Advantest Corp
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Advantest Corp
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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 Advantest Corporation for the First Quarter of Fiscal Year 2018. Let me introduce attendees from Advantest here. In front of the center screen, Yoshiaki Yoshida, the Representative Director, President and CEO; and Myung, Corporate Vice President and Executive Vice President; and Fujita, Managing Executive Officer and Executive Vice President. And I am Nagumo, the MC for today. At the end of June, 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 fiscal year 2018 business outlook by Mr. Yoshida. Then, we plan to entertain your questions. We schedule to end this meeting at 5:00 p.m. today. Mr. Fujita, please start.
And this is Fujita. Nice to see you. I would talk about the financial results for the first quarter of the fiscal year 2018. In the first quarter, the semiconductor market continued to expand across a wide range of fields; and performance improvement trend, especially, in high-end products also progressed naturally. Against this backdrop, semiconductor manufacturers continue to actively invest in testers, creating a favorable business environment for Advantest.
Our strength is our customer base. Utilizing the strength, we continue to receive many orders from a wide range of customers in the first quarter. And we achieved JPY 70.6 billion in orders. Also, this is a decrease of JPY 14.8 billion against the fourth quarter of the fiscal year 2017. However, it surpassed JPY 70 billion mark that [ denotes ] it's very strong. And excluding the previous quarter, this is the first time since the third quarter of fiscal year 2005 that we have surpassed JPY 70 billion, and we continue to receive robust orders. Sales was JPY 70.9 billion, increasing for a fifth consecutive quarter since the first quarter of the previous year.
The gross margin was JPY 38.2 billion, and the rate was 53.9%. While this was a 1.8% decrease quarter-on-quarter, it remained strong. We controlled the total SG&A to achieve JPY 15.8 billion in operating income.
The operating margin exceeded 20%, at 22.3%, for a second consecutive quarter. Our income before tax was JPY 16.5 billion. Net income after tax was JPY 13.9 billion, and net income margin was close to 20%.
Advantest adopted IFRS 15, revenue from contracts with customers, in fiscal year 2018, and adjustments were applied at the beginning of the fiscal year. And the impact on backlog was negative JPY 3 billion. As a result, the backlog at the end of the first quarter was JPY 79.5 billion. Foreign exchange rate applied were JPY 108 to the U.S. dollar and JPY 131 to the euro.
And here, I would like to touch on the remaining of the business domains. Until now, we largely divided our semiconductor test equipment business into 2 domains based on the types of device supported, nonmemory and memory. In consideration of the universality of the names, we renamed these domains in fiscal year 2018 SoC and memory. There is no change to the target market for our SoC tester products and memory tester products, respectively. In the narrow sense, SoC refers to systems on chip devices, integrating various types of IPs. But we will use it as an acronym for nonmemory. In Advantest usage, SoC is broadly defined to include logic ICs, such as MPUs and GPUs; communication devices such as baseline processors, MCUs, analog ICs, sensors, optical devices, display drivers and so on. Memory testers specialized in testing DRAM and nonvolatile memory such as NAND.
The first quarter orders by segment. The total was JPY 70.6 billion. And the breakdown, the Semiconductor and Component Test Systems was JPY 53.6 billion. When we break them down further in green and yellow on the right-hand side, SoC testers, JPY 41.8 billion; and memory testers was JPY 11.8 billion. SoC testers at JPY 41.8 billion posted record-high quarterly orders. The background to this achievement was the qualitative and quantitative changes in the semiconductor market. Particularly in application processors, 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 were also driven by customer investment in a wide range of areas, including automotive, industrial equipment and consumer product. Memory tester 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 nonvolatile memory.
For Mechatronics System, it decreased 34% quarter-on-quarter at JPY 9.4 billion. Device interface orders, for instance, with memory testers, and nontechnology product inquiries were sluggish. For services and others, we saw 31% decrease at JPY 7.7 billion. As many maintenance contracts were renewed at the end of the previous fiscal year, this quarter saw a decline in contracts.
And orders by region. In Taiwan, where the test demand for application processors using smartphones increased, we saw increase of JPY 9.8 billion to JPY 33.9 billion. Meanwhile, in South Korea, there was a decline in memory tester orders in reaction to a large number of advance orders received in the previous quarter, and it was down by JPY 17.1 billion to JPY 15.2 billion.
On the sales by segment. The total sales was JPY 70.9 billion for the first quarter. While the trend is for the first quarter sales to fall over the previous quarter, however, this first quarter showed great strengths of sales increased quarter-over-quarter.
And Semiconductor and Component Test Systems increased from JPY 49.5 billion to JPY 51 billion, of which SoC testers accounted for JPY 31.6 billion. SoC testers maintained a high-level sales of the previous quarter, principally in application process and high-end logic IC segment. For memory tester, sales increased overall. In addition to continued high DRAM tester sales, sales of nonvolatile memory testers increased even further from the previous quarter, and the sales was JPY 19.4 billion.
For Mechatronics System, with 11% increase quarter-over-quarter, it was at JPY 11.1 billion. And for Service and Others, it was JPY 8.9 billion, with 5% increase.
And the sales by region. Sales were high primarily in Asia, where the semiconductor volume products and processors are concentrated. And as a result, Advantest's overseas sales ratio in first quarter was, as written at the bottom, it was at 93.5%. And the sales gross profit and operating income. There was a change in product mix. And the gross margin was negative 1.8 point quarter-over-quarter, at 53.9%. However, we continue to maintain high level. And for SG&A, it was a negative of JPY 1.6 billion quarter-over-quarter and at JPY 22.4 billion. And administrative expenses, such as R&D expenses, were low because of this is the beginning of the fiscal year. And operating income was JPY 15.8 billion at 22.3%, and decreases in SG&A compensated for the decline in the gross margin.
Next is R&D expenses, CapEx, depreciation and amortization. And R&D expenses for the first quarter was JPY 8.6 billion, accounting for 12.2% of the sales. And CapEx was JPY 1.2 billion. And depreciation and amortization was also JPY 1.2 billion.
And the balance sheet for period ending June 30, the total asset was JPY 271.8 billion. Cash and cash equivalents with JPY 2.5 billion increase from the end of the previous fiscal year at JPY 106.4 billion. Bond and current liabilities was at JPY 24.7 billion. Conversion of the compatible bonds maturing in February 2019 progressed and reduced by JPY 5.3 billion. And the conversion rate was 17%. Equity attributable to owners of the parent was JPY 142.5 billion. And the ratio of equity attributable to owners of the parent increased by 3.4 points to 52.4%. And that is all for the financial results for the first quarter of 2018. Thank you.
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 moderation in semiconductor equipment investment, we believe that the tester investment will have no impact. And as originally anticipated, it will materialize within the year.
The SoC 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 processors. SoC tester demand typically declined somewhat in the second half of the calendar year. We expect to see the same seasonal trend this year. But SoC tester investment is expected to hold steady in areas such as smartphones, industrial equipment, automotives and display-related devices.
Our outlook for memory manufactured investment ranges and schedule is not greatly different from what it was 3 months ago. Demand for premium DRAM and nonvolatile 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 tester market in 2019, we expect that the 5G smartphone market to start ramping up. Regarding 5G smartphones [ based on processors ] and RF components that manage 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 a smartphone, all semiconductors used in 5G smartphones will need to cope with higher speed and shorter latencies, and there will need to be more semiconductors in each device. And in addition to SoC semiconductors, memory device will also need to have greater capacities and higher space. 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 mid- and long-term management policy announced in April, higher demand for semiconductors that require better performance and higher reliability and an overall expansion of the semiconductor market present an opportunity for Advantest. 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 first quarter, we progressed towards our full year forecast as follows: sales, 30.8%; and operating income, 45.8%; and net income at 50%. If these trends are sustained, we believe that our calendar year 2018 market share may improve considerably year-on-year.
However, there are certain factors that could have a chain effect on the global economy, such as trade friction between the U.S. 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 is certainly some lack of visibility for the future. But for the present, our business environment is vibrant. And if the world economy and the semiconductor 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.
And next is fiscal year 2018 key measures. And first, we need to improve supply capability to support the business expansion. Although our product supply capability has been improved considerably considered 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 a mid- and long-term growth initiative, our business related to semiconductor testers were reorganized or completely integrated after the general shareholders meeting in June. And it formed one global organization called ATE Business Group.
Looking into the future. New devices going beyond conventional concepts, combining various technologies such as memory, SoC, 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 globe, 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&D and amortization remained unchanged from our initial plan.
Fiscal year 2018 outlook by segment. First, about SoC testers. In 2018, semiconductors used in smartphones and AI servers are gaining higher performance and becoming more miniaturized, extend test times and making test more complicated. This is boosting demand for SoC 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 semiconductors per device continues.
Let me emphasize this point again. Advantest's strength is our base of customers in every tier in both -- 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 SoC 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 display-related semiconductors. Especially in the display-related segment, in addition to higher panel 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.
About the memory testers. Sales prospects for memory testers remain unchanged at JPY 67 billion. Earlier, the market size for memory tester for the current year was shared as USD 900 million or about JPY 100 billion, while our sales outlook is about JPY 67 billion. And in DRAM, due to strong demand for server DRAM, demand for back-end 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 flash 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 tester investment, we believe these adjustments will be short term, and growth will return in the medium to long term.
For mechatronics, Service and Others outlook. In our mechatronics 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 technology will not stagnate. In addition to 5G, there are many other events likely to expand the semiconductor tester market in the future. And semiconductor applications are also expanding. Even if the tester market should hit a stagnation phase in the future, we have confidence 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 am proud of the strong results for the first quarter. And in order to capitalize on the above growth opportunities, we will continue to execute necessary measures with short-term, mid-term and long-term perspectives.
Lastly, but not least, we believe that it is also necessary to be aware of the rise of protectionism and trade friction between the U.S., China and other countries. We have adapted through rapid market fluctuations as a company, but 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 that's all for myself. And thank you for your patience.
Now we would like to entertain your questions. [Operator Instructions] Please kindly state your name and company name before asking the questions.
My name is Wadaki from Nomura Securities. Thank you for sharing the information today. Despite the strong first quarter results, the full year outlook remained unchanged. Your message was that you are being cautious, but I need some assurance. It was a good results to anyone's eyes. What was the driver for such good performance for the first quarter? And any concerns you may have for the second quarter and later? Anything that performs 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 upward, yes, and it may sound like that. But the announcement was made just in April, and the backlog was about JPY 80 billion at the start of the first 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 U.S., 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 third and the fourth quarters. Therefore, after the second 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 first quarter, what went better than you expected?
SoC, which has better profitability than the memory, continued to perform well since the fourth quarter of fiscal year 2017. We have continuous business and so orders above JPY 30 billion for the last 2 quarters. In addition to that, you may think that the memory business has lower profitability, but actually that's not the case. The back-end testers can generate higher profitability rate. The ratio of the back-end testers has been increasing greatly against the front end since the first quarter, and the trend will continue until the end of the year. That is the 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 V93000 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 will you 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 package testers. Our main product, T5833, can be used for both core test and wafer test. The delivery date issue are mainly with those key product. 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 conditions for the second quarter and the full year 2018 despite some slowdown in the third quarter.
The third and the last question. When do you expect the high-speed flash memory and nonvolatile memory business will have a kickstart 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 3D Xpoint. 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 of speed. Our key product, T5833, can support the speed. Therefore, we see the demand. We do not know if the wafer for 3D Xpoint has actually increased or not, but there is an upward trend. And we anticipate that electronic devices, including PCs, integrating disk technology will increase from the second half of this year. And this will lead to a 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, chip on glass, to COF, chip on film. COF is taking over COG, and this generates need for package testers. The main product has been used in the bumping process, front-end process. But moving forward, the transition to COF generates demand for package testers. Along with one-chip with touch sensors require longer test, 2018 and 2019 will continue to have good demands, more than we expected.
My name is Moriyama from JPMorgan. Mr. Yoshida mentioned that the first quarter was as expected, and so it 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 you plan, could you please clarify?
Are you asking if I meant the orders would progress well for the second quarter?
Yes. And it was more about sales in relation to operating income. Backlog was over JPY 80 billion at the beginning of the first quarter. We had JPY 70 billion of orders for the first quarter. In order to address this, the delivery target is somewhere around September and October. Therefore, there are many orders due September. The concern is if the production can catch up with the orders.
Thank you. That means sales was as planned. JPY 70.6 billion was good against the plan, probably around JPY 60 billion. And for orders, it overachieved the plan for the first quarter. And since we received over JPY 15 billion of advanced orders in the fourth quarter of the fiscal year 2017, we did not have high expectation, but we had orders above JPY 70 billion.
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 JPY 30.9 billion in the fourth quarter to JPY 11.8 billion in the first quarter. What are the ratio for DRAM and flash for the fourth quarter and if there are any other major changes?
Comparing the fourth and the first 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 placed advanced orders. It was about JPY 15 billion back then. And these could have sided to first quarter. Despite that, the first quarter had additional JPY 11.8 billion, which is greater than the first quarter of the previous year. And the breakdown for orders was about 50 to 50 after the fourth quarter, but we currently see the stronger DRAM.
And how about SoC testers that saw increase from JPY 29.3 billion to JPY 41.8 billion? What was the biggest contributor for this?
The greatest driver is believed to be APs for smartphones. SoC has a wide range of applications, and it is not just about the V93000. We have T2000 platform that can handle automotive semiconductor test and display driver test. These all performed well in total. As Mr. Fujita mentioned, SoC marked the record-high orders at Adventist.
Lastly, DRAM tester T5833 is expanding. How about T5503HS?
There are speed test and core test, and the core test takes the most time. That is pushing up the unit of T5833. The unit of T5503HS for speed test has not increased greatly, but profitability by unit and the unit price are high. Therefore, it is contributing to our sales and profit.
This is Hirakawa from Merrill Lynch. I have 3 questions. The first one is that the gross margin for the Q1 was 53.9%, a reasonable level. Concerning the 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 second quarter.
Comparing the fourth quarter and the first quarter, SoC sales itself did not change much, and you may find it odd that the gross margin dropped so much. The memory went up in terms of ratio. Therefore, the overall margin goes down. Also, profitability differs by SoC testers. Within SoCs in yellow, some have better profit and others do not. How I see the gross margin of 53.9% is that 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 and the second 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 level for us as a company.
And how about the second quarter?
For the second quarter, sales ratio for memory and SoC will stay the same. Therefore, the same level of gross margin can be achieved.
And the second question is that it is rather repeating one of the earlier questions that good performance of SoC testers in the first quarter. What is the incremental value? Is it because the market is boosting? Or because of advanced orders?
We talked about past delivery date. Until the fourth quarter, it was more about memory. Memory requires many individual components, and when one is not procured, there could be a bottleneck. When we have so many SoC 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 SoCs. As for SoC, smartphone APs and TDDI are pushing the demand.
And what is the incremental benefit you got against the initial plan?
Against the initial plan, for SoC it was roughly JPY 17 billion to JPY 18 billion above the plan due to smartphone demand.
And the third question. SSD tester you mentioned towards the end. It has been penetrating into the enterprise market as I heard. Do you see any progress in the consumer market?
For consumer, the strongest company is in the U.S, and their platform is based on Advantest. It has [ been ] in front at the moment.
We still have time, so we will 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 risk such as the global semiconductor demand. However, how about opportunities you see? I was expecting that the orders from China may see some increase from this quarter. If possible, could you tell me that do you have any inquiries from customers you did not have any business with before?
As for on the 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 fabless companies conducts 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 a slowdown of the global economy. We are committed to work hard as the China 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 fair and square, and we want to deepen our relationship with Chinese SoC customers. For memory, it is a developing phase. And many people say it will take time. But as a memory tester platformer, we would like to put our utmost effort to develop the market. There are many opportunities, and these will not be abandoned because of the trade conflicts. And we still have some time, so we can take one more question. The gentleman at the back.
This is Yoshikawa from Morgan Stanley. One question. SoC testers for smartphone APs show robust performance. Complexity of functionalities prolonged the test time, as you mentioned. The strong orders for this quarter suggest there were some triggers in demand rather than organic changes. If you know any specific functionalities that are causing the longer test time in APs, please let me know?
Smartphone manufacturers are trying to integrate AI function 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 the miniaturization of the process, and this resulted in our business performance. It is gaining much attention that the new smartphones from the Chinese manufacturers will adapt 3-lens cameras.
Is it related to AP test demand?
It is the domain of the image sensor and not related to Advantest.
Thank you.