Advantest Corporation (6857) Earnings Call Transcript & Summary

Thank you for joining Advantest FY 2022 financial briefing despite your busy schedule. Let us introduce Advantest attendees: Representative Director, President and Group CEO, Yoshiaki Yoshida. Director, Senior Executive Director, CFO and COO, EVP, Corporate Administration Group, Atsushi Fujita. Senior Executive Officer, CCRO, EVP, Sales Group, Kimiya Sakamoto. Senior Executive Officer, Co-CSO, EVP, Corporate Planning and Stakeholder Relations Group, Yasuo Mihashi. I will facilitate this session. I am Kobayashi from the Investor Relations. Today, Fujita will present the financial results for FY 2022, followed by Yoshida presenting second midterm business plan progress report and FY 2023 outlook. After that, we'd like to take questions from you. And this time, after questions from institutional investors and analysts, we will take questions from the press members for 15 minutes from 5:00 p.m. Closing time will be 5:15 p.m. Today's presentation materials are uploaded on the TDNet and on our website. Please download them if you are participating via telephone line. Let us make some advance notice before we begin the presentation. In the briefings, we will present, may include forward-looking statements based on our current forecasts. They may all entail risks and uncertainties. Please understand that actual results may be different from our outlook. Now let Fujita offer you an explanation.

Please open the slide to Page 4. From my side, I would like to explain the financial results for fiscal year 2022. Fiscal year 2022 was a turbulent year amid the end of the semiconductor demand spike triggered by COVID, global macroeconomic weakness and the semiconductor market slowdown, the favorable business environment in the first half turned sharply downward in the second half. Nevertheless, Advantest achieved record high sales, operating income and net income. We expanded our market share by reinforcing our product portfolio and strengthening our global sales and support network. In addition, we strategically executed parts procurement production and shipments in order to meet customer delivery requests even in the middle of demand fluctuation. The key to our strong earnings was operational flexibility. Substantial Yen depreciation in comparison to the previous fiscal year also boosted our business performance. ROE also reached a record high of 39.3%. I would like to express my gratitude to all of our business partners, employees and other stakeholders for their continued support in this uncertain business environment. Please turn to Page 5. Here is the summary of results. Fiscal year 2022 results are as shown in this slide. Sales JPY 560.2 billion, operating income, JPY 167.7 billion, net income JPY 130.4 billion. As I mentioned earlier, sales, operating income and net income reached record highs and all increased significantly year-on-year. Sales exceeded our full year forecast announced in January by about JPY 10 billion due to faster-than-expected progress in deliveries to customers. However, both operating income and operating margin slightly undershot our full year forecast due to the recording of inventory valuation losses in the fourth quarter for some system-level test and other products and a less favorable product mix. Net income was roughly in line with our forecast. Combining our year-end dividend forecast of JPY 70 and the interim dividend of JPY 65, our annual dividend forecast is JPY 135. Our total shareholder return ratio, including buyback and dividend is 58%. Please turn to next slide. This is sales by segment and region. Even though the semiconductor market slowed down and production volume decreased, higher semiconductor performance drove an increase in test volume, which compensated for the said decrease in demand. Sales of SoC testers were driven by testers for advanced smartphone application processors as well as for high-performance computing and AI-related devices. In addition, sales increased in the automotive and industrial sectors, which are seeing strong demand. Sales of memory testers also increased year-on-year as customers continued to invest in high-performance memory semiconductor test capacity throughout the fiscal year despite the decline in memory semiconductor prices. As the breakdown by region shows sales expanded in all regions. Taiwan continues to be our largest sales destination as it was in previous fiscal year. Please turn to Page 7. This is the Q4 results summary. In the Q4 of fiscal year 2022, we achieved record high sales. Gross margin declined quarter-on-quarter due to the recording of inventory valuation losses for some SLT and other products as well as a less favorable product mix. Each item will be explained in detail on the following pages. Please turn to Page 8. This is the sales by segment for the fourth quarter. First, in Semiconductor and Component Test Systems business, the result was JPY 110.8 billion, which is up by 12.4% quarter-on-quarter. SoC tester sales were JPY 86.9 billion, an increase of JPY 6.9 billion year-on-year. While sales for high-end SoCs were sluggish, sales for analog semiconductors increased. Memory tester sales were JPY 23.9 billion, an increase of JPY 5.3 billion year-on-year. Product deliveries for both DRAM and nonvolatile memory increased. In Mechatronics Systems business, the result was JPY 17.6 billion, up by 23.9% quarter-on-quarter. Sales of SEM metrology products increased amid wider adoption of EUV lithography technology by semiconductor manufacturers. In Services, Support and Others, the result was JPY 19 billion, down by 24.6% quarter-on-quarter. In our SLT business, which currently has concentrated sales exposure to a limited number of customers, sales contracted significantly due to a decline in consumer-related demand. Page 9, please. This is the breakdown of sales by region. In Taiwan, sales of both SoC testers and memory testers increased. In other regions, delivery of testers for automotive and industrial devices progressed mainly in Southeast Asia. In South Korea, due to sluggish consumer demand, smartphone-related sales decreased. Please turn to Page 10. Gross margin was 53.4%. Gross margin declined significantly quarter-on-quarter, primarily because of the recording of inventory valuation losses of approximately JPY 3 billion on memory and storage SLT products. In addition, high-end SoCs occupied a less prominent place in this quarter's product mix, resulting in a less favorable sales mix, which caused gross margin to decline quarter-on-quarter. SG&A, including all other income and expenses was JPY 40.1 billion. Operating income was JPY 38.6 billion. Operating margin was 26.2%. Please turn to the next page. As for R&D expenses, in the fourth quarter, R&D expenses were JPY 16.2 billion. CapEx was JPY 8.2 billion and depreciation was JPY 6.1 billion. In fiscal year 2022, R&D expenses were JPY 60.1 billion. CapEx was JPY 25 billion and depreciation was JPY 21.4 billion. This was a year in which we made further investments in R&D targeting at medium- to long-term growth. As for cash flow, free cash flow was JPY 17 billion in the fourth quarter and JPY 43.5 billion in full year. Please turn to Page 12. This is balance sheet. Total assets was JPY 600.2 billion. Cash and cash equivalents JPY 85.5 billion. Inventories JPY 169.1 billion. Goodwill and intangible assets, JPY 95.8 billion. Equity attributable to owners of the parent, JPY 368.7 billion with a ratio of 61.4%. In fiscal year 2022, due to difficulty procuring parts and materials, Advantest held more inventories in order to enhance our ability to meet customer demands from the mid- to long-term perspective. We will strive to refine our inventory management for optimal responsiveness to the change in market conditions. This concludes my explanation on the financial results. Thank you for your attention.

Thank you very much. From my side, I will explain the second midterm business plan progress report and FY 2023 outlook. Please turn to Page 14. This is the result of the second year of second midterm management plan. This slide shows the financial progress of our second midterm management plan to date. In July 2022, we revised our MTP2 targets based on our FY '21 results and FY '22 outlook. The right side of the slide shows our cumulative results over the 2 years of the MTP2 periods so far compared with the revised targets highlighted within the red touch line amidst growing recessionary risk. Our business environment is becoming increasingly uncertain, but in terms of progress in the second year of MTP2, we achieved record high results. Continuing on from the previous year, in addition to capturing a higher demand for smartphone, HPC and high-performance memory devices where we have a competitive advantage, we steadily pursued our strategy of expanding our customer base in the automotive, industrial and consumer sectors, which paid off along with our product strategy in the form of higher sales to the sectors. Unfortunately, the semiconductor industry as a whole is currently facing headwinds. Since the volatility is inevitable in this industry, we set our MTP2 targets as 3-year averages. Although market conditions are likely to be less favorable in FY '23, the final year of the plan, we will strive to achieve our targets. Please turn to Page 15. This is MTP2 progress report so far. In 2018, we formulated our grand design, a 10-year plan to define our goals for the next decade. And since then, we have been working to achieve it. As part of our grand design, our Second Mid-Term Management or MTP2, is a 3-year initiative to solidify the foundation for Advantest's further growth in the context of strong growth expectations for the semiconductor market. This slide summarizes our progress in implementing our MTP2 strategies over the past 2 years. As semiconductors become more complex, we have pursued R&D and carried out M&A in future growth areas with a view to technological trends. In FY 2022, we launched the inteXcell, an innovative new memory test sell and acquired CREA, a major Italian test equipment manufacturer, which specializes in power semiconductors. In addition, we further enhanced our responsiveness to customer needs with ongoing sales support hiring and have made progress in securing immediate human capital in anticipation of future business expansion. In order to seek operational excellence, we launched a global business operation initiatives, and commenced activities to promote a business process reform. With regards to governance in auditing [indiscernible] global headquarters management system, we introduced the CxO system to clarify management accountability. Furthermore, in January this year, we appointed a group CEO, a group COO and a group co-COO and shifted to a system with 3 representative directors. We feel that our growth foundation has become broader and more resilient while maintaining industry best customer satisfaction. Please turn to Page 16. This is a semiconductor tester market and a market share report. The calendar year '22 semiconductor tester market is estimated to have been less about USD 5.2 billion year-on-year growth rate of about negative 6% with the SoC tester market accounting for about USD 4 billion of the total and the memory tester market coming in at about USD 1.2 billion despite lower demand for semiconductors for cornerstone, consumer electronics products. Technology evolution in high-performance semiconductors drove demand for testers, which we believe compensated for the overall market construction to some extent. We estimate that our calendar year '22 market share was about 57%, an increase of about 10 percentage points year-on-year. We believe that we have won the #1 market share for the second year in a row, including a roughly 58% share of the SoC tester market and about 53% of the memory tester market. In calendar year '22, despite the market contraction, we expanded our sales by capturing the growing test demand for high-performance semiconductors such as HPC and AI devices and again, market share. Please turn to Page 17. This is 2023 semiconductor market outlook. Uncertainty about the future of our business environment is increasing due to factors such as the increasing risk of global recession due to soaring inflation and interest rate hikes, concerns about expanding geopolitical risks, and the potential for profound exchange rate fluctuations exist. With the global economic slowdown impacting the final demand, the semiconductor market is seeing production adjustments in response to surplus inventories. We estimate that it will likely take 6 to 9 months for demand for semiconductors used in smartphones and other cornerstone consumer electronics to revive. Under these circumstances, the semiconductor tester market is expected to shrink in calendar year '23 for a second straight year. We estimate the calendar year '23 SoC tester market will be [ worse ] between USD 3.4 billion and USD 3.8 billion, a year-on-year decline. While demand for testers for automotive and industrial devices is expected to remain firm, consumer electronics-related tester demand is expected to go on declining in the first half of the year. In the calendar memory tester market, we expect strategic investments in high-end memory to continue, but it is estimated that the overall size of the memory tester market will decrease year-on-year to USD 900 million to USD 1.1 billion due to deterioration of memory semiconductor demand. However, in the long term, we expect an increase in semiconductor demand from new applications, including electric vehicles and ChatGPT, which will contribute to the expansion of the semiconductor tester market. Please turn to Page 18. This is FY 2023 forecast. Due to the slowdown in the tester market, our FY '23 forecast calls for sales of JPY 480 billion, operating income of JPY 105 billion, income before income taxes of JPY 103.5 billion and net income of JPY 78 billion. Customers are expected to continue their inventory and production adjustments for the time being. We see sales declining in the first half, but they should gradually improve in the second half. Our full year gross margin is expected to be around 55%. We forecast a decline from the previous fiscal year primarily due to changes in our product mix. Our operating margin is expected to decline to 21.9% as we continue to invest in R&D and CapEx to respond to new projects and applications that will ramp up in calendar year '24 and beyond. This forecast assumes exchange rates of USD 1 to JPY 130 and EUR 1 to JPY 140. Our latest forecast for the impact of exchange rate fluctuations on FY '23 operating income is plus JPY 1.1 billion per JPY 1 of JPY depreciation versus U.S. dollar and minus JPY 0.3 billion per JPY 1 of JPY depreciation versus the Euro. Regarding the tightening of restrictions on the export of semiconductor production equipment to China by the United States, [indiscernible], a direct impact on our FY 2023 earnings is currently expected to be minor, but we will continue to closely monitor the situation. Please turn to Page 19. This is FY '23 outlook by segment. This is FY 2023 Semiconductor and Component Tester Systems outlook. Our full year FY '23 SoC tester sales forecast is JPY 265 billion. Tester investment is likely to slow down across a wide range of applications. Due to the global economic downturn, we expect a drop in demand for advanced process products, such as devices for smartphones and data centers, as well as for mature process products used in automotive and industrial applications. Our full year FY '23 memory tester sales forecast is JPY 70 billion. Although customers will continue to make some technology buys in anticipation of long-term high-end memory demand growth, memory tester sales are expected to decline due to worsening memory semiconductor market conditions. Please turn to Page 20. This is FY 2023 Mechatronics and services support and other business outlook. Our full year FY '23 Mechatronics system sales forecast is JPY 45 billion. Sales of device interface products and tester handlers expected to decline in step with the slowdown in tester investment. However, sales of SEM metrology products are expected to stay flat year-on-year due to wider customer adoption of EUV lithography and increased demand for mature process photomasks. Our full year FY '23 services, support and other sales forecast is JPY 100 billion, year-on-year increase. We expect stronger demand for maintenance services due to the steady growth of our installed base. In our system-level tester business, we expect sales to remain flat year-on-year, including sales postponed into FY '23 due to the impact of the decline in consumer-related demand in FY '22. Please turn to Page 21. This will be the final page, and this is key measures for FY 2023. Currently, the semiconductor market is in the midst of an adjustment that began in the second half of calendar year '22. We expect it will be a little longer before the market bottoms out, but it should pick up again going into calendar year '24. FY '23 and the final year of MTP2 will be a year in which we strive to achieve our MTP2 targets and prepare for a new wave of demand by building a stronger and more resilient management foundation, and we have key measures. We will strive to create added customer value through the development of leading-edge test technologies, including a further expansion of our test solutions for future growth in markets, such as AI and power semiconductors, and reinforcement of our data analytics business foundation. We will continue to make necessary growth investment in new projects targeting future business expansion. In addition, we will seek operational excellence by, among other things, refining our supply chain management for better responsiveness to demand fluctuations and actively utilizing DX to improve company-wide productivity. Finally, we held our first sustainability briefing at the end of last month. The briefing explained our belief that betterment of our human capital is one of the keys to improving our corporate value. To that end, we have launched a mid- to long-term project to support the sustainable growth of Advantest by introducing ESG initiatives, including investment in human capital by promoting the enhancement of individual employee skills and the deployment of a global personnel system. That's all for my presentation. Thank you very much.

Now let us open the floor for questions. From Mitsubishi UFJ Morgan Stanley Securities, Mr. Wadaki.

Can you hear me?

Yes, I can hear you.

Regarding your revenue forecast, there could be certain upside in my view. Based on market conditions, you are conservative for the drop in revenue and mid-tier local manufacturers investment is gaining momentum and ChatGPT now having a lot of the momentum, everyone looking for business opportunity. And I'd like to know the advantage to view on these developments.

Well, this is Yoshida speaking. First of all, regarding our outlook, you're saying that we -- our outlook is rather conservative, but the most recent condition is rather difficult. And for mid- to long run, we are confident that market is going to grow. And the customers in China, mainly in fabless areas, they are quite active. However, for the time being, on our operational levels, best case is that -- this revenue forecast. And if we are able to maintain our market share, we could achieve more, and we believe that we can maintain our market share. So of course, I'm not going to say there is no possibility for upside; however, we are not still uncertain about the bottom out in our site. So this is our outlook. And regarding ChatGPT, there are hot discussions in the market. And certainly, on a customer basis, there are -- we are capturing almost all of the major players, but direct impact on our revenue would be in the second half of this year or maybe in fiscal year 2024. Therefore, we'd like to prepare ourselves. So we'd like to position this period for preparation. That is my answer.

Can I ask a follow-up question? Regarding this performance forecast, when did you make this forecast?

Well, around January to February, we made a tabulation of the numbers. And based on these numbers, we made our budget.

Let us move on to the next question. Yoshida from CLSA.

This is Yoshida from CLSA. Can you hear me?

Yes.

In the tester market this year, we are seeing or expecting a decline for 2 years in a row. At this point, among the fabless customers, when we look at the road map toward fiscal year 2024, how do you foresee the tester market?

Please allow me to explain. Customers plan for device development is something we understand through our engagement with customers. Toward fiscal year 2024 advanced node -- new advanced node is going to be used by some customers and we know who they are, and we are involved in those projects. Testers, we need to collect a lot of technological data and engineering testing capacity is going to be needed and in fiscal year 2024, in various projects with customers, we are currently engaged in preparing so that we can succeed in multiple projects that could contribute to our revenue in 2024. It is true that 2023 is going to be a moderate year, but in 2024 we are expecting to capture a meaningful portion of the TAM. That's all for me.

I have a follow-up question. The SLT, system-level test business, there is a valuation loss on inventories. Together with memory tester, you explained the amount of JPY 3 billion, but only for SLT alone, how much was it? And the revenue forecast for SLT in this fiscal year is flattish, a slight increase, so I believe it is steady for testers business. What is the background here? You mentioned that some of the opportunities were deferred from the previous year, but can you please explain your view on the market situation?

Yes. Regarding system-level test, valuation loss was recorded for memory-related system-level test. And the exact amount is something we would like to refrain from disclosing, but more than half of approximately JPY 3 billion is the answer, I can share with you, which is a large amount. Memory-related system-level market declined, and there is quick switching over to the next generation, meaning that we have to face with our materials on hand becoming obsolete. Regarding system-level test, our challenge has been related to not only memory but SoC system-level test and/or weakness is that we only have a limited number of customers. With the significant decline of system-level test, we once again recognize our high dependence on a limited number of customers, and business stopped there and some of the opportunities were deferred, and we had to postpone some of the opportunities that we thought we will be able to secure. For the deferred opportunities, we believe we will be able to capture them sooner or later, and we are expecting them to contribute to revenue in fiscal year 2023. Also, consumables-related system-level test business is in the company that we acquired. In that market, once inventory adjustment ends, we can expect the market to recover and there, we will be able to expect a revenue that will be equal to the revenue from the previous year. Is it not the case that the customer -- number of customers is decreasing? No, we are strategically trying to increase the number of customers, and there is a sign of new demand. So customers' performance recovery and by acquiring new customers, we would like to lead toward fiscal year 2024.

Let's move on to the next question. Goldman Sachs, Shuhei Nakamura.

In your previous explanation, the revenue is expected to recover in the second half of the year to some extent. But looking at the current order situation, what sort of recovery story do you have for the second half of the year? What's your view on this?

Could you repeat your question? Or me clarify your question. So the current order situation, looking at that, what sort of recovery do we expect in the second half of the year? Was that your question?

Yes, that's right.

Okay. Thank you very much in the first half of the year until [indiscernible] order backlog, and we will continue the shipment, [ AT, BT ] as mobile devices are the key. And when will they recover? This is something that we are trying to figure out by talking to customers, and we are monitoring the timing very closely. And the current situation at this point in time, we have been speaking to customers, but they give a varied answers about the recovery timing. Some customers say, in the second half of the year, they have a more production plan. So we have some expectations from such customers, but other customers have tester capacity available already. They are still trying to use up all the capacity that they already have. Given these situations, for different customers, situations vary.

Understood. If that's the case, in the second half of the year, mobile will lead to fluctuation and server and HPC. What about the trends of these areas?

Regarding HPC, looking at the current customer trends, the order backlog capacity is still being used up by those customers. The situation is going to continue just like the first half of the year and towards the second half of the year, as was mentioned, generative AI, conversational AI and HPC AI. These demands could, in 2024, grow to a great deal. Because of that, in the second half of FY '23, we believe that these trends will manifest themselves.

Thank you. Now we'd like to take the next question. Mr. Yasui from UBS.

I have also a question concerning HPC. So many people paying attention to HPC, so a number of the customers and also the I would like to know whether they are increasing number of the customers for HPC. Whether the potential customers are on the increase or not?

Well, You know some companies and you can imagine. Please consider that we are already doing business with them. On top of that, for example, in China, or in Japan or in Taiwan and South Korea and in Europe, there could be certain possibilities for such players to emerge, but any [indiscernible] activities cannot be observed. Of course, in China, there are certain customers of ours may start coming to this area, but we have not seen that and customers in the U.S., we believe that we are quite closely working with them. Well, regarding the potential customers in the United States, do you believe that there could be certain phase where they would make the investment or you are not sure or expecting that to happen in the second half. Already designing the devices and making product type, that is our assumption, and we had a project on that. But as you know, Around the world, there are also regulations and the rules making. Therefore, when mass production stage comes in, in what part of the manner, including the back-end processes, we have no clear plans.

Well, a follow-up question. My second question is regarding this fiscal year's revenue guidance, and the revenue is JPY 80 billion to be reduced, but operating profit would be reduced by JPY 63 billion. Considering the marginal profit, your view is for profit to decrease quite significantly. And I'd like to know your views on the gross market and please also inviting us with the product mix.

Well, gross margin compared to last fiscal year, our plan is to see a little bit of the dip, but considering the product mix, this is not a significant change. And at the operating income level, this appears to be slightly big. But although we are in a down year, but we are not going to spend unnecessary expenses, and we'd like to control where we can control. And as I mentioned, we have a new project and we'd like to also making a capital investment for production expansion for the future growth. And we are also working on Advantest cloud and the data business, and we'd like to secure some manpower. So we are not intending to work on that. So beyond 2024 leap forward, such expense requiring investment is likely to continue. So Currently, our phase is where we have to spend expenses. And it appears because especially the revenue is declining, but we are considering this is the investment phase for our future. So operating income and operating margin decline. It's something we have to accept at the moment in order to make progress. I might repeat, but it's not a deterioration of the product mix you are assuming. Well, 57% gross margin will be dropping 55% or so. Therefore, product mix could be less favorable. You could consider that; however, the raw material cost increase, and we are also making effort to raise our prices. So in this kind of the manner, we'd like to aim to exceed 55%. However, our current view is around 55%. That will be sort of a point given our current product mix. Thank you very much.

Let us move on to the next question. Next is Mikio Hirakawa from BofA Securities.

This is Mikio Hirakawa from BoA Securities. In fiscal year 2023 in the SoC tester market, there is minus 5% to 6% was your view for the market. And the factor for this range, what do you have as a factor for this range? And minus 19% is for SoC tester during this fiscal year. And what was the basis for your forecast?

Hirakawa, hello, this is Mihashi speaking. So minus 5% to 15% for SoC tester market. The reason for this expectation is due to the macroeconomic situation, recovery of consumer electronic products is the key. There is recovery in the Chinese market, together with a smartphone market recovery. And to what degree is that going to recover is the question that we had when we decided this range, minus 19% is our figure. And in terms of market size, where do we see our potential decline in sales. There's 3.9 -- excuse me, please give me a second, JPY 3.4 billion to JPY 3.8 billion is the range we are explaining. This is below the midline that is our expectation for the TAM, and we consider this based on our expectation for the TAM at the moment.

As a follow-up, I prefer to have company-wide number, but if you divide your sales forecast between front end and back end, can you give me some hint what is the breakdown?

Yes. As President, Yoshida explained earlier, basically, in the first half, there is less visibility in the market, there is excess capacity as well. So there will be more concentration in the second half in our sales forecast.