Renesas Electronics Corp

TSE:6723

Earnings Call Analysis

Renesas Reports Q3 Decline in Revenue and Adjusts Q4 Guidance

Renesas reported a Q3 revenue of JPY 345.3 billion, slightly below forecasts, reflecting a 9% annual decline, with net income at JPY 86 billion. Gross margins improved to 55.9%, while operating margins were 28.5%. However, the company anticipates a significant revenue drop of 19% in Q4, primarily due to inventory reductions and weaker demand, especially in automotive and IIoT segments. The impact of a stronger yen and adjustments in production further complicate the outlook. With Altium fully consolidated, cost controls were emphasized to manage operational expenses effectively.

Overview of Q3 Performance

In the third quarter, the company reported revenues of JPY 345.3 billion, with a net income of JPY 86 billion. EBITDA was JPY 121.4 billion, while gross margins were at 55.9%, slightly above the forecast. Operating profit stood at JPY 98.4 billion, translating to an operating margin of 28.5%. Overall, these figures suggest a stable yet cautious performance, with revenues slightly below the forecast range due to a stronger yen.

Segment Breakdowns and Challenges

The earnings call highlighted specific challenges faced by different segments. The Industrial Internet of Things (IIoT) and automotive sectors saw significant impacts, particularly with IIoT contributing negatively due to low demand. Automotive showed slight positivity against expectations but faced weakening demand in regions like Japan and the EU. Also, production cuts and inventory adjustments hampered performance, with IIoT year-on-year results tumbling down by 24.3% primarily due to currency fluctuations and a weaker sales environment.

Directional Guidance for Q4

Looking ahead, the company expects significant challenges in the fourth quarter, anticipating a close to 20% decline in revenues. Breaking this down further, about 15% of this decline is due to a stronger yen and inventory adjustments. A further breakdown showed a 10% decline related to reduced customer demand and inventory correction. Discernibly, approximately one-third of the anticipated dip stems from efforts to decrease channel inventories, emphasizing the need for a tighter management approach.

Cost Controls and Margin Outlook

Despite difficulties, the company reported strong cost control measures leading to a reduction in operating expenses. Compared to the previous quarter, operating margins experienced a downturn, with forecasts suggesting a slowdown to around 22.5% for Q4. Continuing adjustments in production capacity and efforts to clear inventory will be pivotal in managing operational efficiency moving forward.

Cash Flow and Strategic Implications

Free cash flow for Q3 appeared weak, primarily due to onetime expenditures related to the Altium acquisition and tax obligations. The company anticipates a return to normal levels of cash flow in Q4. The management emphasized maintaining shareholder returns while also retaining flexibility for potential future acquisitions, particularly as they continue to integrate Altium and explore synergies.

Long-Term Strategy Amidst Current Pressures

Executives communicated a clear willingness to adopt a long-term view while remaining vigilant regarding both current market dynamics and internal performance pressures. While cautious about the near-term outlook, the expectation of recovery in the second half of the next fiscal year provided a slightly positive tone, hinting at strategic pivots rather than short-term reactive measures. Overall, maintaining an operational balance between capturing demand opportunities and exerting necessary caution appeared as an essential part of the company’s strategic vision.

Earnings Call Transcript 2024-Q3

[Unknown Executive]

[Audio Gap] CFO, Shinkai Shuhei. [Foreign Language]

[Hidetoshi Shibata, executive]

Good morning, everyone. This is Shibata. I'm sure that some of you have already seen the numbers. But for third quarter results, we thought we were stepping on the brakes before, but we needed to step on the brakes more. That's how we see the results.

Revenue-wise, excluding FX impact, we were within our guidance range that we report and demand. More than expected, it became weaker. Therefore, channel inventory wise, more than expected, we saw an increase.

So in the fourth quarter of the year, we would like to reduce the inventory levels. So that's one thing we would like to take on. Inclusive of that, for our Q4 guidance, we are expecting a significant decline in revenue close to 20%. Out of which, a quarter is expected to be impacted by the stronger yen. So when you take that item out, the impact is about a revenue decline of 15%.

So earlier, I talked about channel inventory and that we are going to reduce inventory. About 1/3 of the 15% comes from that effort. So when you look at the mix, what reflects demand compared to the 20% significant number, it's about half. That's attributed to end demand. I would say, more or less around 10% of the revenue decline is the substantial guidance.

Timing wise, there was a slight shift and Mr. Shinkai may refer to this later, and we could also take on your questions in Q&A. But when you look at our performance year-over-year, automotive still mid-single-digit growth has been observed. So stepping on the brakes during the fourth quarter may have been a surprise for some of you. But before I was saying that we had a lot to regret in the previous results, but this time around, it's more about taking a deep breath and engaging measures in anticipation of the future.

So from that perspective, automotive on an annual basis is still on a growth trajectory. So we would like to take on the long-term challenges and implement measures steadily.

So now without further ado, I would like to pass over to Mr. Shinkai, who will talk about the actual numbers. Then after, we would like to move on to Q&A like we always do. Mr. Shinkai, please.

[Shuhei Shinkai, executive]

Hello. I am Shinkai, the CFO. I'd like to talk about Q3 results. I'm going to be talking of the material that is on our IR site. Next page, please. And next page, please.

Here's a disclaimer pitch. At the very bottom, please look at the bottom bullet. We concluded the acquisition of Altium as of August 1, '24, and it's been consolidated from August. So for Q3 results, Altium performance is included.

Regarding segment allocation, it is mostly included under industrial infrastructure and IoT. For PPA and the full year results, we expect to close, and we will like to retrospectively revise the actuals impact.

And next page talks about the results, look at the dark blue column that shows Q3 results. So for revenue, we were at JPY 345.3 billion. Gross margins were 55.9%. Operating profit were JPY 98.4 billion. And operating profit margins were 28.5%. Net income was JPY 86 billion. EBITDA JPY 121.4 billion and currency rates were JPY 154 to the dollar and JPY 168 to the euro.

The comparison gets to our forecast. Please look at the third row that is the third to the right. And looking at Q3 results, please look at the last column, excluding August and September Altium impact, please look at the part that says Altium excluded, which is the fourth row.

So compared to forecast by item, please look at the top right. For revenue compared to forecast median, we were slightly below, but we were within the lower end of our range. LTM's consolidation, if it didn't exist, we would have been below the forecast range due to a stronger yen.

In IIoT, especially industrial and mass market contributed significantly negatively. And for automotive and mobile, it was slightly positive compared to expectations.

And for gross margins, we were at 55.9% for the quarter, which was slightly above our medium forecast. If we excluded Altium consolidation, it was at 54.9%, which was slightly below 55.5% of the forecast median. The reason is because due to less utilization, the production recovery decrease was the main factor. And during -- because of cutting inventory during Q3, input and production was cut.

And operating margin-wise, we were at 28.5%, and this was above our forecast median. And the impact from LTM's consolidation was neutral. And compared to forecast, OpEx went down. And due to -- this was mainly due to cost control. It was down on a net-net basis when you account for Altium impact.

Q-on-Q, looking at the bottom right, for revenue q-on-Q, it went down by 3.8%. Altium and FX impact excluded, it was 5.5% more or less decline. And for gross margins, Q-on-Q, it went down by 0.9 points. Due to less production recovery Q-on-Q, it went down by 200 basis points. On the other hand, because of Altium consolidation, part of it was offset.

And for operating margins, in 1Q, it went down by 2.3 points. Like mentioned earlier, we did cost control. But in Q3, because Transphorm and Altium was consolidated, OpEx, the base went up. So as a result, operating margins Q-on-Q went down by 2.3 points.

Segment wise, for automotive and IIoT. For automotive, gross margins -- operating margins went down Q-on-Q. And the utilization decline impact was substantial. For IIoT, book gross margins, LTM's consolidation impact was a positive. Apart from that, the transfer the same as automotive.

And for operating margins on top of utilization declines, OpEx cuts and cost control was able to offset the negative coming from sales volume decline. Next page, please.

So here are the quarterly trends of revenue. For Q3, the results are on the right-hand side. Overall, we saw revenue decline of 9% and Q-on-Q revenue declined by 3.8%. By segment, it is as shown here.

And for FX year-on-year, overall impact was about 3 percentage points, and it had the same impact by segment. And Q-on-Q, it was about less than 1% of an impact. And for Altium consolidation, which I would like to comment on for IIoT, it is recognized here, most of it actually. And revenue-wise, year-on-year, it's 3 points worth of contribution. Therefore, for IIoT year-on-year results, FX minus 24.3%. But when you exclude the FX impact and the Altium impact, it was close to minus 30% of a decline or it's actually a weak yen, not a strong yen of an impact. Next page, please.

And here, we're looking at terms and financial indicators. And let us look at the cash flow. Free cash flow, please take a look. To exempt M&A impact in Q3, and we have also exempted the outlays for Altium acquisition. The free cash flow is negative quarter-on-quarter. Q3 is negative periodical. Cash-out items, namely corporate tax payment and interim bonus payments have taken place. There have also been onetime items, which include a foundry prepayment for capacity buildup. This has contributed to the decline in numbers. In Q4, we return basically to normal.

And then going on to the next page, and to the far side, we have the inventory sales channel, inventory and to the right, the change factor. Now let us look at the in-house inventory DOI. As earlier mentioned in the Q3 results, during Q3, production adjustments took place. Input reduction also have taken place resulting in lower utilization rate. Due to higher end and also GOI, we have seen a decline. And this is for Q3.

And as for Q4, further production adjustments for own plans will take place. And there will also be a reduction in and foundry codes. In natural value terms, Q-on-Q is expected to decline. Yes, there will be a cutback in scale, and therefore, we can expect DOI to increase.

To the bottom right-hand corner, we had the sales channel inventory. Q3 results showed Q-on-Q increase and as for WOI, 11.1 weeks. In terms of the actual increase for auto and for IIoT, a decline. The direction is in line with expectations for IIoT sell-through in the industry and also mass market was weaker than expected.

For IIoT, pitching up the WOI. And hence in Q4, we plan to reduce inventory in these segments and hence it will be control for their purpose. In automotive, control sell-in rather than sell-through will be done to promote efforts to clear out inventory among Japanese customers. We will work to compress channel inventory.

And as for IIoT, sell-in more or less similar to sell-through level is expected. And hence, China inventory will basically be flat. And the switch supplementary remarks in auto, 2023 by year-end, we have concluded market inventory adjustment. However, during the interim, for the 40-nano MCU, the supply was temporarily tight. And hence, in the first half of 2024, the 40-nanometer MCU inventory buildup have continued.

And especially in Japan and the EU, due to the expectations of the auto market weakening, inventory buildup occurred but now due to a surplus, we are now at a juncture, which we'll need to control inventory and therefore, there will be a decline in inventory.

Meanwhile for IIoT, in Q3, WOI is expected to increase as we have indicated. But mainly around MCU, WOI is high. But in terms of the actual terms, it is easing, declining. And therefore, in terms of the short-term lead time order due to the size of the market in order to support the short-term LTE order, we will conduct a control so that we will not have a surplus inventory.

Next slide, this is a reference to utilization rate. And to the left, we have the Q3 somewhat weaker than forecast and declined to mid-40% range. And for Q4, where the production adjustment is expected to lower the utilization rate.

On average, around 30% year-on-Q decline of about 15%. And to the right, we have the CapEx situation. Apart from production, we have decided on CapEx Q3, focus on IP and EDA procurement. In Q4, we will continue with R&D investment. And next page.

And this is the revenue for Q4 and also full year 2024 forecast, please look at the dark blue column. But the mid-life forecast is JPY 278.5 billion. And in terms of GM, gross margin, 52.5%; operating margin, 22.5%; ForEx assumption, JPY 145 to the dollar and JPY 160 to the euro.

In terms of revenue, Q-on-Q, 19.3% decline excluding ForEx. And if you look at the line below, 14.9% decline is expected. And as for the breakdown, we would like to supplement details on subsequent slide.

And at this chart, we are looking at the expectations, the bridge Q3 and Q4 and look at it from the left to right, and let's look at the higher yen. 5% point of an impact is to be served in dollar, JPY 145 and we expect this -- we expect September to continue. And as for the channel, inventory reduction, that will be worth 5% or so.

In the channel inventory decline is expected and we will apply the control on the auto to compensate for this. And then we had the sell-through at the bottom, that's about 10% points. And for automotive and also IIoT, generally split half and half.

As for auto, for Japan and the EU, we are seeing a weakening of demand. And for IIoT, due to seasonality of mobile and also industry and also mass market, decline is expected. And thereafter we're looking at the supply, and we are looking at a 2% point of impact for supply, parts and supply. This is attributed to quality issues by which temporarily supply for particular components have been installed, and therefore, translating to delay shipments of particular products and the impact will be 2% in Q4 as expected.

And however, we will be able to recover the delay by Q4. And there's auto consolidation impact worth about 2%. And going back to the earlier page, and we are looking at the GM, 52.5% Q-on-Q. That's 3.4% decline. This is attributed to lower utilization rate and weakened production recovery.

As for the input utilization rate, we are seeing Q-on-Q 15% point decline. And also for work in progress, we have had to partially suspend operations to reduce inventories. And also in the front end and also back-end process adjustments have had to be made. And therefore, 15 percentage points in the utilization rate decline for the input as I've indicated, but more than that, we can expect to see a larger drop in production recovery.

And also year-end maintenance fees allowance are also expected to raise. And with the Altium consolidation impact, this will be partially offset in Q-on-Q, 3.4% decline is expected.

And as for operating margin, 22.5% in Q-on-Q, 6% decline is expected. And generally, in OpEx trends offers Q-on-Q due to seasonally driven year-end adjustment. And starting from October, the global pay rate impact will also be a contributing factor and also ATM consolidation. And therefore, as baseline terms will increase. But due to onetime matters, it will be offset.

And therefore, on a net basis, it will decline. As for onetime factor, we can cite the bonus allowance, which will have to be reverted in Q3, and that is an asset as expected. And also cost synergy with the acquisition will also help to offset this number and also an offset basis -- net basis will decline. However, in the revenue, it will not compensate for the decline in revenue. And therefore, the operating margin will be negative.

And then now moving on to the appendix and going on to Page 15. Barings for Altium execution have been executed, and it has been temporarily reflecting goodwill and revised post PPA calculations. And Page 17, please.

The bridge that is to say non-GAAP reconciliation, there are nonrecurring items worth JPY 2.4 billion and onetime acquisition-related expenses have also been incurred. And also structure reorganization related expenses are also among the main items.

Page 19, completion of the Altium acquisition completed August 1, and consolidation started Q3. And most figures recorded under industrial infrastructure IoT segment, the business say, is making good progress and also PMI and also synergy effect is to be enjoyed. We are seeing smooth progress.

And with this, I would like to conclude my presentation. Thank you very much.

[Unknown Executive]

Now we would like to move on to the Q&A session, Shibata-san. Can you turn your video on. First, I'll explain how to ask a question.

[Unknown Executive]

[Operator Instructions] Now without further ado, first from Goldman Sachs Securities. Mr. Takayama, [Operator Instructions]

[Daiki Takayama, analyst]

Because it's 2 questions. The first question I have is about Q4. You were talking about a 19% revenue decline. So can you break this down into detail by application. And can you break it down into automotive and IoT?

Can you also give us your view on signs of a bottoming out process. Have you already gained visibility looking out into the next quarter to the March quarter because you were just talking about taking a deep breath. So I was wondering if you're already looking out into the next quarter, the March quarter. So can you share with us your view as well as the probability of that materializing.

[Hidetoshi Shibata, executive]

Thank you for your question. The details of Q4 numbers will be given out by Mr. Shinkai. From myself, I'd like to say we're talking about the next first quarter, it's too early to say, so I will refrain from doing so. But the reason why I said now is the time to take a deep breath is because up until now, over the short term, it was about stepping on the brakes where necessary, but we didn't want to miss opportunities either. That is how we've been managing the company.

But we didn't want to miss the upturn. But now we want to change the balance of taking on the opportunities and stepping on the brakes. So stepping on the brakes is going to be stronger of a balance compared to capturing upturn opportunities. So it's 2 sides of the coin.

But for Q1, right now, our expectations are cautious. The major reason being due to Japanese industrial and automotive customers, mainly. Actually, we're not sure yet, but in anticipation of the fiscal year March end results, customers may accelerate their efforts to reduce inventory.

So just to say this once again, customers have not communicated that to us. However, right now, we want to be increasingly cautious about the outlook. And that is why we have started to account for a slowdown scenario as well. And of course, there are some applications in regions that will grow, but mainly around Japan. From Q4 going into Q1, we expect that there might be pressure of a slowdown.

So we're not really expecting a strong recovery from the first quarter next fiscal year. At least at this point, that's how we feel. So from the fourth quarter's point of view, it's kind of the -- a trend where we're going to be trending at the bottom. So in the next earnings call, we hope that the expectation was too cautious and conservative. But we don't want to repeat a process where we're revising down our expectations again. So that's why we changed our outlook.

So Shinkai-san, can you go through the breakdown?

[Shuhei Shinkai, executive]

If you can project Page 11 on the screen, please. So looking at the waterfall chart, the second one, where it says inventory reduction. This is mainly attributed to automotive. That's our assumption. And for sell-through decline, which is about 10 points worth of an impact, automotive and IIoT are expected to contribute by half each.

And for automotive, and which it's not really which product, but it's more like region, which is Japan and Europe. That is going to weigh and be weak. And also inventory adjustments by customers we believe will contribute by a certain degree. And for IIoT, there's 2 things to say here. First is mobile. Seasonal factors are expected to lead to this decline. And also industrial and mass market related Q-on-Q decline is anticipated.

And for car supply stagnation, it's predominantly SoC substrates for automotive. That's it for me. Thank you.

[Daiki Takayama, analyst]

Shibata-san, going back to your comment, and interpreting it from my perspective. So for the March quarter, you do want a pickup. And you did feel that you don't have to cut production that much or inventories that much, but by being cautious because you regretted what has been done in the first half of the year, are your operations based off the assumption that it's going to be really conservative? That's the way I interpreted your comment.

[Hidetoshi Shibata, executive]

Yes, exactly. However, we don't want to be too extreme. So if we see signs of a change, we would like to swiftly change the weight of our focus. But right now, as you rightly said, we feel that we need to be very cautious and conservative in managing the company right now.

[Daiki Takayama, analyst]

So that leads to my second question. When it comes to the pickup in profitability then. Is it going to be moderate due to the way you're operating or the company 5% gross profit, gross margins were 30% OPM is probably on your minds. Have you changed your approach? Or would you like to try to strive for a quick recovery? And also from a stock price point of view, I think there's higher expectations towards your company compared to the pickup in the cycle so you have been increasing borrowing. So share buybacks might not be easy to do. But do you have anything on your minds as to shareholder return or share buybacks?

[Hidetoshi Shibata, executive]

Right. Thank you for the question. Margins or gross margins, how should I put it? Of course, we're not in a great position. However, having said that, I think it is being well controlled. The challenge is OPM actually.

For operating margins, when you think about it, I think we were in a rush to grow the company. So this is a regret that has been ongoing. The baseline OpEx has been increasing. And I think we need to become a little bit leaner than where we are right now. So we will be implementing a variety of measures.

However, over the short term, it's not about addressing quarterly operating expenses, but we need to take a deep breath and look out over the medium to long term to well control our costs. That's what we would like to do.

So in Q1 next fiscal year or Q2 next fiscal year, I'm not sure what's going to happen. But when you look out to the full year, next fiscal year, you'll probably be able to know what we had on our minds. So we need to take that kind of bold approach.

For shareholder returns, of course, we would like to consider the best of what we can do. But when we acquired Altium, and after Altium, we have talked from time to time about our digitalization vision. In order to realize this vision, Altium is not going to fill all the pieces we need and that was our initial way of thinking. So it's not going to be multibillion, but we still have some areas where we would like to acquire and reinforce. So the timing when we can take that action needs to be on our minds.

And of course, we don't need the funds at some point in time, we could allocate that to shareholder return. But if we see an opportunity, we may prioritize that opportunity. But we resume dividends so we would like to ensure that dividends are payout consistently going forward as well. Thank you.

[Unknown Executive]

Thank you very much. From BofA Securities, Hirakawa-san.

[Mikio Hirakawa, analyst]

BofA Securities, Hirakawa speaking. There are 2 questions. The first of which is in Q4, your revenue plan. And as a backdrop, I believe I have been able to understand your train of thought. Sell-through declined Q-on-Q, a 10% decline is expected. However, the performance of your peers have not really been disclosed as of yet, but it appears as if your outlook is rather weak and sales through 10% decline. What would you say about the factors and your train of thought?

[Hidetoshi Shibata, executive]

As you have pointed out, if you look at -- this target itself, we understand that this does appear to be very constrained. Because of the ForEx and IIoT put together, accounts for about 10% in terms of contributing factor. The interest of the end demand and when you look at the breakdown, we find that on the customer side, there are inventory adjustments, which accounts for quite a sizable portion of the total and hence when the final product is into the market.

And if that is a contributing factor for the decline in demand, that is not the case.

[Mikio Hirakawa, analyst]

So what is the factor behind the 10% decline for auto?

[Hidetoshi Shibata, executive]

As Shinkai-san has earlier mentioned, and you might recall at the beginning of the year, I talked about RH A50 MCU, and we will tend to demand. So given the situation on the customer side and also the sales channel side and also on our side as well, there have been movements to step up on inventory buildup and that has prolonged.

And this level of inventory is truly appropriate. Compared to other products, there has been a delay in the timing. We should have taken action to reduce inventory. However, we have witnessed a delay. And therefore, into Q4, the impact will hit our performance. And therefore, it may appear very sizable.

I would like to repeat, the year-on-year basis, that is not so dramatic. In our automotive business alone, it is not as if our revenue has been dramatically hit even if we look at this very objectively. So the performance this year was not that bad.

On the other hand, on IIoT side, in terms of substance we do recognize a decline. And also Shinkai-San has earlier mentioned about Q3, 30 percentage points as the figure has been mentioned, and this describes the sizable decline that we are witnessing versus our competitor.

If this number is very weak, how will this -- where would the impact lie? Of course, it really depends on who we compare this to. So if we compare -- if we look at the exposure to our local customers in China versus our competitors is rather small. And on top of that, and this is also something that I mentioned at the beginning of the year. It really depends on who we compare ourselves to.

In generative AI, our solution exposure has grown very strongly. But compared to the revenue overall, it is not a large proportion. And hence, when it comes to the downside in other areas, we have not been able to really offset this number. But what is peculiar to our business is the way we take the -- how we capture the sockets, and we find that the mobile is rather weak. And as we move into the next year, the new sockets will increase.

But in terms of substance, we have to, of course, refer to the exposure in China and also related smaller customers. A smaller in size but also generating growth. And this is an area in which we have not been able to really build upon compared to our peers. And therefore, there have been swings in the business cycle that has also had an impact on our IIoT business.

[Mikio Hirakawa, analyst]

The second is about power semiconductor devices, and we have to divide this into 3 components. And what about the line and also the PL. In 2025 is going -- SIC is is going to be again. So those are the 2 questions. And then for related to SIC, for Wolfspeed, deposit of $2 billion is not -- do we need to be attended to the risk of impairment losses.

[Hidetoshi Shibata, executive]

Thank you very much. Good points you have raised. They are for very good questions. As to the cofo utilization, more than expected, we are expecting today. The operations already begun at Coso. However, when it comes to commercial production, we need to take a more cautious approach.

In 2025, what is our plan? We still have some time before 2025 comes around. I will not be able to make a decisive cost comment. However, we will take a cautious approach so that in order to delay the process to the extent possible.

And on a similar note, for SIC to quite some extent, the market situation, of course, we need to look at demand and supply and also the competitor situation as well as the business in China, we find that there have been substantial changes that is different from our company.

And the difficulty with SIC is to be sure that we do not rush forward. We understand undoubtedly that this is going to be a growth market. And of course, we need to take a very long-term perspective. And rather than focusing on the beginning of the business, we have to place an emphasis on R&D, and that is how we'll be shifting our focus.

And therefore, for Wolfspeed, initially as expected, we will -- are we going to procure wafers? That will not really be the case. And therefore, there has been a change in plan. Of course, there are some sensitive matters, and therefore, I will not be able to, at this point in time, disclose everything.

Wolfspeed chips under the chipset funding acquisition has been made. And that will enhance the possibility of recovery of our deposits into Wolfspeed. And -- however, when you look at it, this is going to translate to a positive. And therefore, in terms of cash interest, payments to be received. We have agreed on a delay, but not only that, at the same time, of course, I will not be able to quote on details. However, as Renesas, we are to Wolfspeed, there are obligations and liabilities to address. And there have been changes so that there will be a win-win engagement for both sides.

So the question arises as to whether there will be a $2 billion demand? The situation has changed dramatically. However, as the expectations of recovery of the $2 billion deposit because of the Chips Act. In terms of financials, the process are brighter in the 8-inch operations that we'll see when it is up and running, the concerns can be eased. And therefore, compared to a while ago, we believe that we can take a more optimistic view. Thank you.

[Mikio Hirakawa, analyst]

And there's a follow-up question in terms of changes to the liability terms. And of course, when the time comes, are you going to disclose information to us?

[Hidetoshi Shibata, executive]

Yes. We may not be able to, of course, divulge all the specifics. But however, as the implications, we will be able to share information with you. Thank you very much.

[Unknown Executive]

Thank you very much. The next person is from Citigroup, Mr. Fujiwara.

[藤原 毅郎, analyst]

Mr. Fujiwara from Citigroup. I also have 2 questions. The first one is about more sell-through demand decline for is about 3 months from your previous earnings. And during the 3 months from when did the probability of demand decline materialize? And also in the past 3 months, up until right now, talking with your customers, or the demand decline, do you think this is going to continue? Is it continuing? Or has it settled down as you approached this earnings call. That's my first question.

[Hidetoshi Shibata, executive]

So the demand decline for Q4 from when did we sense it? I would say it is due to the conditions that we -- the third quarter. What I mean by that is I have mentioned this from before. But the demand and supply situation has changed quite a lot and short lead time orders have been increasing, as Mr. Shinkai has mentioned.

Before the quarter started, there were some orders that were not a backlog. So the orders came in when the quarter started. So that was what we were not anticipating at the beginning of the quarter. And when you compare with the trends that we've been seeing so far, after entering Q3, short lead time orders, we did forecast in our planning, how much of those types of short time orders will come in.

However, for July, August, maybe it was summer vacation, but maybe it's a little bit weaker than we thought. And then entering September, there's only 4 weeks left. However, last minute orders didn't really come in is what I've been hearing.

So even for short-term orders, it seems that it became weaker. So that's the reason why. So I would say from around the summer, holiday season. We were wondering if that's the case. And we started to feel that things have changed ever since we entered September and ever since I've started to get everyone's feedback.

And also for the fourth quarter, Shinkai-san, would you like to speak about it?

[Shuhei Shinkai, executive]

Excuse me. Can you -- what am I supposed to talk about the fourth quarter?

[藤原 毅郎, analyst]

So over the past 3 months, it's been about a month ever since the fourth quarter started. And you just talked about short lead time orders, but is the demand outlook deteriorating? Or has it settled down?

[Shuhei Shinkai, executive]

Short lead time orders in balance with that, when you look at order booking trends, further deterioration is not a trend we're seeing. It's not a trend we're seeing. As usual, we are low. We are trending at low levels, and that's how we are anticipating October.

[Hidetoshi Shibata, executive]

And to add a comment here, short lead time type orders. And our forecast, we have reduced it to close to 0 now. So if anything were to happen or if anything were to come in going forward, that will be an upside for us. So that's a big change we have made this time around.

And speaking with customers, I would say for automotive, first of all, compared to 3 months ago, I do feel that it has become quite weak, weaker or -- in other areas compared to 3 months ago, I don't really feel that there has been a big change. Whatever -- whichever customer you talk to, they talk about a recovery -- anticipated recovery in the first or second quarter next fiscal year, although their comments don't have a reason why. So my gut feeling is that we haven't been seeing an improvement nor have we been seeing a deterioration.

[藤原 毅郎, analyst]

All right. My second question is about -- well, earlier, you talked about free cash flow and third quarter numbers were weak. And with your performance weakening, I would anticipate that free cash flow is also going to decline. You acquired Altium and you increased your borrowing substantially. And for the repayment schedule, will it be impacted in any kind of way? Or will this also impact your dividend payout?

[Hidetoshi Shibata, executive]

So Mr. Shinkai will address that question.

[Shuhei Shinkai, executive]

So for Q4 free cash flow, it's likely to be about the same level as the second quarter. So debt repayment or dividend impact is not expected. That's all for me.

[Unknown Executive]

From KBB, Koshima-san.

[Unknown Analyst]

This is Kojima from KBB. There are 2 questions. The first, which is related to the earlier earning call, and you have mentioned action to be taken. And recently taken up by the media, how were the trends translate to your business.

I'm just going to throw out the questions at the outset. Earlier, you disclosed that an action to be taken. And there are 2 things that come to mind. This is a reference to Altium acquisition, where the platform will be developed. I believe that is what you have said. Will that be impacted?

And then the other question is in reference to auto mounted products. The next-generation product with functionality have been enhanced. You will work on your R&D efforts you have mentioned. And with the tightening, what will be the impact? Will there be an impact?

So this is -- these are questions in reference to the action forward. And the second set of questions is reference to the market trend and how would that play out in your business? In terms of trends that come in mind, there are 2, for DDR5 transition to some extent, have progressed. So what is the impact there? Is it a positive or a negative impact?

And the second is an HEV. Each is on the rise, EV is kind of trending downwards the hype on the HEV, excuse me, is on the rise, whereas is kind of stagnant. And I would like to inquire to the impact on these.

[Hidetoshi Shibata, executive]

Is associate Generation 5 and the digitalization platform I would say that there is absolutely no impact, and we are progressing as initially intended. And that is how we will proceed. We hesitate, given the situation, to speak about activities ahead, I would like to be conscious. But if things well, for Aon Gen 5, in November or December, we will be able to disclose information about progress made. Of course, if all goes well. So I would like to ask you to stay tuned.

For Altium digitalization platform, two weeks, Electronica, there was an exhibit called Electronica just a part of our new projects will be exhibited. So that's not 2 weeks ago but that's 2 weeks ahead. I would like for you to also to visit our exhibit. This is something that I'm very proud of. So I would encourage you to take a look.

For DDR5, however you look at it, for Renesas, it is a positive. There is no negative factor there. For DDR5 this year, we have mentioned that it is really going to pick up. But beyond expectations, it is slower than earlier anticipated. I may have mentioned that memory interface device, the power management from other companies, when combined presented a problem. And therefore, our power management IC to be qualified. This has consumed time. And this has been the major factor.

When we combine, of course, devices from various companies, of course, this is very challenging. I'm sure that, that is -- has been well understood by customers. And therefore, when we go into the next version, our memory interface and power management IC will be combined. And however you look at it, this will be, of course, a win for us. It's too early to say.

But in terms of direction forward, I will ask the say for certain that this is not going to be a negative factor. So please, for your concerns to rest.

[藤原 毅郎, analyst]

EV and HEV, EV is going to slow down is just playing a slowdown.

[Hidetoshi Shibata, executive]

For our business, it's not necessarily a negative factor. I'm sure the answer are concerned about for HEV. Is it going to be a tailwind? And if so, is it going to be a tailwind for Renesas? I'm sure that is a point in question. I would say yes, but not to such a sizable extent. And therefore, we look at the trend, more than expected, the EV start has taken time. But that's not necessarily a negative.

Having said that, was it Fujiwara-san presented a question about power devices and how that is rolling out. And of course, for the company, it is also a negative. And therefore, we will begin the IGBT next year and SIC as well. And this has been a very ambitious plan that we have put together. The situation has changed, and therefore, we will take a cautious approach into next year. And therefore, in terms of the numbers per se, it would be fair to say that it is a negative.

[Unknown Executive]

Thank you very much. That was service reference. Thank you. We have received some other questions, but as we are trying to close we would like to end the Q&A session. So finally, in closing, Mr. Shibata will speak.

[Hidetoshi Shibata, executive]

So for 2 quarters in a row the downward revision of the guide has been widening. So I don't think it's appropriate for me to say a lot about this, but we will be changing perspective from here on and ensure that we show results.

So for the fourth quarter and the first quarter next year, we will be more cautious in our management. And we hope that in Q2 next year or in the second half next year, we will be ready for Q2 or the second half next year from a cost perspective and also continue on with our R&D.

So we don't want to be reactive on a quarterly basis, but we would like to have a long-term perspective. So we would like to ask you for your ongoing support. Thank you very much for joining today.

[Unknown Executive]

That concludes Renesas' fiscal '24 Q3 earnings call. Thank you very much for joining today.

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