Tokyo Electron Ltd

TSE:8035

Earnings Call Transcript 2018-Q3

[Kenichi Hirayama, executive]

Now it's time for start the Tokyo Electron financial announcement for the third quarter of this fiscal year. Thank you very much for joining us today despite your very tight schedule. I am Hirayama of IR Department, acting as operator. This year as well, we are going to make every effort to improve the IR activities, really appreciate your support. First of all, I'd like to introduce the attendees from our side. In the middle, we have Mr. Tetsuo Tsuneishi, Chairman of the Board. Next, we have Mr. Toshiki Kawai, Representative Director, President and CEO. And next, Mr. Tetsuro Hori, Representative Director, CFO and Executive Vice President.

Now first of all, we'd like to ask Mr. Hori, the CFO, to give us the information about the third quarter consolidated financial summary. Mr. Hori, please.

[Tetsuro Hori, executive]

Now I would like to make a presentation on the third quarter consolidated financial summary. First of all, last year, October to December period, that is the third quarter of fiscal year -- this fiscal year, the third quarter financial results showed good progress, in line with our plan for the second half of this fiscal year. Along with an increasing demand from the data center, the SPE business continued to be driven by investment in the memory devices. Also for Flat Panel Display, investment to Generation 10.5 has started, and it has been fluctuating very steadily. For the second issue, I will touch upon this issue later on again, but the FPD segment achieved profit margin of 10 -- 19.0%, and we submitted the midterm target for Flat Panel Display. The profit margin target is 20%, and we have flat midterm target of 20% coming to sight. And next, the Field Solutions business keeps growing as equipment utilization goes up across a wide range of generations.

Now you can see the financial summary on the quarterly basis. As you can see over here, the third quarter net sales was JPY 257.7 billion. The gross profit margin was 41.1% and operating margin was 22.5%. Compared with the second quarter, third quarter sales was declined by 8.1%, as you can see over here. This is just as planned, and we don't have any concerns about this values. As for the gross profit margin and operating margin, compared with the second quarter, you can see some decline. However, we don't have any concern because this is just because the decline in the sales -- net sales.

Now you can see quarterly financial performance. Again, the third quarter, net sales was declined and gross profit margin was 41.1% and operating margin was 22.5%.

Segment information is shown on this slide. As you can see here, Flat Panel Display, the third quarter segment profit margin was 19.0%. The previous quarter was 15.4%. So in the second half of this fiscal year, Flat Panel profit margin is improving. That's what we can learn from this -- these figures.

Here, you can see sales by region. Compared with the previous quarter, for Korea -- the sales for Korea is now getting into a kind of low investment. However, when you see the orange color bands, you can see overall increasing trend for the orange color band. And there are some regions where sales were decreasing a little bit. But in Taiwan, you can see slight increase in sales.

So here, in a sense, this is a kind of seasonality of our sales trend. When you look at the history, the first quarter and third quarter sales are lower than the other quarters just because of the seasonality. That is a trend of our company. Here you can see equipment sales by application. As I said earlier, sales was declined from the previous quarter in this third quarter. However, the majority comes -- came from the NAND, the nonvolatile memory, accounting for 41%. Again, the memory devices accounts for the big portion, the DRAM and nonvolatile memory accounts for the big proportion out of those sales.

Here, you can see Field Solutions sales. As I said in the beginning of my presentation, there are some fluctuation in the sales. However, by and large, sales shows the increasing trend in the Field Solutions.

This shows the balance sheet. On the left, for assets. So cash and cash equivalent was JPY 301.2 billion. Just because of dividend payment, you can see decline in cash. The inventory increased from JPY 283.4 billion to JPY 332.8 billion. As I said in the previous meeting, our inventory -- actually 1/3 of our inventory is just because of the -- our recognition criteria for sales. In other words, that is the completion of setting up and testers, most -- many of those equipment waiting for the installation at the customer site, so there is no major risks over here. On the right-hand side, liabilities and net assets. There is no debt, and our equity ratio is around 64%.

Here you can see inventory turnover and accounts receivable turnover. For third quarter, the inventory turnover has increased from the second quarter because of decline in sales. And as I said earlier, some of our equipments are just waiting for the installation at the customer site. These are the reasons for the increase of the inventory. And currently, inventory turnover is 117 days. But we don't have any major concern about this increase. The other one, the accounts receivable turnover, 54 days. We are -- the collection of accounts receivable is going well on the steady basis.

Finally, this is cash flow chart. Again, on the right-hand side, you can see orange color bar. This shows the payment of dividend -- interim dividend, JPY 45.7 billion. We carried out the dividend payment and share buyback back in third quarter in fiscal 2016. But actually in this third quarter, we have the dividend payment more than the amount of the fiscal 2016 third quarter. And free cash flow was JPY 15.1 billion. Thank you very much. That's all from my side.

[Kenichi Hirayama, executive]

Let's move on. Next, Mr. Kawai, our CEO, will give you the presentation on the business environment and financial estimates. Mr. Kawai, please.

[Toshiki Kawai, executive]

Once again, good afternoon. I am Kawai. I'd like to make a presentation on business environment and the financial estimates.

First of all, now let's take a look at big picture. We have -- I have been saying this for a while. So WFE market business outlook is shown on this slide, based on the midterm, long-term perspective. As you know, IoT is to be introduced and the new concept of big data is generated. AR, VR and other new applications are being introduced, and beyond 2020, 5G will be also introduced. When you look at the entire market, so e-commerce, FinTech, those businesses are coming out. And also in the future, virology, medical -- medicine, transportation, autonomous drivings, so new business models and new lifestyles will be emerging.

In the past, we just relied on the applications such as PC, mobile phones and smartphones, but now the -- we are now shifting to the broader demand for IoT. And when you look at the IC itself, the demand -- when you look at the demand, and also we need to handle large amount of data. So high-speed device will be necessary and higher reliability is also important. On top of that, low power consumption is also one of the requirements. And highly advanced technology need to be introduced. So the demands and technology innovations, those 2 are the kind of pillar to be pursued. The higher performance devices require further miniaturization, device shrink, and 3D structure need to be introduced and new materials need to be introduced and new memory devices also need to be introduced. So we have double or triple innovation required for the future. So in the future, the semiconductors and WFE are to be driven by the demands increasing and technology innovation. As a result, we are now getting into a new phase of the growth this year and beyond, where we're going to see $50 billion or more growth.

So that's the new phase we're getting into. So amid those circumstances, when you look at current year, let's take a look at this year's business environment. First of all, the WFE CapEx. As you can see here, the 2018 investment is expected to grow by about 10% from the previous year, driven by the strong demand for memory devices for data centers. Last October, I talked about the investment should be almost the same as previous year, but based on our scrutiny and discussion with the customer, now we can see the investment increase by 10%. For FPD production equipment CapEx for the TFT Array Process, for -- investment in FPD production equipment expected to increase by about 20% on year-on basis because of ongoing investment in small, medium-size panels and also the 65- and 75-inch large-screen TVs. Last year, we saw the 30% increase in the FPD market itself. But this year, furthermore, 20% market growth is expected in the FPD segment.

Next, calendar year 2018 WFE market growth by -- and business opportunities by application is shown over here. First of all, for the NAND, the WFE market for NAND is expected to grow by 5% on the year-on-year basis. As for the CapEx, the leading-edge 9X generation investment accounts for 50%. On the right-hand side, you can see 3D NAND monthly capacity -- monthly capacity for 3D NAND for calendar year 2018. By the end of 2018, the monthly capacity is expected to grow to 1.2 million wafers. The drivers is SSD demands for data centers. And in this area, etching process potential is getting bigger than before. In addition, film deposition, cleaning and high-speed testing system. So in all areas, we are enhancing our position in those areas and those growth will be contributing to next year business.

For DRAM, the wafer market for DRAM expected to increase by 30%. This is the #1 growing area. CapEx is driven by the 1X/1Y nano, which accounts for 80%. The average DRAM contents in mobile devices increased by 25% on year-on-year basis. Also, the capacity for server increases by 30%. So these are the contributors for the 30% or more increase for the wafer market -- WFE market for DRAM.

And we made announcement for the mobile phone production, and that mobile phone production increase is also incorporated when I talk about the 30% or more increase in this area. And business opportunities here includes, in particular, for DRAM, etching share has been increased from previous year. Again, this year, we can see etching area as one of our business opportunities.

Next, logic and foundry. The WFE market for logic and foundry remains at the same level as the last year. And CapEx, the nodes of 10-nanometer and beyond accounts for 6%, which includes pilot lines for 7-nanometer and 5-nanometer. Drivers, as I said in the beginning of presentation, is needs for the higher performance of the device and also lower power consumption devices. And business opportunities is device shrink and patterning.

In our company, we have several products available, but by enhancing our integration technology, we're trying to find the every possible business opportunities in this area.

Next, let's take a look at drivers of NAND flash memory investment. On the left-hand side, you can see the outlook of NAND bit demand composition by application by using bar graph. For SSD -- I'm sorry, NAND bit growth rate for 2018 is about 45%. The green portion, SSD bit growth, is expected to be about 50.9% till 2021. Therefore, NAND bit growth is mainly driven by SSD, followed by mobile. Mobile CAGR is about 32% from 2017 to 2021. That's our expectation. This demand for server capacity grows rapidly, as I said earlier. For server capacity, in 2017, it's about 300 exabyte. By 2021, it will goes up to -- it will go up to 1 zettabyte. So there is a strong potential for growth because SSD content right now for server is only 9%. So this is the great potential -- there is a great potential for growth.

The fiscal -- this fiscal year, SPE business progress is summarized over here on this slide. Due to growth in market size and our share, the full year SPE sales for memory is expected to be doubled on the year-on-year basis. And the Field Solutions business sales has increased, as Mr. Hori said earlier. The accumulated 9-month sales amounted to JPY 181 billion, increasing by 22% on the year-on-year basis.

The used-equipment upgrade, [ CIP ], the service contracts and parts, in every area, we can see some increase. And as for the sales of our strategic products, are expanding steadily in accordance to our strategy, not only etching but also ALD equipment, cleaning process, we can see the steady increase. For etching, last year, etching market exceeded $10 billion. The production capacity is to be increased, which is necessary, but as we announced, the logistics building has started its operation from this month, and our new development building will be completed by September this year. And within the existing building, we have added a new production line by October this year, so that we can increase our production capacity by double.

Now FPD business progress is shown over here. Actually, there is no difference or no change from the previous meeting slide. As Mr. Hori said earlier, the third quarter profit margin was 19%, which was increased from previous year, and we can expect full year profit margin of 15%. So we are getting closer to the 20% target -- midterm target for FPD profit margin. That's the current status.

So 2018 financial estimates. Again, financial estimates are shown on this slide. There is no change on this slide from our October meeting. So let me just skip this slide.

And for SPE segment, you can see new equipment sales forecast on this slide. So the third quarter -- up to until third quarter, you can see actual values and fourth quarter, you can see the estimates from January to March this year. As you can see over here, purple portion, which represents 3D NAND, is a kind of driver, but blue portion, DRAM, is increasing rapidly. That's the current status for the fourth quarter. FY 2018, throughout this year, memory is expected to account for about 60%. And as for the details, for DRAM, the DRAM supply is really tight. 3D NAND in this Q4, we have started delivering equipment for the next 9X generation. For logic and foundry, 10-nanometer, 7-nanometer investment is going on, and next year, we will see 5-nanometer as well.

So 2018 R&D expenses, CapEx plan is shown over here. Again, there is no change from the October 31, 2017, announcement. So I won't touch upon into the detail, but our intention is we are going to find out the opportunity for business, and we are going to make upfront investments so that we can capture the potential business opportunity so that we can cope with the expanding market.

Now here, you can see the 2018 dividend forecast. There is no change. So this slide is just the same as our announcement on October 31, 2017. The dividend per share on full year basis is JPY 605 and expect to raise the dividend per share more than 70% on a year-on-year basis. And we are going to achieve record-high dividend for 4 consecutive years. Through increasing our profitability, we are going to return a lot to the shareholders.

This is the last slide of my presentation. As a summary, so 2017 -- calendar year 2018, WFE market expected to increase by 10%, FPD products and equipment market is expected to increase by 20%. Amid those circumstances, for our company, both SPE and FPD businesses, we are going to outperform the market growth.

And as for the expanding equipment market and more the business getting -- technology getting higher and more challenging, our value gets higher. So in order to satisfy customer expectations, we are going to make active investment in our development activities. For 5-nanometer node, the pilot line is to be introduced. For that one, we are going to develop the process integration technology, which will become more and more critical. We have established process integration center, and we're going to promote the development in that process integration center. And IoT applications, and as I said earlier, we are going to expand the Field Solutions business to cope with emerging IoT applications. Thank you very much for your kind attention. This concludes my presentation.

[Kenichi Hirayama, executive]

Now I'd like to entertain questions up to until 6:30. Could you raise your hand if you have any questions? Could you identify yourself by your name and affiliation before asking questions? Could you limit your question to one followed by another one? And please speak a bit clearly and slowly because this session is also uploaded to the website.

[Kenichi Hirayama, executive]

So could you raise your hand if you have any questions, please? Yes, the gentleman on the front row, please.

[Tetsuya Wadaki, analyst]

I am Wadaki from Nomura Security. And I think there is a good atmosphere -- happy atmosphere over here. So one question I want to ask right now. Calendar year 2018, WFE market expected to increase by 10%. As I discussed with you on the elevator, many of your suppliers -- parts suppliers were asked by TEL to increase their capacity by 2x, twice. But you said your growth will be outperforming the market growth, but I think the 10% or more market growth might be expected. How do you think about that?

[Unknown Executive]

As I said in my presentation, we are going to outperform the growth of the market itself. In principle, in our company, so technology innovation is expected and market growth is also expected. That's the area we are going to develop the products. That's where we have the product portfolio, for the high innovation and market growth. Etching and film deposition area are promising area for future growth. We are going to increase our share and also increase the entire market itself, based on the midterm, long-term perspective. When it comes to the CapEx, we cannot increase anything from tomorrow, so we'd like to have the longer perspective. And for the short-term perspective, as well as long-term and midterm perspective, as I said in my presentation, we can see the increasing trend, so when you think about the kind of overall increasing trend. As for the increasing area for -- we need to enhance the capacity furthermore. As I said in my presentation, for etching, October this year, we're going to add one more production line, so that we can double our production capacity. That's what I said earlier. So related to that production capacity increase, our partner or parts vendors, we're asking the parts vendors to do very similar things. That means not only etcher, but also the diffusion furnace and coater/developer, relevant parts vendors.

[Tetsuya Wadaki, analyst]

I think you are also asking those partners to increase that, so you said outperform drastically the market growth, is that what I can interpret what you said?

[Unknown Executive]

Yes, if you -- maybe you can think in that way.

[Kenichi Hirayama, executive]

Thank you very much for your question. Next question, please. Yes, the gentleman on the first row, please. On the other side, please.

[Takeo Miyamoto, analyst]

I am Miyamoto from Mitsubishi UFJ Morgan Stanley Securities. I have a question on Page -- Slide 17. I want to ask about the understanding of risks. So WFE, the NAND, 5% or more. DRAM is expected to increase by 30%. And foundry and logic is going to remain flat. And are there any risks or factors which cannot realize these values for each product, especially the unit price of the NAND is going down. That might have some negative impacts on CapEx. If you have some discussion with the customer, what sort of discussion do you have with your customer? Could you give us some comment on that, please?

[Unknown Executive]

First of all, the NAND and memory as a whole, the -- our customers are now generating profits and cash flow. As long as customers are generating cash flow and profit, we don't have any concerns. The market itself is oligonomized and customer does have some accumulation of experience and they are watching market. So customers are not expected to invest excessively to crash the market itself. That's the assumption that we have. So at this moment, there is some shortage in the market. In other words, even at the same amount, and now we can see the same generation product at the same price, but there are some decline and maybe we can see some gap fill, so that, that will give us some tailwind to promote our growth. So the -- in the case of NAND in particular, the NAND does feature the very high elasticity against pricing. As for DRAM, as I said in my presentation, the mobile devices amounts are being watched by our company. The 30% I talked about, and the mobile amounts are also taken into account when I talk about 30% growth. For logic and foundry, again, as for device factors, I think the risk is very much limited. For 5-nanometer and 3-nanometer as well, we are going to do -- we need to do many things. The other day, a Taiwanese top foundry talked about the CapEx. Their top management talked about some issues about the capital investment, and what they said really supports our estimation. When it comes to the macroscopic economy, as you know, this year in the United States, there will be midterm election, and the American government might issue some stimulate -- economy stimulation measures. Therefore, there might be no concern on that issue. But there is some geopolitical risks, but those geopolitical risks cannot be controlled by one company.

[Takeo Miyamoto, analyst]

So on Page 17, upper right, you can see the 3D NAND monthly capacity value for DRAM. From 2017 to 2018, how much monthly capacity do you expect for NAND?

[Unknown Executive]

I'm sorry. I think demand is rather high or significant, as you know. But we haven't collected data for NAND monthly capacity. Thank you very much.

[Kenichi Hirayama, executive]

Thank you very much for your question. Next question, please. Yes, the gentleman on the front row, please.

[Claudio Aritomi, analyst]

I am Aritomi from CLSA Securities, Japan. My question is very similar to the previous question about WFE forecast, that this is the area that I want to ask question. For NAND, the 5% increase and 30% increase for the DRAM, that's what you said in your presentation. Compared with previous meeting, so by region, in particularly China region, how do you view the Chinese market or Chinese investment in China, I should say? That's the question I want to ask to you.

[Unknown Executive]

For China, in a word, there is no change in our view on China. So WFE impact -- impact on WFE for calendar year 2018, this year, about JPY 9 billion. So China accounts for 18%. That's our prospects. For next year, 2019, JPY 12 billion, and China accounts for 23%. That's how we view the Chinese market. And in China, excluding overseas players, the China local IC vendors, when you just focus on the China local IC vendors, JPY 2 billion in 2018 and JPY 3 billion in 2019. That's the prospect that we have right now. The current delivery plan is also remain unchanged from the previous meeting. In that sense, they're having no changes about the China market from the previous meeting.

[Kenichi Hirayama, executive]

Next question, please. Yes, the gentleman on the second row, close to the aisle, please.

[Yu Yoshida, analyst]

I am Yoshida from Deutsche Securities. Again, I have a question about the prospect for WFE market. 2019, how do you view WFE market? What sort of assumptions do you have for that? For example, based on this, the NAND and DRAM will increase furthermore and logic and foundry as well, along with the device shrink. I think there is some intensity of -- investment will be increasing. At the same time, lithography intensity will be increasing as well. So I think investment for exposure system will be increasing furthermore. And how do you see the market? And what sort of market share do you expect for 2019?

[Unknown Executive]

So midterm and long-term perspective is adopted when we look at the outlook of the future growth of the market. As I said in my presentation, toward 2020, we are expecting the steady increasing trend. And that macroscopic trend remain unchanged. And depending on customer investment plan, there might be some adjustment. But still, there should be some growing -- steady, growing trend. For 2019, the China -- the amounts in China will be increasing. At the same time, as I said earlier, there is a shift toward 5G. Therefore, in 2019, we haven't carried out a scrutiny, but there is no negative sentiment at all. For China, you can see some increase.

[Yu Yoshida, analyst]

I agree with you, but as you said earlier, the China local IC vendors, their investment is expected to be JPY 2 billion or JPY 3 billion. I think those values might not be updated yet. Do you see some upward revision of those figures?

[Unknown Executive]

I think that it is highly likely that we are going to revise them upwards in the future.

[Kenichi Hirayama, executive]

Next question, please. There's the gentleman in the rear, please, just in the middle.

[Masahiro Nakanomyo, analyst]

I am Nakanomyo from Jefferies Japan Limited. Again, I have -- towards midterm period, towards 2020, the market remains strong. I quite agree with you. But based on that assumption, so 3D NAND capacity, graph on Page 17. So 2018 profit margin is rather big, and 9X generation accounts for majority, then the bit growth based on the NAND capacity is rather strong. And NAND growth might be more than 5%. But 2019, the profit margin might decline drastically. So when you just focus on NAND, when there is a strong investment this year, there might be some adjustment investment for NAND next year, 2019. How do you view the forecast? If there is any mistake in my assumption, could you correct my assumption, please?

[Unknown Executive]

Towards the end of second half of this year, there is some investment to the 5G infrastructure, starting in the second half of this year. For the data traffic or data communication, there might be quite a few drivers, not only mobile, but also servers, as I said in my presentation. Demand for mobile and server is rather huge. In reality, now 2017 it's as low as 9%. But if there is more application in those areas, servers and mobile, and when we see the stable growth expected, therefore, we don't have any negative sentiments. Even if there is a quite big bit growth rate, it should be no concern that investment might stop.

[Kenichi Hirayama, executive]

Next question, please. Are there any other questions? Yes, the gentlemen in the second row, just in the middle, please.

[Masahiko Ishino, analyst]

I am Ishino from Tokai Tokyo Research Center. The semiconductor, including China, many of the IC vendors are very active in investment. When it comes to the materials, in particular, silicon wafer supply is very much limited. Asking many of the silicon wafer vendors, they are rather conservative, and they don't have so much preparation ready for very active investment. But Chinese manufacturers, for example, this year, they are going to build the new -- 10 new fabs. But I wonder, how are they built -- manufacturer ICs without having the silicon wafers? But how do you see the growth when there is a limitation by the materials, silicon wafers? From the viewpoint of the materials, how do you see the scenario for the future growth of this IC market? Could you share your idea with us, please?

[Unknown Executive]

Actually, there is no reduction in production. And there is the slight -- stable supply of the silicon wafer. But at this moment, the silicon wafer supply cannot catch up with the demands. But we don't have any pessimistic sentiment. I'm rather optimistic in the situation of the silicon wafer supply. In principle, in essence, at present, just like our suppliers, like parts vendors, we asked them to increase parts, but at the same time, our customers asked the wafer vendors to ask them to increase wafer supply. That's the current status. But in principle, there is no limitation or restriction by the wafer supply to stop the technology innovation. So there is no such thing happening. For this year, there is some, can we say, sufficient supply of wafers -- silicon wafers. Of course, there is a need for adjustment of silicon wafer supply and demand. In other words, that is one of the issues the customers need to think about, but there should be no major change in their plan on the customer side. So that's the reason why I explained our scenario in my presentation. When it comes to the bit growth, in order to secure this kind of very rapid bit growth, 6 million wafers per month, that capacity is not enough. The NAND, DRAM leading vendors are reducing number of test wafer, and they use those test wafers for the production itself. That's the current status.

[Masahiko Ishino, analyst]

And the wafer supply restriction. In order to maintain this level of market, from the viewpoint of the 2 vendors, for 2020 -- year 2020, how many silicon wafers do you think is necessary? From your viewpoint, how many silicon wafers? Let's say, for 300-millimeter wafers, per month, it's 7 million wafers are necessary in year 2020, in order to support this NAND bit growth. How many wafers are necessary? Do you have any reference for that?

[Unknown Executive]

We are now just in the middle of marketing to find out it.

[Kenichi Hirayama, executive]

Thank you very much. Are there any question? Yes, the gentleman on the second row, please.

[Satoru Ogawa, analyst]

I am Ogawa from Goldman Sachs, Japan. I have a question on Page 17. Logic and foundry CapEx forecast is just the same as previous year.

[Unknown Executive]

Which page are you referring to?

[Satoru Ogawa, analyst]

Page 17, please. The logic and foundry, your forecast is just the same as this year. But how do you see the impact of EUV Lithography introduction? The foundry manufacturer investment is also very flat, but at the same time, investment toward EUV Lithography would be increasing. Accordingly, investment to other tools might be declining. Is my understanding correct? In your company, coater/developer and etcher, these are major 2 products. What sort of impact do you see because of the introduction of EUV Lithography?

[Unknown Executive]

Essentially, for the device shrink, number of the process steps is expected to grow. However, just because of the introduction of EUV Lithography, increase of process step can be suppressed, to some extent. According to our understanding, the criticality of technology and number of process steps, we need to think about totality. But etching market is expected to grow. And for coater and developer, together with EUV Lithography system, we need to enhance the productivity or throughput of coater and developer. That's our challenge. So we need to add the functions to our coaters and developers. If you think about those additional functions, we can see increasing trend in the market as well. So we can see the growth potential for the future.

[Kenichi Hirayama, executive]

Are there any other questions? Yes, the gentleman on the third row, please.

[Kenji Yasui, analyst]

I am Yasui from UBS Securities, Japan. I have a very simple question. The cash on hand, about cash on hand, your target level. I think you have more cash on hand than your target. Do you have any potentiality for the buyback or M&A? How do you think about the share buyback and M&A?

[Unknown Executive]

How we can use the cash, actually, our policy does remain unchanged when it comes to the usage of the cash. About 2 years ago, we say that comfortable level of cash should be JPY 250 billion, and that figure remain unchanged even now. And the potential M&A or possibility of M&A, for example, needless to say, we are now focusing on the SPE and FPD business. And based on those 2 hubs, we are thinking about the potential investment for our further growth. And we need -- I need to spend cash effectively. And when you think about the share buyback, as I -- as we say always, we are always flexible in buyback.

[Kenji Yasui, analyst]

So when you say flexibility, at present, the smartphone is rather weak. And the market is rather stable. So you may see more cash next year, and the amount of cash on hand will be increasing. So any possibility for share buyback? I think there is some expectation from the market that you may start the share buyback. Is there any criteria for the absolute value when you start the share buyback or anything?

[Unknown Executive]

If you say something about criteria, our policy doesn't remain flexible.

[Kenji Yasui, analyst]

I'm sorry, I understand your point.

[Kenichi Hirayama, executive]

Thank you very much for your question. Any other questions from the floor? Yes, the gentleman in the front row, please.

[Toru Sugiura, analyst]

I am Sugiura from Daiwa Securities. I have a question about the gross profit margin. This year, now you are investing a large amount of money, and we will see more burden for the depreciation next year, and you have the increase of the cost of materials and also labor costs will be increasing in the future. Amid those circumstances, towards next year, is there any possibility to further improve gross profit margin? And if it's possible, what sort of measures are you going to take to further improve the gross profit margin? Could you share your idea, please?

[Unknown Executive]

First of all, we already submitted our midterm business plan, our financial modeling, in other words, JPY 1.2 trillion and JPY 1.05 trillion. And we have the gross profit margin and operating margin values. And we know that we haven't achieved those targets by 2 points. That's our understanding. How we can fill the gap of 2 points? We have 2 years to go before the end of this midterm business plan. And about your question, the improvement of the gross profit margin. So you asked us what sort of measures or methodology do we have to improve the gross profit margin. I think there are several measures. For number one, we can reduce the cost for warranty. But before that, needless to say, we need to encourage our customers to recognize our value in technology, so that we can sell our products at the appropriate price. That's primarily the important thing. And before -- after that, we have warranty, and we need to improve efficiency in start-up operation. They are very basic issues, but that's how we try to improve the gross profit margin. What is difficult is, so when you say JPY 1.2 trillion, we are getting closer to that. We need to think about this beyond -- the future beyond, and what sort of plan should we have. We are now discussing the plan after that, beyond that midterm plan, but there is more room to further improve our gross profit margin, and we are making every effort day by day.

[Toru Sugiura, analyst]

I have one follow-up question. Earlier this year, you said you tried to enhance the high value-added product so that you can improve the gross profit margin. Are you following your plan at this moment? Could you give us some update, please?

[Unknown Executive]

Yes, we are steadily following our plan to enhance the high value-added products. There are many things. Now when we see the -- certain increase in sales, then accordingly, fixed costs will be increasing rapidly, but we try to control those increase of the fixed costs properly, so that we can come up with good profit margin -- gross profit margin. So margin and profit ratio for each individual tool cannot be disclosed. In some cases, we are exceeding our plan. In some cases, we are just in line with the plan.

[Kenichi Hirayama, executive]

Thank you very much. Are there any other questions? Yes, the gentleman on the front row, very close to the aisle, please.

[Damian Thong, analyst]

I'm Damian Thong from Macquarie Capital Securities. For 2018, the calendar year, WFE market is expected to grow by 10%. So could you give us the figure of the growth ratio by product? If you have any data available, could you share that with us, please, especially, the growth rate of etcher for this fiscal year?

[Unknown Executive]

I'm sorry, but we do not disclose information of the market size by product. I'm sorry for that.

[Damian Thong, analyst]

But could you give us some guts feeling, the rough round figure? Could you share some comment with us, etcher growth -- about etcher growth?

[Unknown Executive]

Essentially, etching market is growing. This is the major area for -- when it comes to growth rate. Therefore, each product, in every product, we are going to increase our share. Amid that, the market size of the etching is the largest. So DRAM, our market is improving or increasing. This year, for DRAM, market is expected to grow by 30%. That's what I said in my presentation. Another issue is the slit process. We won the process of record for one customer. Our products were introduced into the mass production line last year. The other customer product will be getting into their manufacturing line this year. So those business will be materialized. So all products are expected to grow and also, etching system is growing rapidly.

[Damian Thong, analyst]

So 2017 calendar year, your company's etcher share, how -- what sort of value do you have for the share of the etcher?

[Unknown Executive]

We do not disclose any individual figure, but several points increase, that's what I can say right now. Thank you very much.

[Kenichi Hirayama, executive]

We do have some time for another question. Yes, the gentleman in the middle, close to the wall, please.

[Masahiro Shibano, analyst]

I'm Shibano from Citigroup Global Market, Japan. I heard a lot about the midterm perspective, so I want to ask some questions about short term. In the beginning, Mr. Hori talked about the October to December sales and service. He said it's a bit low. That's what he said in his presentation. But the -- he used the term, as planned. But when you look at the third quarter sales, do you think the values for the third quarter is just as you planned? Is that correct understanding? And I have another question on Page 23. Now we can see the fourth quarter forecast for product sales by application. So now you can see the drastic increase of the sales from the third quarter to fourth quarter. And this is also as planned, increase. And if that is just as planned, now we can see the drastic increase in the fourth quarter, you may need a lot of capacity for engineering and parts. Do you have sufficient engineers and parts for that drastic increase?

[Unknown Executive]

As for the third quarter sales, this is just as planned and within our company, we don't have any surprise for the sales of the third quarter. As for the fourth quarter sales, as you said, this is rather significant increase, if we materialize. I think this Q4 sales is expected to become record high for the quarterly sales. This is just a accounting matter. As I said before, we are using completion of setup and testing criteria for recognition of sales. Even for the sales for the fourth quarter, some of the machines are already delivered or shipped in the third quarter. I cannot give you any specific numbers, but quite a few tools are already shipped to the customer, although sales are recognized in the fourth quarter. So that really depends on the number of setup personnel and how our customers are prepared to receive the installment of the equipment. If they are ready, we can achieve this level of sales for the fourth quarter. Thank you very much.

[Kenichi Hirayama, executive]

I think we do have some more time for 1 or 2 questions. Are there any other questions? No more questions from the floor.

Okay, thank you very much. This concludes our financial announcement.