Renesas Electronics Corp

TSE:6723

Earnings Call Transcript 2021-Q3

[Operator]

Hello all, if you would like to hear this session in English, please click the globe icon on the bottom and select the English channel.

Thank you very much for joining us for Renesas Electronics 2021 Q3 Results Presentation Session despite your busy schedule. And today, this session will be simultaneously interpreted. Please click the channel at the bottom of this screen.

In attendance today are Representative Director and CEO, Hidetoshi Shibata; Executive Officer and CFO, Shuhei Shinkai; Executive Officer and Head of Automotive Solutions Business, Takeshi, Kataoka; plus other staff. CEO Shibata will say a few words of greetings in a minute, and then CFO Shinkai will explain Q3 results, which will be followed by a Q&A. In total, we will have 60 minutes. Presentation materials used today are the same ones -- same as the ones uploaded on our website.

Shibata-san, please turn on your microphone.

[Hidetoshi Shibata, executive]

Hello, everyone. This is Shibata, CEO. At this time, there's a bit of a news that I'd like to introduce at the outset. First, in August, we were able to close the Dialog acquisition and so that is now consolidated. And so therefore, it may be difficult for you to really see the continuity of the numbers and so this is something we'd like to explain during the presentation. And if you have any further questions, please do raise so.

Second, maybe you have already seen our slides, but then there is an increase in channel inventory this time. I do believe some of you would want to know more about that. And so therefore, we did have -- we do have a slide to explain more about the channel inventory. Now as a conclusion, there is nothing for you to worry about but then there is an area where we do want to pay attention to. And so that is also something that we hope to be able to offer explanations so that you'll be able to have more understanding. But at any rate, it is not something that you would have to worry so much.

And then also, we also do have a slide of order backlog. And this is sort of related to the channel inventory, but the numbers coming from Dialog, we still do not have the full set of numbers at this point. And so we do have the order backlog numbers from Dialog. But then when it comes to this -- the programs to secure the orders for Renesas, this is something that is to be completed in November when it comes to the numbers with Dialog. And so the numbers that we have for order backlog, some of them is still under analysis. And so you would have to be careful.

Now at Dialog, there's a lot of engineering culture, and this is something that I have shared with the analysts. But then perhaps on the other hand, when it comes to sales and supply chain, I think I would say perhaps Renesas do have a bit of a lead in that sense. But then now that we have been able to integrate the company, we hope to be able to better the integrated company.

And also, we do have, towards the end of the presentation deck, at this time, we have also acquired an Israel -- Celeno [indiscernible] WiFi chipset company. We have also made an announcement of this acquisition. This is something that I have been saying for the past, but when it comes to connectivity devices, there are a little more that we'd like to add to the portfolio. And so I have been saying that and the acquisition of Celeno does supplement our initiatives in that sense.

And so that concludes my introduction. And so with all that in mind, the details will be introduced from Mr. Shinkai. So with that, I'd like to ask Mr. Shinkai.

[Shuhei Shinkai, executive]

This is Shinkai. I am the CFO of the company. I would like to give a presentation about Q3 results using the materials.

First of all, Page 4, this includes Dialog numbers. In the middle, dark blue column, please look at -- revenue was JPY 258.5 billion; and the gross margin, 55.2%; OP margin, 83.9%; and the profit and loss attributable to owners of the parent, JPY 62.9 billion; and EBITDA, JPY 103.6 billion.

Next page, please. This shows the numbers excluding Dialog contribution in the month of September. From the top, revenue, JPY 244 billion; and gross margin, 55.6%; and the operating profit, JPY 80.2 billion; and profit attributable to owners of parent, JPY 60.2 billion; and EBITDA, JPY 99.4 billion. And the change from July, the revenue up by 1.4%; and gross margin, it's above the -- it's above -- up by 2.6 points; and operating profit, JPY 10.6 billion up, which is 3.9 percentage points up.

Next page, please. Regarding the revenue, I would like to explain about the quarterly trends. Year-on-year, 44.6% up and Q-on-Q, 18.6% up. And Dialog -- excluding Dialog contribution in Q3, the year-on-year, the -- 12%. And industrial and the infrastructure IoT, Dialog has a major impact. Excluding that, year-on-year, 22% and Q-on-Q, 11%.

Next page, please, the Q3 gross margin and so on and so forth. So in the top right, you can see the projection. The gross margin, 3.5 percentage points up. First of all, revenue, Dialog contribution in absolute term, JPY 18.4 billion, of which JPY 15.1 billion from Dialog and -- for Dialog -- the 1/3 is from ForEx impact. And then the automotive, minus; industrial and infrastructure, plus. And the revenue -- or the gross margin, the upside. And Dialog, a negative 0.3%. And other than that, product mix improvement and improvement in the production cost effectiveness.

And the manufacturing costs, we had conservative assumptions, but actually, the manufacturing cost is more or less in line with the plan. And the sales expenses went up because of the consolidation of Dialog. But in other areas, the expenses went down. Other than Dialog, centering around the [ SG&M ], the numbers declined.

Next page, please, inventory. As Shibata said at the outset, combining our inventory and in-channel inventory, I will explain about the reasons behind the decline and increase using another slide. And our inventory as of end of Q3 increased for both automotive and infrastructure IoT. And as shown in green here, it includes inventory valuation increase.

Next page, please. Next page, please. Page 10, please. The previous one, go back by one page. Yes, this is it, so sales shadow inventory and WOI. Regarding WOI, both automotive and infrastructure -- industrial/infrastructure, both went up. And the channel inventory does not include Dialog. And in the first half of next year, this exercise shall be completed.

Next page, please. On the left-hand side, you can see the Renesas inventory. On the right, you can see in-channel inventory. And the left one, Dialog portion, which was consolidated in Q3. And in Q4, because of the seasonality, shipment will progress, but in absolute amount, it will decline. And advanced purchase orders have been made. And therefore, this is a reason for increase in Q3 and the trend is likely to continue into Q4. And the work in progress in Q3, responding to increasing demand, input has been increased and also due to the improvement in production costs at Naka plant, it increased as well. But some semifinished products, which are in chip form increased because of slow-moving parts.

And in the back-end process, this is likely to continue to some extent. And therefore, work in progress is likely to remain virtually the same going forward. And the finished products in Q3, due to the logistics and the supply chain problems, there is a stagnation. But the EOL products have been increasing. And at Q4, we assume that supply chain issues will continue to some extent. And therefore, it is likely to be at the same level.

On the right-hand side, you can see channel inventory. And if I may start explaining about the industrial infrastructure IoT, it increased significantly Q-on-Q, and there are several factors. The first one is increased demand and responding to such increased demand. So we have shipped goods in advance in order to respond to increased demand, MCU, SoC and memory interface-type products. And then a change in distribution. This is a technical factor from a direct sale to a channel sale, distribution has been changed.

And the third point is postponed shipment. So the consumption timing, which was scheduled at the end of the quarter, has been postponed to the next one. And the fourth point is mismatch of a product. Unless BOM are prepared, the products cannot be finished and therefore, cannot be consumed by end users. Take, for example, the shortage in CPU, power management ICU cannot be shipped or consumed. And various countermeasures have been implemented in order to counter this problem. For example, what is in short have been shipped, given a higher priority. So we are taking a rather conservative and cautious view towards this. So the first one, first point is the regular increased demand. And the second one is the change in distribution. And the fourth one is the fact that we are taking a conservative and cautious view.

On the right-hand side, in Q4, we will continue to act on increased demand and therefore, absolute amount is likely to increase. But WOI will be decreasing in Q4. And the bottom half, automotive in Q3 and Q4. It seems to be increasing in Q4 from Tier 1, the pool. The consumption of inventory had an effect. And just like industrial and infrastructure, some product shipments have been postponed. On the right-hand side, in Q4, OEM production recovery is anticipated. Therefore, absolute amount will increase. However, in terms of WOI, it will decrease because of increased demand.

Moving on to the next page. The front-end process, wafer input basis Q3, 12 inches, the Naka plant recovery had a positive impact and the 8-inch is leveled off on a high level, 85% or slightly above 85%, which is in line with our assumption.

Next page, please. EBITDA and cash flow in Q3, EBITDA was JPY 103.6 billion and JPY 256 billion for 3 quarters. And on the right-hand side, the GAAP cash flow was JPY 75.6 billion. In Q3, EBITDA yield, the reason why the cash flow yield is low is because of payment of tax and bonuses. And if you look at the gray portion, in Q3 onwards, the machinery and equipment procured for -- to respond to the fire, which took place in Naka plant, and it's JPY 6.5 billion.

So here, allow me to touch more about -- for example, for automotive business. On Q-on-Q, there is an improvement of 5.4 percentage points. Now again, this comes from the Naka factory improvement. And so therefore, there's 2 percentage points of improvements in the production. And otherwise, the impacts come from, for example, production cost decline as well as better efficiency. So that's the automotive business. But then going to industrial business, so there's a 2 -- 0.2 percentage points improvement, and so -- there's the Dialog that comes in here. Excluding Dialog, it is 1.9 percentage points of improvement.

And moving on to the next slide. So here, we look at Q4 and full year forecast. So if you look at the middle blue line, so for revenue, from the midpoint forecast, that's JPY 298 billion, which is a Q-on-Q 15.3% increase. And gross margin, 53%, which is a Q-on-Q-wise minus 2.2 percentage points. And then operating profit margin, that's a 28% Q-on-Q, that's a decline by 4.5 points.

So first of all, for the gross margin, we have the Dialog impact and also the product mix impact. And compared to the previous quarter, it's been declined. There's also the variable cost for it. And for the operating profit margin, because of Dialog integration, OpEx is now going to concentrate more to happen towards the year-end. And for the full year, we also have the figures on the far right. But please, we'll just move on to the next slide.

So now here we look into the sell-in and the sell-through for the demand. And so here, we look at the Q4 forecast. First of all, let's look at the sell-in. And so again, for total, that's 15.3% like we introduced earlier. And for automotive, late single digit. And then for IIBU, 20-some percent double digit. But then when it comes to sell-through, we are seeing a double-digit percent increase for all.

Moving on. So here, we look at the order situation and order backlog. And it goes back to what Mr. Shibata was saying at the outset. So on the right, top right, you see what's in green, so this is about some of the initiatives for long-term outlook. And so we still have not been able to include all the Dialog figures. And so at the moment, it is still an ongoing process in obtaining all the numbers.

Now this is just a reference slide. Here, we look at Dialog revenue and breakdown per quarter. So on this gray part, which is about licensed PMIC in 2018 October, that was the time when Dialog was able to sign a license contract with a major customer. And so that is how the numbers have been trending, very well. Then based also here, based on that license, we have -- we are able to keep track of the business size. Now you can see that in Q4, that gray bar pretty much disappears and so this is cleaned off in next year.

Now I'd like to jump into a few slides in appendix, starting from Slide 21. So here, we look at the balance sheet. With Dialog acquisition, we have JPY 530 billion in goodwill. PPA, we are going through the process. And so from Q1, we should be able to collect all the numbers.

And moving on to Slide 23. Now so here, we have the GAAP versus non-GAAP reconciliation. And so in Q3, operating profit, that was -- on non-GAAP, that was JPY 83.9 billion. And then in GAAP, that's JPY 53.8 million. And so there is like a JPY 30 billion amount of reconciliation. And out of that, there's part of the PPA JPY 18 billion and then there's also the Naka cost and then -- and there's also a JPY 9 billion amount coming from Dialog adjustment.

Now please also turn to Slide 26 now. And this is about CapEx trend. Again, there has been a procurement of equipment after the fire. And so in Q3 -- so the decision has been made to complete that by Q3. And so in Q4, this is really about some of the CapEx required to enhance the resilience of the factories.

Now -- turning to Page 28 now. Now this is again something that Mr. Shibata did mention at the outset. So as of today, we have been able to put forth this announcement of the technology tuck-in M&A. And again, this is about Celeno, a start-up company in Israel.

So that concludes my presentation. Thank you very much.

[Operator]

So thank you very much. Let us now begin Q&A and allow me to explain how to ask a question. [Operator Instructions]

Let us begin the Q&A. [Operator Instructions]

[Operator]

So Mr. Sugiura from Daiwa Securities.

[Toru Sugiura, analyst]

This is Sugiura from Daiwa Securities. My first question is about the guidance for Q4. First of all, excluding the effect of Dialog consolidation, revenue, gross margin and operating profit Q-on-Q, how it is likely to evolve? And also, only the revenue numbers of Dialog has been disclosed, so I would think that it is flattish from Q3 to Q4. And would you elaborate on that, including IPO situation and so on and so forth?

[Shuhei Shinkai, executive]

I -- Shinkai, I would like -- or Shinkai, I would like to respond to that question. So the revenue impact, excluding Dialog, Q-on-Q, 6% up is anticipated. Excluding Dialog and ABU and IIBU, ABU, the higher end of the single digit and IIBU, double digit, slightly above double digit or in the middle of the double digit. So it's like a 5% or a 6% growth -- overall growth.

[Toru Sugiura, analyst]

So what about the gross margin and operating profit?

[Shuhei Shinkai, executive]

Gross margin, excluding Dialog, 1.8 percentage points and operating margin, 3.4% up Q-on-Q.

[Toru Sugiura, analyst]

My second question is for Shibata-san. And sorry, I may be asking the same question over and over again. So demand forecast for the next half year or 1 year. So the customers' patterns of placing orders has been changing, you said in the past. And there seems to be some sweet spots but it seems to be changing. So in the next half year, as far as 1 year, what is your demand forecast?

[Hidetoshi Shibata, executive]

Half year up until the first half of next year, the forecast remains more or less the same. And overall, it would be solid. As of today, I maintain that view. The only concern is not the demand side but supply side and logistics. Compared with the beginning of the year, I am somewhat more confident to somehow manage the situation. But supply management, we are having tough time. Without that, demand up until -- at least up until the first half of next year is likely to grow steadily. That is the picture we have in our mind.

As you rightly pointed out that TI results, we are looking at, and the laptop or PC-related will be the focal point. Like Chromebook is slowing down recently and desktop terminals have been ramping, and it seems to be slowing down recently. And note, a name brand, the platform, generation change is one factor and Windows 11 has been introduced. So it continues to be robust. But the strong ones and not so strong or weakening ones, the situation is very mixed. As Shinkai said, unless the product mix is optimal, we will not be able to sell enough products and inventory will build up.

And like TI, the customers are becoming selective. In the past, customers wanted to buy anything that was available, but now they are changing their behaviors. Unless things are packaged in a set, they don't want to buy. And the midterm inventory of finished goods seems to be increasing on the customer side. And therefore, we are taking a very cautious view because we don't want to increase inventory without any justifiable reason.

And the name brand seems to be robust but we must be agile to respond to the future movements. Otherwise, inventories will further build up. So we will remain cautious. And our exposure to smartphone and laptops are not so huge and therefore, overall, the automotive, industrial and IoT in a broader sense are doing quite well, and those have been the drivers. Up until the first half of next year, it will be quite robust.

[Toru Sugiura, analyst]

Thank you very much for easy-to-understand response.

[Operator]

Next, Fujiwara-san from Citigroup.

[藤原 毅郎, analyst]

This is Fujiwara from Citigroup. I hope you can hear me.

[Hidetoshi Shibata, executive]

Yes, we can. Thank you.

[藤原 毅郎, analyst]

I also have 2 questions. First, you just talked about PCs, but then can I go back to sales channel inventory? So WOI has been able to see execution going up. And now when you look towards the year-end and also to the beginning of next year, and I guess it is going to -- WOI is going to start to decrease, but then what about the channel inventory? Do you think it is going to increase from here on? Is that how you see it? Or do you think it's going to be flattish? Or is it going to decline?

And at the same time, you just talked about PC and you said there's a lot of inventory there. But then this finished product or interim products for PC, that's what's behind this inventory. But is there anything else like FM (sic) [ FA ] or for home appliances? For example, perhaps there's a restraint -- constraint to the production because of components. There's not enough components. But do you think in the end, it is going to be very much a similar feature with PC inventory?

[Hidetoshi Shibata, executive]

Yes. So allow me to answer that. So for the channel inventory, on actual value, we do expect it is going to increase. So that's something that we did illustrate in Page 10. And so for example, if you'd be able to look at where the arrow is going, this indicates our expectation as for what could happen from now on. And so for IoT, so it's going to be flattish on absolute value. But then for automotive WOI -- well, absolute value itself is going to increase.

And this is something that I did mention earlier, but then from Q4 and onwards, we expect that there is going to be a healthy demand. And so we have to cope with that. And that means we have to make sure that we will have a good inventory amount even in this channel side because we need to respond to the increasing demand.

Now would the -- what we're finding in PC happen in other areas? I think that's your concern. Now of course, quality-wise, maybe we will see something very similar. But then, for example, I think the same thing to be said with decreased production by OEMs here for the auto side. And you don't have all the BOMs, you don't have all the parts, and so therefore, you cannot complete the products. And I think this is going to be the same story elsewhere as well.

But FA, health care, auto, compared to PC, I do believe the unit price or the product -- finished product is much higher. And so the consumers or the clients, they probably would just not want to finish to the extent they have without having the full product because that is going to be too much of a burden capital-wise. So we do have to be careful where -- how things would develop. But then what's going on in the PC, that lumpy situation in PC, like sometimes you'd be accelerating, sometimes you'd be stopping, I don't think that would happen in other areas like auto. And so for the time being, we do believe that it is going to be important that we keep up with the robust demand and be able to increase our shipment. So that's my response.

[藤原 毅郎, analyst]

And my second question, you also introduced about the order trend. In total company-wise, that's JPY 1.2 trillion size now. And I take that is going to be there. That is the amount of order, that will last until 2022. Now this JPY 1.2 trillion-worth order, if you look at on quarter-to-quarter trend, within that JPY 1.2 trillion, I have to be sticky in asking this, does this include some tentative order not a complete official order? But then, does it include some of the tentative order?

[Hidetoshi Shibata, executive]

Yes, in terms of the capacity, I do believe we've been able to secure the necessary capacity. And I think this is the best way to answer. As you know, when it comes to the components or parts or the wafer for foundries, it's difficult to really obtain a full commitment into the future. And we do believe that -- well, there is a level that we have been able to come to an agreement. But then there's also some stretched amount that we have included within the yearly plan.

Now if we look back the previous trend, it seems like as we go down the road, we should be able to see the actual numbers and we cope with that, and that's something that we have been doing. And of course, we do not believe that all the numbers will be filled if we don't really make any proactive movements. But then we have Mr. Kataoka, I have Shinkai and I, myself, we all do communicate with the suppliers on a day-to-day -- day-by-day basis, and so that we'd be able to secure enough supplies that we need.

The double loading or phantom order, how much of that would be in here? That was your question. That's a million-dollar question. That is something that we always talk about internally. Now from -- for example, some of the noncancelable, nonreturnable order that we obtained from the client, it's -- if we include that, the bar here should have been much higher. And we decided to sort of make our own judgment in introducing this number because sometimes, we'd find some inflated order. And so we did a lot of haircutting. And after that, we have been able to build up the number and that is exactly what you find on Slide 16.

Of course, there will be some inflated order. We -- some of that still might be here, but we did try to make sure we do enough hair trimming. We did make our own decision in seeing that this is a more probable number. Now if -- maybe we could have been too conservative. And in that case, we'd have to keep on making sure we have enough supply. But then maybe there still could be a bit of a phantom order remaining here. Maybe that could be the case. We will have to see. But we did do a lot of robust haircutting before we introduced this number, so I am pretty comfortable with what we have here.

[Unknown Executive]

So can -- the Secretary would correct -- make a correction. So on Slide 9, Mr. Fujiwara said that -- talked about the channel inventory. For auto business, there are -- if you look at the gray line, IIBU on 9 weeks and for ABU, that's 7 weeks. In total, 8 weeks strong. And the dotted line is like 11 to give a follow-up.

[Operator]

Next, [ Kojima-san ] from Nikkei BP.

[Unknown Analyst]

This is [ Kojima ] from Nikkei BP. I have 2 questions as well. Naka plant had a fire, and I think you made hard efforts to ensure the replacement products or the production. So what is the current situation? That is my first question.

And also this Israeli company that you have bought, the company -- so that company in Israel and Dialog, I'm wondering if there may be some overlapping question -- products.

[Hidetoshi Shibata, executive]

So I would like to respond to the second question. And regarding your first question, I would like to invite Kataoka-san to the microphone because he did work marvelously for this deal. And Celeno's products are not overlapping with Dialog's products. WiFi advanced version, here, it says a 6 and 6E, but inclusive of [ G5 ]. Celeno is a tiny company that focuses on WiFi with 150 employees. So it focuses on WiFi product.

On the other hand, Dialog up to Generation 4 of WiFi and it's a low-power focus products. In addition, at Dialog, Bluetooth low energy, inclusive of that other connectivities Dialog also offers. So what was lacking in Dialog, the newer generation of WiFi will be covered by this company.

And Celeno, obviously -- so there has been progress in the client side technology development and access point. These tiny companies need to earn money by working on access points.

But now, IoT and client products are becoming more enriched. And therefore, I thought it would be a good timing. And also a millimeter-wave -- if millimeter-wave development become prevalent, then the last 1-mile WiFi capability will be very much needed. So this will be an excellent combination.

And Kataoka-san will respond to your first question.

[Kataoka Takeshi, executive]

This is Kataoka. So the alternative production, there were several of them. First of all, the wafers were produced at other factories. And the mature products were produced at other plants of Renesas and [ in 300, Tesnal C ], TSMC. And because of that -- for example, something which was only internally produced is now made at TSMC as well. So sustainability has been enhanced. And we would like to capitalize on that benefit going forward, and we can have a dual-fab system, so to speak. We can choose, either we want to make it at Naka or TSMC, so on and so forth.

And also, the growth, the bump process, the special process like that, we only handle the -- internally, but a certain overseas manufacturer made those things for us. So this company has been very supportive. But TSMC was very supportive, but this other overseas company was very supportive as well. So production flexibility has been dramatically increased. And with that company in overseas, we would like to continue a transaction in order to ensure flexibility going forward. That is the current situation.

[Unknown Analyst]

I see. So because of that fire, you came up with these improvements?

[Kataoka Takeshi, executive]

Yes. I mean in a way, it may seem odd, but we have been able to reduce cost of production eventually.

[Operator]

From Goldman Sachs, we'd like to invite Takayama-san.

[Daiki Takayama, analyst]

Can I go back to Q4 gross margin and OPM? I think you were saying that it's going to decline. And SG&A and expense is going to increase towards the year-end, I think you said that. But then, for example, as you increase revenue, I felt like -- for example, on the OpEx, et cetera, seems to be more. Or do you think Q3 was too high? And is there any reason behind explaining Q4?

[Hidetoshi Shibata, executive]

I think that's something Shinkai-san should answer. Mr. Shinkai, please.

[Shuhei Shinkai, executive]

Certainly. So in Q3, I don't know. Was it too high? Maybe. But on gross margin line in Q3, there was the auto side product mix, which worked well. And on the other hand, in Q4, there was a -- on the other hand, Q4 seems to have dropped or worsened. Now when it comes to variable costs, for example, be it ingredients or some of the procurement for the foundry, we're seeing the price increase there. That is also impacting. That is something that we have included in the forecast.

Now for the OpEx in Q3, there has been conservative spending. And on the other hand, Q4 will be increasing and there's also that year-end concentration of expenses. And so that is why OP margin Q-on-Q is going to decline and that is what we expect. So that's my explanation.

[Hidetoshi Shibata, executive]

Well, if I may add, gross margin dropping, 1/3 of that comes from Dialog and another 1/3 comes from, again, the product mix change -- or not 1/3, 1/4 is from Dialog and 1/4 from product mix and then the remaining half, again, comes from the price increase for the raw materials and also other production cost increase. So in that sense, if you look at Q1 next year or first half, depending on the product mix and depending on the cost, we don't know, we should still have to see how things would go. But for example, some of the -- of course, we don't know the timing of when the raw material costs will start increasing.

[Daiki Takayama, analyst]

Do you think you should be able to start to find better gross margin as you try to be able to level off the materials cost because I'm not exactly sure if Q4 is higher or lower than the normal level?

[Hidetoshi Shibata, executive]

Well, that is a good question. Thank you. At the moment, when it comes to raw material, it is very unstable at the moment. It's very difficult to define what is normal level now. So the numbers that you are seeing here, I guess, we should be trending a bit higher. That's what I hope.

[Daiki Takayama, analyst]

And also my second question. Again, the actuals for Q3 for auto and nonauto, what is the growth rate excluding Dialog? I think you were -- and Shinkai -- Mr. Shinkai did touch upon that. But then I -- can I hear again, ABU versus non-ABU?

[Hidetoshi Shibata, executive]

Yes, Mr. Shinkai, please.

[Shuhei Shinkai, executive]

So can I go back to Page 6? So auto excluding Dialog, that's 51.8% year-on-year and 13.8% Q-on-Q. In IIBU excluding Dialog, that's 22.2%; Q-on-Q, 10.5%.

[Operator]

Next, [ Eguchi -- Mr. Eguchi ] from Nikkei.

[Unknown Analyst]

So this is [ Eguchi ] from Japan Economic Journal. Can you hear me?

[Hidetoshi Shibata, executive]

Yes, we can.

[Unknown Analyst]

So sourcing of materials, I would like to ask you a question. So in the past, you touched upon the electricity-related issues in China. And in Q3, a material cost increase and the risks pertaining to the sourcing. And overall, do you think that the risk related to the sourcing is rather high?

[Hidetoshi Shibata, executive]

So how should I respond to this one? So Nikkei and media, I think this has been making headlines already, major suppliers price increase impact. That is probably the largest impact on us. The size of the price increase, the materials used for our products, in some cases, have doubled. However, in terms of the impact of the price increase, the major foundry rose its prices. They increased its prices, and it's very difficult for us to cope with.

[Unknown Analyst]

And another point is this company you acquired, this Israeli company that you bought. So tech-driven acquisition, this is -- I would assume. So this may not have an immediate impact on the business performance. But in terms of synergy, to what extent do you anticipate the synergy? And how is it likely to be realized?

[Hidetoshi Shibata, executive]

This is a small company, which is growing rapidly. Like compared with Dialog -- how should I say? We have -- we think it's very promising. But whether it is convincing or not, I do not know. But taking a conservative view in 2022, the nonconsolidated number is likely to grow rapidly.

[Unknown Analyst]

I don't know about 2022, but 2023 and 2024, combo chip and others?

[Hidetoshi Shibata, executive]

Well, actually, it's rather embarrassing but we haven't had many WiFi-related expertise. But connectivity, WiFi, Bluetooth combo chip is becoming commonplace. So if we can produce things like that entirely in our company, the synergy can be huge, so -- compared with Celeno revenue. Now compared to this, it will be much bigger. In a not-so-distant future, we should be able to come up with a very impressive number.

[Operator]

Next, from Wall Street Journal, [ Mr. Shinioka ].

[Unknown Analyst]

Earlier, you talked about anything for auto for next year, you are saying that there should be a robust trend all the way to first half next year. But then, for example, supplying MCU for auto purpose, what is your short-term forecast? And perhaps a little more mid- to long-term forecast into like a couple of years, 3 years?

[Hidetoshi Shibata, executive]

Yes. That's exactly why we have Mr. Kataoka here. So Mr. Kataoka, please answer that question.

[Kataoka Takeshi, executive]

Yes. So first of all, we know there's strong demand. And I'm sure you know all the OEMs, especially during July all the way to September, there was this reduction in production because of what's going on in Malaysia. And of course, we tried to look into the end of fiscal year all the way to March, they're hoping to be able to increase their production now historically -- back to like historical high. And so that's what the OEMs are trying to do.

When we look at the inventory level of OEM, it's really historically low. So it's going to be important that they start building up their inventory, and that is why we're expecting a very robust demand. And that's -- its goes -- that's exactly what Mr. Shibata was saying.

Now we will be increasing the production capacity for Naka fab, and we will be investing for that and also our work with TSMC. Do you understand what we're trying to do? So our share in TSMC will be increasing. And so as we try to go into 2021, 2022, for example 40-nano, the production level is going to be increasing.

Now as we have looked into the long-term perspective, as you know, production -- unit production volume of car is going to increase. And nowadays, we're seeing that it's going to be at least 5% or 10% CAGR in terms of volume growth. But then also, if we look at the semiconductor, how much chips will be included within cars, this is going to increase because there's more electrification and then authentication. It also has to do with a lot of -- not just the control units, but then, for example, sunroof. I don't think we see so much in Japan except for the real high-end vehicles. But then outside Japan, you see a lot of sunroofs -- sunroof vehicles. And this is exactly where analog power, SoC, MCU, a lot of them are used. And so from that perspective, in the mid- to long range, there's a lot of expectation we'd be able to hold here.

So again, here, we basically offer 40-nano, but then, there is also 28-nano that is already being offered. So how much more can we go into this space is also very interesting, but that's what -- something that I'd be able to say.

[Unknown Analyst]

There's also one more follow-up question. Chiba earthquake and eruption of Aso Mountain, are these impacting production to you?

[Hidetoshi Shibata, executive]

Well, those natural disasters that happened recently? No, there's no impact. I think I'm correct in saying it -- in saying so. But again, Japan is prone to natural disasters, as you know, so it is important that we keep -- we be prepared, we do that. And so even if something happens, we do not believe that we'd be late in coping with what happens.

But then, of course, depending on the size of the natural disaster, there might be some of the fluctuation in production level. And it's something that we have to live with. I don't know if this is the right way to say this but it's probably similar to COVID. We have to live with these natural disasters.

But then in terms of human resource, I do believe we have enough talent or experience with these natural disasters. So even if in the event of some disasters, I'm sure we'll be able to cope with that.

[Operator]

So the next will be the last question as we are running out of time. From Morgan Stanley Securities, Yoshikawa-san.

[Kazuo Yoshikawa, analyst]

This is Yoshikawa from Morgan Stanley. So Q3 gross margin, I would like to ask you about. So Q3 gross margin was good because of good product mix. Actually, it may have been too good, you said, I think. So our car grew. Am I right in understanding it that way? If that is the case, at Investor Day, Shibata-san said that you don't have to do anything and still, the automotive business would grow. Centering around R-Car, if that is the case, it may go down a little bit in Q4. But next year, the gross margin target, probably I can expect that you will be achieving the upper end of the gross margin target range.

[Hidetoshi Shibata, executive]

Well, in terms of the directionality, that may be the case or I hope that is the case. But there are 2 things we need to keep in our mind. SoC, it's entirely outsourced. And wafer prices have been increasing, as I said previously. And SoC packaging materials, the material prices are increasing very rapidly.

Regarding price increase, we have been trying to pass on the price increase to customers to some extent. However, unit by unit, SoC is likely to have the largest impact from a price increase and the pressure on gross margin from that is probably quite strong. So if SoC grows, like it did in Q3, then the gross margin may grow rapidly a month again, you may think, but it's not likely to happen. But it is true that SoC is growing so rapidly.

[Kazuo Yoshikawa, analyst]

Understood. But as you said just now, so if the cost is rising, the first round or second round of price increase might have already happened, but the third rounds and fourth rounds, am I right in understanding that you will be requesting a customer to accept the price increase?

[Shuhei Shinkai, executive]

Well, regarding automotive business, in a various sense, long-term stability is important. And we have no intention of changing prices frequently. But at the same time, we would like to pass on the price increase to our customers to some extent. So more or less, once every half year, we are requesting our customers to make adjustments.

[Kazuo Yoshikawa, analyst]

I see.

[Shuhei Shinkai, executive]

If I may supplement, in Q3, automotive mix improved because of SoC and MCU. As Kataoka said, the 40-nanometer product increased, that had an impact as well.

[Operator]

I know more people do want to ask questions, but it is now time so we'd like to close the Q&A session. Now before close, can we ask Mr. Shibata to give closing remarks? Mr. Shibata, please.

[Hidetoshi Shibata, executive]

Yes. So allow me to summarize once again what we announced today. So within our portfolio, for example, PC portion, compared to the past, is not really going that lucratively, so we do have to keep an eye on how things develop. But then fortunately, as a result of the previous strategies, the end market exposure, I do believe we have been able to diversify to quite an extent.

And so from that perspective, I think there's a -- it does give us reasons to have a very strong outlook into the future. And so for the demand side, our view has not really changed. But then on the other hand, the supply side, it's always tough. Every day, all the executive members are working all together to really make sure that we'd be able to have enough supply and still we're at this point. And so it's exactly where we really have to work hard on so that we will secure enough supply. But please do understand that we're really working hard so that we'd be able to secure the supply that we need.

And if there's -- maybe some of you still would have some concerns, but then at the end of Q4, even for the channel inventory, I'm sure we'd be able to show some evidence that everything was okay. And that's exactly how we need to keep our operations going, so I hope we'll be able to obtain your understanding. But once again, thank you very much for joining.

[Operator]

Thank you very much. So with that, we will end our Q3 results announcement for year 2021. Once again, thank you very much for your participation. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]