Tokyo Electron Ltd

TSE:8035

Earnings Call Analysis

Strong AI Demand Drives Growth at Tokyo Electron

In the latest earnings call, Tokyo Electron reported net sales of JPY 566.5 billion, reflecting a 2.1% quarter-over-quarter increase. For FY 2025, they forecast total net sales of JPY 2.4 trillion, a 31% year-over-year growth, driven by heightened demand for advanced devices. AI-related sales are set to exceed JPY 600 billion this year, with expectations for 70% of sales to derive from advanced applications next fiscal year. They plan JPY 254 billion for R&D investments and announced a JPY 70 billion share repurchase. Gross profit margin is expected to rise despite a declining sales proportion from China, anticipated to fall to 30% next year.

Tokyo Electron's Strong Financial Results and Market Position

In the second quarter of the fiscal year ending March 2025, Tokyo Electron demonstrated robust financial performance, achieving net sales of JPY 566.5 billion, a 2.1% increase from the previous quarter. The company's gross profit was JPY 259.9 billion, resulting in a gross profit margin of 45.9%. This is slightly down from the previous quarter, largely due to one-off inventory disposals and product mix changes. However, operating income reached JPY 148.1 billion, reflecting a decline of 10.6% from the previous quarter, attributed to the lower gross profit margin and increased selling, general and administrative expenses, primarily related to R&D.

Growth Driven by AI and Advanced Technology Demand

Tokyo Electron is witnessing a significant uptick in demand for its products, particularly those related to artificial intelligence (AI). The company expects AI-related sales alone to exceed JPY 600 billion this fiscal year. With the ongoing demand for advanced logic and high-volume manufacturing (HVM) tools, the company has been capturing substantial market share in high-value sectors. The strong inquiries from customers for tools related to DRAM and advanced packaging paint a positive picture for future revenue growth.

Market Outlook and Sales Projections

Looking ahead, Tokyo Electron has revised its financial estimates for fiscal 2025. It now anticipates full-year net sales of JPY 2.4 trillion, representing a remarkable 31% growth year-over-year. The gross profit is projected at JPY 1.129 trillion, operating income at JPY 680 billion, and net income attributable to owners of the parent expected to reach JPY 526 billion. The company is also preparing for a potentially booming 2025 wafer fabrication equipment (WFE) market, projecting a size exceeding $100 billion.

Declining Sales in China and Future Adjustments

While Tokyo Electron's overall business is expanding, there are notable shifts in geographical sales proportions. Sales to China accounted for 45% in the first half of the fiscal year but are projected to decline to about 30% moving forward. This downward trend reflects a strategic shift in customer sentiment towards enhancing yield rather than expanding capacity amid geopolitical uncertainties and regulatory scrutiny. This change presents both challenges and opportunities for the company as it navigates evolving market dynamics.

Investment in R&D and Capacity Expansion

To capitalize on future growth opportunities, Tokyo Electron plans to invest JPY 254 billion in R&D along with JPY 170 billion in capex during fiscal 2025. This investment will focus on advancing technology and increasing production capacity to meet anticipated demand, particularly in the AI and memory sectors. With these initiatives, the company aims to maintain its competitive edge and continue enjoying robust financial performance.

Dividend Forecast and Shareholder Returns

For investors, one of the promising aspects of Tokyo Electron's strategy is its commitment to shareholder returns. For the full year, the company anticipates paying a dividend of JPY 571 per share, surpassing last year's record. Moreover, a share repurchase plan worth JPY 70 billion is also being executed to enhance capital efficiency and return value to shareholders. Total returns this fiscal year are projected at a record JPY 413.9 billion.

Earnings Call Transcript 2025-Q2

[Koichi Yatsuda, executive]

It's time for us to start to Tokyo Electron financial announcement for the second quarter of fiscal year ending March 2025. Thank you very much for joining us today despite your busy schedule. I am Yatsuda of IR department serving as a moderator for today's session.

I'd like to introduce today's attendees Mr. Toshiki Kawai, Representative Director, President and CEO.

[Toshiki Kawai, executive]

I am Kawai. Nice to meet you.

[Koichi Yatsuda, executive]

Next, Mr. Hiroshi Kawamoto, Senior Vice President, General Manager, Divisional Office of Finance Division.

Before starting the presentation, let me explain the flow of today's session. First of all, Kawamoto and Kawai will make presentations. After that until 6:30 Japan time, we will have a question-and-answer session where we entertain questions from the audience. This meeting uses 2 channels of Webex for the simultaneous interpretation between Japanese and English.

As we explained in our e-mail, you're kindly requested to use apps on PCs or mobile terminals, if you plan to ask questions. But if you are not going to ask questions, you can use telephones.

Since this conference is intended for institutional investors and analysts, we appreciate your understanding that we receive questions only from institutional investors and analysts as usual. We will post the audio contents of this conference in Japanese and English on our website within a couple of days. It would be appreciated if you could also visit our website.

Now Mr. Kawamoto will present the consolidated financial summary. Mr. Kawamoto, please.

[Hiroshi Kawamoto, executive]

Once again, good afternoon. I am Kawamoto, Finance Division. I'd like to present the consolidated financial summary of the second quarter of fiscal year ending March 2025. This slide shows quarterly financial summary. I will mainly refer to the figures in the blue box. In the second quarter, we generated net sales of JPY 566.5 billion, 2.1% increase from the previous quarter. Gross profit was JPY 259.9 billion, 1.5% decline from the previous quarter.

Gross profit margin was 45.9%, dropping by 1.7 percentage points due to one-off inventory disposal and changes in product mix. Operating income was JPY 148.1 billion, 10.6% decline from the previous quarter. Operating margin was 26.2%, dropping by 3.7 percentage points from the previous quarter due to the decrease of the gross profit margin that I mentioned earlier and increase of SG&A to sales ratio, mainly including R&D expenses.

Income before income taxes decreased by 8.2% to JPY 153.6 billion. Net income attributable to owners of parent was JPY 117.7 billion, 6.7% decline from the previous quarter. The CapEx in the second quarter mainly comprises development of buildings, both in Tokyo Electron Miyagi and Tokyo Electron Kyushu, which are under construction right now.

This is a graphic representation of the financial summary shown on the previous page on the chronological basis. As shown here, net sales have been recovering after hitting bottom in the first half of the previous fiscal year. This shows the financial summary on the semi-annual basis. The figures in the blue box are the financial results in the first half in this fiscal year. The far right column shows the financial estimates for the first half of this fiscal year, we announced on August 8. As you can see here, in every item, we have achieved the guidance we announced on August 8.

In comparison with the second half of the previous fiscal year, we generated more net sales and profit, driven by strong customer demand. Compared to the first half of the previous year, our financial performance has grown significantly along with the recovery of our customers WFE spending. Net sales in the first half of this fiscal year hit the second highest level on the half year basis. This shows SPE new equipment sales by application. In the second quarter, from the bottom of this chart, sales to nonmemory customers accounted for 71%, nonvolatile memory accounted for 3%, and DRAM accounted for 26%. The composition is comparable with that in the previous quarter. The new equipment sales slightly dropped in this quarter, partly because recognition of some sales was pulled forward to the previous quarter.

Inquiries from our customers, however, remains strong. This slide shows the field solutions sales. In the second quarter, field solutions sales were JPY 139.5 billion, increasing by JPY 21.4 billion, driven by modifications. Also, sales of parts and services rose along with the recovery of utilization rate in the customers' fabs. This slide shows net sales by region. In the second quarter, proportion of China dropped by 8.6 percentage points to 41.3%. Proportions of the other regions generally showed an increase. Proportion of China is expected to decline from the first half to the second half of this fiscal year.

This slide shows balance sheet. The total assets were JPY 2.5178 trillion, cash and cash equivalents were JPY 525.5 billion, rising by JPY 87.0 billion from the previous quarter. Notes and accounts receivable were JPY 371.7 billion, increasing by JPY 12.8 billion quarter-over-quarter. Inventories were JPY 742.2 billion, declining by JPY 22.5 billion from the previous quarter.

Investment and other assets were JPY 386.5 billion, declining by JPY 84.9 billion from the previous quarter because of such factors as the increased market value of shares we own. For liabilities and net assets shown on the right-hand side, liabilities were JPY 719.4 billion, decreasing by JPY 3.0 billion from the previous quarter. Net assets were JPY 1.7983 trillion, increasing by JPY 25.3 billion from the previous quarter. This change is primarily attributed to increase of asset due to recognition of net sales and decrease of assets due to decline of other securities valuation difference. The equity ratio was 70.8% for your information.

This slide shows the cash flow. The cash flow from operating activities in the second quarter was JPY 148.6 billion. The cash outflow from investing activities was JPY 54.4 billion, mainly due to acquisition of fixed assets. The cash outflow from financing activities was JPY 600 million. The free cash flow was JPY 94.1 billion.

This concludes my presentation on the consolidated financial summary of the second quarter of the fiscal year ending March 2025. Now Mr. Kawai will present the business environment and financial estimates.

Mr. Kawai, please?

[Toshiki Kawai, executive]

This is Kawai. I will present business environment and financial estimates. Thank you so much for joining us despite your very busy schedule. I will present business environment and financial estimates. Let me start with business environment. We expect calendar 2024 WFE market will be $100 billion plus in size. Just we expected in August 2024 though partially customers' investment for advanced logic has been slowed. Thanks to the support of more overwhelming strong AI demand that we have in market seeing momentum surpassing the original guidance.

At present, customers continue active investment for AI servers. Capital spending for AI servers accounts for about 15% in the entire WFE spending, growing as much as 1.5x year-over-year. About half of that is for HVM applications. In parallel, customers are activating advanced investment to prepare for full fledge spread of AI-mounted PCs and smartphones, which are -- also accounts for about 15% in WFE investment. Driven by extremely robust AI demand, investment for DRAM, in particular, for HVM is very, very active.

In advanced logic foundry, in addition to investment for scaling to 4-nanometer, 3-meter and 2-nanometer node investment for the mass production. Advanced packaging and testing needs are growing rapidly. In calendar 2025, in addition to strong demand for AI servers, AI content in PCs and smartphone is expected to grow. All in all, proportion of tools for AI semiconductors will go up to 40% in the WFE market.

Well, research companies say proportion of AI semiconductor in the semiconductor devices will grow to 70%. And accordingly, AI presence will also rise largely in the WFE market. Following the recovery of investment for DRAM, investment for NAND is also expected to resume as the inventory adjustment proceed. A further recovery of WFE spending in the advanced logic foundry is expected to offset the low investment for mature nodes.

We expect that these factors will drive double-digit growth in calendar 2025 WFE market. For AI applications, cutting edge semiconductor technologies are essential toward the realization of semiconductor devices featuring large capacity, ultra-high speed and low power consumption, technology innovation is moving forward. Along with evolution of such technologies as GAA, backside PDN and high stacking memories, our business opportunity will expand more and more.

This shows business progress in second quarter of fiscal year ending March 2025. Regarding financial performance, as Mr. Kawamoto presented earlier, net sales, profit and all other indicators achieved our guidance. Towards full implementation of investment for high-volume manufacturing and advanced devices, we are receiving increasing inquiries for tools for advanced logic, DRAM for HVM and advanced packaging, which pushes up the proportion of our new products.

This trend is expected to raise our full year net sales and profit to a record high. I will show you an entire picture later. We are steadily winning PORs with our high value-added strategic products in this fiscal year as well. We have won PORs with high-k film deposition system for DRAM capacitor and also single wear cleaning system with 24 chambers for NAND, featuring high controllability and productivity.

For bonders, which are expected to do more in the future. We have 1 POR from new customers with temporary bonder for HVM, for which we have already gained high market share among the major customers. Another highlight is that we have 1 POR with fusion bonders for backside PDN used in advanced logic and development POR for SOC in advanced packaging. For the probers, we have an overwhelming share in advanced blue chip customers and our probers sales in fiscal year is growing rapidly, likely to be doubled year-over-year. We have won high-volume manufacturing with probers for DRAM as well because of its advantage in temperature controllability from a major customer in this fiscal year for cryo etching, which attract attention in the market, we have confirmed a significant progress toward high volume manufactured in POR at multiple customers.

This diagram shows forecast data presented by TechInsights, which represent size of the WFE market and test and assembly market. As shown here, both WFE and test assembly markets are expected to grow strongly. And it is AI and advanced devices that drive this growth. Various development items shown on the right-hand side are currently underway. Leading-edge wafer process tools to be delivered in massive volume and tools for advanced packaging and testing, which are rapidly growing, in both of these 2 fields we have won significant number of high-volume manufacturing PORs and development PORs, all of which will provide us with growth potential for the future.

In this fiscal year, AI-related sales alone will be more than JPY 600 billion by leveraging our broad product portfolio will embrace growth potential as much as possible in both scaling and packaging. Toward the achievement of the midterm management plan, our business is advancing steadily right now. In next fiscal year, we expect the application shown on the table will account for about 70% of our sales. We will hold IR Day on February 26, 2025, where we would like to talk about Tokyo Electron's growth potential. We will announce more details about this event.

Please join us in this event. Next, I will present the financial estimates for fiscal 2025. As I described earlier, driven by the strong demand for AI-related devices, WFE market is currently recovering. Towards calendar 2025 full-fledged WFE spendings are expected to start with advance memory, an advanced logic. We have revised the financial estimate upward by reflecting past half results and latest market trend. Fiscal 2025 full year net sales estimates are JPY 2.400 trillion, which represents 31% positive growth year-over-year. We expect to considerably outperform the market growth. We estimate JPY 1.129 trillion for gross profit, JPY 680 billion for operating income and JPY 526 billion for net income attributable to owners of parent.

In order to capture future growth opportunities as much as possible. We plan to invest JPY 254 billion for R&D.

Net sales, gross profit, gross profit margin, operating income, net income and EPS are expected to hit record high.

This slide shows SPE new equipment sales forecast in fiscal 2025. As shown here, sales recovery after bottoming out in the first half of previous fiscal year. For the second half of this fiscal year, we expect record high half year sales. This shows our plan for R&D expenses and CapEx. In fiscal 2025, as presented before, we expect R&D expenses of JPY 254 billion, CapEx of JPY 170 billion and depreciation of JPY 63 billion. All of which are expected to hit record high.

This slide shows the dividend forecast. Based on the vision of fiscal 2025 financial estimate, the full year dividend per share is expected to be JPY 571 surpassing the record posted in the fiscal year ended March 2023. In the Board of Directors meeting held today, we decided to implement share repurchase of up to JPY 70 billion. Back in February 2024, we announced our plan to spend R&D expected of JPY 1.5 trillion and CapEx of JPY 700 billion for 5 years to come, starting from this fiscal year. This share repurchase has been decided by comprehensively taking into account various factors, including investment for our expected growth beyond next fiscal year, enhancement of our cash generation ability and our cash position as well as improvement of capital efficiency, looking ahead toward our expanding business opportunities, cash generation ability and cash efficiency improvement, we are going to manage balance sheet flexibly.

This is my last slide showing total return amount over the past few years. The total return amount in this fiscal year, totaling the dividend per share and additional share repurchase that I presented earlier is expected to be JPY 413.9 billion establishing a new record, beating the record in the previous fiscal year ended March 2024 by more than JPY 100 billion.

We are planning to essentially cancel the shares we plan to repurchase during this fiscal year. Thank you very much.

This concludes my presentation. We will have a question-and-answer session until 6:30 Japan time. [Operator Instructions]

[Operator]

[Operator Instructions] Now the first question is from Mr. Yoshioka from Nomura Securities.

[Atsushi Yoshioka, analyst]

So I have 1 question. One question per person. Is that correct?

[Unknown Executive]

Yes.

[Atsushi Yoshioka, analyst]

Could you let us know about the WFE market in 2025. You said double-digit growth is expected on Page 13. So I think there's been no changes from the previous financial announcement in terms of the statement given. However, over the past 3 months, there have been many changes, I believe. Are there any changes in the degree of double-digit growth was some nuance in the growth potential in the WFE market.

[Toshiki Kawai, executive]

In principle, Double-digit growth is expected, and we haven't changed our idea for calendar 2025 WFE market. Logic is very strong at present the investment for memories, especially for HVM has been growing significantly. So leading-edge logic, almost the same level of the investment is expected as this year. And for DRAM memory area, the investment is expected to grow furthermore for HVM, investment is expected to grow. NAND, the investment is also recovering because of those factors, double-digit growth is expected. This year, proportion between the logic and memory are 7 to 3. But next year, the proportion should be 6 to 4. So memory proportion will go up next year. So Logic WFE is almost comparable to this year, but there will be spending for memory increases. As a result, proportion between logic and memory will become 6 to 4 next year. That's the reason why I expect double-digit growth next year.

[Atsushi Yoshioka, analyst]

Thank you very much. By applications, I understand your point, but what about China, how do you view China market -- next year a proportion of China will be changing. How do you think about that?

[Toshiki Kawai, executive]

For WFE as a whole the China proportion is expected to decline to 30% level. So in the second half of this fiscal year, it's below 40%. But next fiscal year, the China proportion should be about 30%, getting -- going back to the previous level. There are 2 reasons. Number one, the leading edge investment is increasing. That's 1 thing. Number two, the many new emerging customers in China are now focusing on enhancement of yield rather than investing for capacity enhancement, because of those 2 reasons, China proportion will be declining. I think competitors are having a very similar view on China. So maybe the proportion of China will become about 30% next year.

[Operator]

Next question is from Mr. Yoshida of CLSA Securities. Mr. Yoshida, please.

[Yu Yoshida, analyst]

I'm Yoshida from CLSA Securities. For SPE new equipment sales, your company is outgrowing the WFE market, which product is driving your good performance. And next month, you said you are winning POR and application mix will be shifting to memory. So by product, what is the driver? I wonder there may be some changes in driver by product. So I want you to give us the information about driver for this year and next year in terms of product.

[Toshiki Kawai, executive]

Fortunately, the scaling and patterning and packaging and testing. In those areas, our company's product portfolio is rather growing -- this slide showing the data from TechInsights. So via obligation shown over here, coater developer, etching system, film deposition system and cleaning systems. These areas are to be delivered in massive volume and they are going, especially for HVM applications. This is high volume zone including HVM and AI-related advanced logic. For DRAM, DDR5. So these areas are showing the growth. So testing and assembly market, on the other hand, compared with WFE market. The size of the testing assembly market is smaller in size. The blue squares in the right table. They are representing testers and assembly, the purple squares are for WFE market-related equipment.

So testing and assembly process, you can see significantly increasing the bonding and probers alone compared with previous year, we can see the increase more than JPY 100 billion. Actually, the growth is almost doubled in this fiscal year, contributing to record high results. So probably, the probers and bonders compared with exposure to the entire market, rather small, therefore, etching system, coater developer and film depositing system in those 3 applications, which product is growing most next year. Are there any changes in terms of driver? So it depends on the market size. For etching, this is a big portion, GAA nanosheet investment is expected to grow next year, already started this year.

So you can expect the investment more and maybe 2 years from now, the full fledge investment will start for 2-nanometer and etching grow furthermore, coater developer based on high market share, I think you can see strong growing and for film deposition system, we are winning POR steadily.

So these are the current conditions. So for those applications shown on this page, the dots and blue portion there are representative examples, and they are related to our application, and we have started evaluation of those applications together with our customers. These areas will become by 2025, it accounts for 70% or more than 70%. So the product portfolio over here drive our growth potential. This is I would like you to understand the situation. As you can see, the diversified major products are delivered by our company and for packaging, bonding, testing, in other words, probers are growing steadily as well. Thank you very much.

[Operator]

Next question is from Mr. Nakamura from Goldman Sachs Japan.

[Shuhei Nakamura, analyst]

So earlier, Mr. Kawamoto said, your sales to China will be declining in proportion from the first half to the second half of this fiscal year, 46% should be the actual proportion of China in the first half of this fiscal year. What is the percentage or proportion of China in second half of this year and next year? So how about the absolute value of sales to China for next fiscal year? Could you share your idea with us, please?

[Hiroshi Kawamoto, executive]

So this is Kawamoto. Let me answer your question. The first half of your question, in the first quarter, we had a very high proportion of sales to China. The second quarter declined. So 45% should be the proportion of China in the first half of this fiscal year. As you said earlier, for the second half of this fiscal year, as Kawai said earlier, the proportion of China will go down to the 30% level. For next fiscal year, again, as Kawai said earlier, the leading edge for advanced node will increase so proportionately, there is a kind of lull for China customers.

Therefore, the proportion of China sales will go down to 30%, the previous figures. For the first half of this fiscal year, the China proportion should be at 45%. The second half will decline by nearly 10%. And next fiscal year, further decline is expected. So the China proportion will go down to the 30% level in next fiscal year. The investment for advanced node, including investment for 2-nanometer and the investment for 2-nanometer will start in a full-fledge manner 2 years from now. Therefore, the China proportion will go down to the 30% level.

[Shuhei Nakamura, analyst]

I have 1 follow-up question for this fiscal year. Now you have revised your sales forecast by JPY 100 billion. So what is the proportion between China, sales to China and sales to other regions?

[Toshiki Kawai, executive]

In our upward revision, the advance logic area. We have additional inquiries in the field of advanced logic. On the other hand, so there is some revision of the customers of advanced devices, the proportion between advanced node and mature node to be 50-50. These are the factors which made us to revise our estimate downward.

[Operator]

Next question is from Mr. Yasui of UBS Securities.

[Kenji Yasui, analyst]

I am Yasui of UBS Securities. Once again, I have 1 question. For the second half of this year, you have 47.3% of the gross profit margin. On the other hand, China proportion goes down, I think the China sales feature high profitability. So why the gross profit margin goes up, although the China proportion goes down in the second half of this fiscal year.

[Toshiki Kawai, executive]

So the -- as I said earlier in my presentation, the leading edge area, the high-value added area business are growing steadily. As I said earlier in my presentation. So we have some advantage in that area. And that advantage is recognized by the customer, and we can provide high value added to the customer. That's the reason why the gross profit margin goes up. In other words, HVM, logic and packaging and testing in these areas, the technology advancement is going on. And accordingly, our technology advantage is recognized, and that leads to high value-added products of our products. And the main drivers because of high value, we can provide both the proportion of China goes down, we are able to increase gross profit margin in the second half of this fiscal year.

I have one additional comment. From the first quarter to second quarter, the gross profit margin goes down -- went down because of the product mix. So we have high market share product whose gross profit margin is rather high. That proportion goes down. Another one is one-off inventory disposal because of that, the gross profit margin goes down from the first quarter to second quarter. So this is a major reason. We are just talking about the second half -- second half of this year. The question is about second.

[Kenji Yasui, analyst]

Yes, yes, I wanted to know, both for the second half of this year and the difference between first quarter and second quarter.

So the region mix changes, but because of product mix, you can see some improvement. Therefore, for this fiscal year, if the gross profit margin is as planned. Next year, you may see further increase in gross profit margin? Or do you think, there is no change in gross profit margin next year.

[Toshiki Kawai, executive]

So I think if we can keep balanced business and we are doing business in a balanced manner. So 2027 fiscal year mark is JPY 3 trillion or more, which to be achieved in year -- fiscal year ending March 2027. The OPM of 35% or more and ROE of 30% or more. That's part of our midterm management plan and the new -- our new products progress in this fiscal year will help us to improve our business performance so we can add more PORs for high volume production in addition to 70% that I mentioned earlier.

So we have a steady progress towards the achievement of the mid-term management plan. So this is how our business is going on in a balance manner. The semiconductor manufacturing industry is capitalized by the very rapid changes, but very fast technology innovation. So we need to continuously have the world-leading technology innovation. That's the reason why we are investing more than JPY 1.5 trillion for R&D and JPY 700 billion or more CapEx for 5 years to come, we are going to implement those 5-year plan steadily for R&D expenses and CapEx.

[Operator]

Next question is from Mr. Wadaki of Morgan Stanley MUFG Research Japan.

[Tetsuya Wadaki, analyst]

For next fiscal year, so it depends on China. We don't know what happens next year depending on China situation. But 2025, the China that we see market growth, what is your assumption for memory and nonmemory, especially for memory. I think -- I saw the similar thing in Kokusai Electric. Many of the customers are putting forward their orders. So they have some concern for next fiscal year's performance. So China as a whole, how sort of growth do you expect in the China WFE market? And what is the breakdown between memory and non-memory?

[Toshiki Kawai, executive]

There are numerous customers in China. Therefore, in my mind, there is no breakdown between memory and non-memory. But when it comes to China sales, or WFE market in China, the China open market is expected to decline.

[Tetsuya Wadaki, analyst]

You said earlier, the WFE market shows double-digit growth, while the proportion of China will go down by 40%. That means Chinese market set will decline by 20%. Is that correct?

[Toshiki Kawai, executive]

I don't think 20%, so I think decrease by double digits. That's our expectation for China market.

[Tetsuya Wadaki, analyst]

So I have one follow-up question. This forecast is based on the export control by the American government. How do you factor in the export control?

[Toshiki Kawai, executive]

So geopolitical issue and regulations are to be watched closely. That's why I always say, already, there are various information coming in. So regulations will be imposed and even after regulation are imposed, we need to get the permit from [indiscernible]. There are some products which we may get permit and there are some other products, which we may not be able to get permit from [indiscernible]. Based on that assumption, we report those figures.

[Operator]

Next question is from Mr. Hirakawa of BofA Securities.

[Mikio Hirakawa, analyst]

My question is very similar to the previous question. Second half of this fiscal year, so when you see the competition by application, I got information for the first quarter results, I think there have been no changes. So I think the DRAM, nonvolatile memory, no memory are growing January. But by region, which region is the major driver to make you revise your forecast upwards.

[Toshiki Kawai, executive]

The primary driver is Taiwan. So in terms of upward division of our estimates, the mature node customers in China are added. There is addition in the mature customer in China, the major driver is the leading-edge foundries. By region, Taiwan, followed by Korea and China, partially United States, including memory area, the advanced memory and advanced logic as well as the mature node in China, are the major drivers. Thank you very much.

[Operator]

Next question is from Mr. Damian Thong of Macquarie Capital Securities.

[Damian Thong, analyst]

On Page 8, now you can see the field solution sales for the second quarter, you hit the record high. And Q-over-Q -- quarter-over-quarter and year-over-year, you can see drastic increase. What is the reason for this drastic increase? And what will happen in this third quarter, fourth quarter and next fiscal year, are there any special factors to raise the field solution sales or no, utilization rate is increasing right now for advanced nodes. So can you see some tailwind next year as well.

[Toshiki Kawai, executive]

So as you pointed out in your question, the customer's fab feature higher utilization rate. Accordingly, the part sales has been growing steadily. Installed base is growing and also the customer's’ fabs utilization rate. Because of these factors, service and part sales as well as the sales are increased because of the growing installed base. So these are the major reasons for the increase of the field solution sales. Thank you very much.

[Damian Thong, analyst]

So this level of field solution sales. You said double-digit growth is expected next fiscal year, including products and service. But when you just look at the service what sort of growth rates do you expect for next fiscal year.

[Koichi Yatsuda, executive]

So IR department will answer to your question. As of today, we don't work in our next fiscal year's budget, but customers' utilization ratio is improving, especially for NAND. The first half of this fiscal year, utilization ratio of NAND process is rather low, but it's growing. Maybe the investment for NAND will be doubled next year. Therefore, you can see growing installed base. Accordingly, the utilization rate is increasing. DRAM also active and logic is also very active. But when it comes to mature node, there are some weak utilization rates for mature node. I hope this answers to your question. So we can see strong inquiries for the advanced logic and advanced memory. But when it comes to mature node, you can see some slowing trend. So the growth rate expected for next year. Actually, we haven't calculated the expected growth ratio for next year.

[Damian Thong, analyst]

I have 1 follow-up question. For next fiscal year, Chinese WFE market is declining. However, when it comes to service, field solution service in China, the utilization ratio is expected to grow furthermore by improving the yield rather than capacity enhancement.

So field solution sales in China, although WFE market declined slightly are there any possibilities that field solution sales in China increase next year.

[Koichi Yatsuda, executive]

This year, China is stronger because of the active investment by the emerging customers in China. And they are working on the yield enhancement and utilization ratio is not so high. So when yield is enhanced, we can expect a further increase in utilization ratio. However, we don't see such kind of trend yet among the Chinese emerging customers.

[Operator]

Next question is from Mr. Shimamoto of Okasan Securities.

[Shimamoto Takashi, analyst]

I am Shimamoto of Okasan Securities for WFE for 2025, the memory should be the swing factor. In the previous meeting, DRAM increases by 20% to 30% and NAND will be increasing -- do you have the same idea for DRAM and NAND still now?

For NAND, compared with RAM, the NAND market is rather small, but no market is to be doubled. And DRAM growth is expected as well. So as you said, we haven't changed our year for the market trend for DRAM end market. You can give us some qualitative comments. Are there any enhancing trend or a declining trend for NAND. I think the recovery might be delayed in fiscal year. Do you see such kind of trend in NAND market?

[Toshiki Kawai, executive]

So far, we haven't seen any significant changes.

[Shimamoto Takashi, analyst]

I have 1 follow-up question. for cryo etching, POR, so significant progress is achieved. I want to know specifically, it's so difficult for us to imagine what happens. Maybe you can tell something what sort of progress has been achieved for cryo etching? And how much sales do you expect for next year if some sales are recognized for cryo etching. Let us know whatever you can say now.

[Toshiki Kawai, executive]

So multiple customers and the applications of cryo etching has been increasing slightly. So the characteristics are now being evaluated and verified right now. So if the customer can enjoy the desired characteristics. Maybe we can have a negotiation with the customer for the mass production POR, 10-micron that can be etched without bowing or tilt. At the same time, environmental performance, which is very important is really good. We don't use carbon gas. So 400-layer will be introduced in the future, then we will see more and more applications for this cryo etching. The etching is rather big. In area, the volume on hedging should be around 2026. 2025, the cryo etching will have some contribution to our sales, but volume zone will come in 2026.

[Shimamoto Takashi, analyst]

Do we have any specific amount for the size of the market?

[Toshiki Kawai, executive]

Too early to say. I reported some figures in the past, I believe. The size of the market, we haven't publicly announced any signs of the potential market of cryo etching. I'm sorry. I'm sorry. As for the exact market size, we haven't presented in report.

So maybe you can see the drastic increase without an increase of the application of cryo etching. Although certain in the future. But one thing maybe 2 years from now, we have -- the cryo etching will start contributing to our sales in 2027. The market size is JPY 2 billion. That's what we said earlier. But that's 2 years from now. So far, we haven't changed this prospect drastically.

[Operator]

[Operator Instructions] Next question is from Mr. Yamamoto from Mizuho Securities.

[Yoshitsugu Yamamoto, analyst]

So I have a question regarding share repurchase. So JPY 80 billion. And now we have additional JPY 70 billion. You said you have the flexible implementation of the share repurchase. And I think that's true. So I don't think that there's no major change in the policy for share repurchase, but are there any particular reason or trigger that you have decided to do some additional share repurchase? And are there any indicator to do another share repurchase next fiscal year, if any?

[Toshiki Kawai, executive]

So now we are going to do the appropriate balance sheet management. That's what we always say. In particular, in terms of ROE, around 30%, double of ROE is our constant target. So that's part of our consideration to decide the additional repurchase of shares. Of course, we are watching the market trend, our cash position as well as ROE of about 30%. So we are doing the share repurchase so that we can achieve the ROE about 30%.

[Operator]

Next question is from Mr. Hanaya of SMBC Securities.

[Takeru Hanaya, analyst]

The Taiwan is really strong. I know that, but other advanced logic manufacturers are not doing so well. I mean those circumstances, ASML has revised their forecast for next year downward. You have 100% market share for EUV. Does the downward revision of ASM sales for next fiscal year has some negative impact on your financial estimate for your next year.

[Toshiki Kawai, executive]

As far as we are concerned, we -- our orders are increasing steadily. Therefore, in terms of coater developer, there have been no major changes in coater developer business. And there is no big volatility in our business of coater developer. That business is growing. Yes, do we have additional comments. For next fiscal year, DRAM and NAND are drivers, especially DRAM for scaling, so not only EUV, but also the existing immersion lithography demand is increasing. So not only EUV, but also immersion lithography we do have high market share according -- in accordance with the market growth, our sales are expected to grow next year steadily.

[Operator]

The last question is from Mr. Shibano of Citigroup Global Markets Japan.

[Masahiro Shibano, analyst]

I have a simple question, just clarification. And a very simple follow-up for '24 and '25 WFE market forecast. You used the same sentence as the previous financial announcement. But how about reality? Are there any changes? You can just give me 1 word answer.

Should you record to TechInsights information and strong growth is expected for the future. According to Mr. Kawai's understanding earlier this year, you presented R&D expenses, head count enhancement and CapEx enhancement, you are going to increase it by 1.5x, but do you need further enhance budget for the future? Or do you just follow the initial plan for R&D head count and CapEx.

[Toshiki Kawai, executive]

The business opportunities are expanding. Served available market is growing right now. So we are given great opportunities in that JPY 1.5 trillion or more or JPY 700 billion or more expenses. So we cannot give you quantitative additional expenses for R&D expenses and CapEx as of today, but we may need more expenses for R&D and CapEx and we are now preparing the plan for the future.

For WFE market forecast. Double-digit growth is expected for next year. Page 13 shows some information. So AI servers investment, the proportion of that for next year accounts for 20% in total WFE. And AI-mounted PCs and smartphones accounts for 20% within WFE market and conventional PC and conventional smartphone accounts for 30%. So these are the major drivers. For this year, 15%, 15% and 35%. Therefore, 65% are driven from the leading edge node. But next year, the 65% will be increased to 70%, especially driven by AI related demand.

So market itself is expected to grow on a double-digit basis, but AI-related servers and PCs, smart phones are expected to grow furthermore. In the future, AI area is expected to grow furthermore. According to our perspective, there have been no major changes in our idea for the future market trend. So there have been no major changes from the previous financial announcement.

Yes, that's correct. And so new area, we are winning POR. Also we have started some evaluation. Therefore, we are making steady progress towards the midterm management plan.

[Koichi Yatsuda, executive]

So now it's time for us to close the financial announcement. Before closing, however, I'd like to make 1 announcement as Kawai, CEO announced in his presentation. We will hold IR Day at 4:00 in the afternoon of February 26, Wednesday 2025. In this event, we plan to present our business opportunities, expanding along with the growth of WFE and test assembly to market our initiative to embrace opportunity as much as possible. So we'd like to very much appreciate your participation. We will inform you of the details of this event later. We'd like to continuously improve our R&D activities, IR activities based on your precious feedback.

So we appreciate your kind cooperation in filling out the questionnaire before we exit the Webex.

Thank you very much for taking time to join this conference despite your busy schedule. Thank you very much.

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