier questions, but good performance of associate testers in the 4th quarter. What is the incremental value? Is it because the market is boosting or because of other bounced orders? We talked about tough delivery date. Until fourth quarter, it was more about memory. Memory requires many individual components. And when one is not procured, that could be a bottleneck. When we have so many Esauce test system orders, we see the lead time stretched a little, but we do not think that the orders were made in advance Some customers place orders to be delivered before September, even now. Therefore, we don't believe there are advanced orders for Esocis. As for Esoci, smartphone APs and TDDI are pushing the demand. What is the incremental benefit you got against the initial plan? Against the initial plan, for SoC, it was roughly 1,000,000,000 to 1,000,000,000 above the plan due to smartphone demand. On the third question, SSD tester you mentioned towards the end, it has been penetrating into the enterprise market as hard, do you see any progress in the consumer market? For consumer, the strongest company is in the US and their platform is based on Adventist. It has been flat at the moment. We still have time, so we would like to entertain the last question. My name is Aritomi from CLSA Securities. Mr. Yoshida mentioned that the U S and China trade conflict is one factor that you need to keep your eye on. Of course, it poses risks such as the global semiconductor demand. However, how about opportunities you see? I was expecting that orders from China may see some increase from this quarter. If possible, could you tell me that you have any inquiries from customers? You did not have any business with before? As for an opportunity, we have long seen China as an important market. If you look at the sales by region, China is after Taiwan And South Korea. And the Fabrice Companies conduct tests in Taiwan, not in China. Currently, we are deeply engaged with the China market. Compared with our competitors. The biggest risk we see here is the slowdown of the global economy. We are committed to work hard as the time market kicks off and we believe that we are well prepared for this. We are fully aware of the opportunity and we have built good relationship with many customers. Therefore, we are not worried When China fights against the U. S. Over trade, the Chinese customers may stop buying products from the U. S. And we do have competitors in the U S. That might happen, but we do not rely on that. We are winning the game plan square, and we want to deepen our relationship with Chinese F Sochi customers. For memory, it is a developing phase. And many people say it will take time. But as the memory test platform we would like to put our utmost effort to develop the market. There are many opportunities and this will not be abandoned because of the trade conflict. And we still have some time, so we can take one more question. The gentleman at the back. This is Yoskawa from Morgan Stanley. One question. Associate testers for smartphone APs showed robust performance, complexity of functionalities performed at this time, as you mentioned. The strong orders for this quarter suggests there were some triggers in demand rather than organic changes. If you know any specific functionality that are causing the longer test time in AT's, please let me know. Smartphone manufacturers are trying to integrate AI functions into APs for new products. That changed the AP design. So we do not know the details. Along with that, the test time became longer and yields have changed due to miniaturization of the process. And this resulted in our business performance. It is gaining much attention that the new smartphones from the Chinese manufacturers who adopt 3 lens cameras. Is it related to AP test demand? It is the domain of the image sensor and not related to Adventist. Thank you.