Advantest Corporation (6857) Earnings Call Transcript & Summary

Thank you very much for joining Advantest Corporation's financial briefing for the second quarter of FY 2025 despite your busy schedule. I'd like to introduce today's speakers. From the left side of the slide on the screen, Mr. Douglas Lefever, Representative Director, Senior Executive Officer and Group CEO; Mr. Koichi Tsukui, Representative Director, Senior Executive Officer and President, Group COO; Mr. Makoto Nakahara, Senior Executive Officer, Leader of CEO Office; and Ms. Hisako Takada, Senior Executive Officer and CFO. Mr. Sanjeev Mohan, Senior Executive Officer and CCRO, was scheduled to attend is unable to attend due to unforeseen circumstances. Mr. Makoto Nakahara will be attending on his behalf today. I'm Samba from IR Department serving as the moderator for today's session. In today's financial briefing, Mr. Lefever will provide a summary first. After that, Ms. Takada will report Q2 FY '25 results and full year forecast. Mr. Lefever then will present the third midterm plan update before entertaining questions from the audience. We plan to close this session at 5:30 p.m. Japan time. Before we begin, we'd like to remind you today's briefing contains forward-looking statements, all of which are subject to risks and uncertainties that may cause actual results to differ from those forward-looking statements. Now Douglas will present the summary of this quarter. Doug, please go ahead.

Good morning, and good afternoon, everyone. Thank you for joining our financial briefing for the second quarter of FY 2025. We are pleased to report that our second quarter of FY '25 results exceeded expectations with sales surpassing our July forecast and remaining close to the quarterly record achieved in Q1. Operating income and net income also beat our July forecast. Although they declined quarter-over-quarter, the decrease is mostly due to changes in the product mix and an increase in SG&A associated with a onetime charge related to a small growth investment. We are raising our full year guidance for FY '25. This reflects our stronger-than-expected first half results and the fact that the digestion we anticipated in the second half is offset by the acceleration of tester demand for next-generation devices. Takada-san will cover these details in her prepared remarks. We are also raising our 3-year midterm plan financial targets. This reflects the robustness of AI-related demand, our enhanced supply capabilities and our market share outperformance. In light of a robust industry outlook and our commitment to maintaining our leadership position, we are strategically accelerating growth investments in technology development, automation of test, supply chain and expansion to adjacent areas. Before we dive into the details of our financial results, I'd like to start by sharing our view of the business environment and our outlook for the tester market in calendar year 2025. We believe the fundamental dynamics of the semiconductor industry remain largely unchanged. Growth continues to be driven primarily by AI-related applications, while demand in other segments such as automotive and industrial remain relatively subdued. Overall, our visibility has improved compared to 3 months ago. We have grown confident that the favorable business environment supported by the ongoing build-out of global AI data center infrastructure will continue. However, there still remains some macro risks, including ongoing geopolitical tensions and the possibilities of sharp fluctuations in foreign exchange rates. With these factors in mind, I will now update our market size forecast as follows. For the SoC tester market in calendar year 2025, we are raising the market size estimate range to USD 6.5 billion to USD 6.9 billion, up from our July estimate of USD 5.7 billion to USD 6.3 billion to reflect stronger-than-expected AI-related demand and our enhanced supply capabilities. For the memory test market in calendar year 2025, we are narrowing the range of the market estimate to USD 1.8 billion to USD 2.1 billion from USD 1.7 billion to USD 2.2 billion, with the midpoint unchanged at USD 1.95 billion, a relatively high level by historical standards. Taking all these factors into account, we now expect the semiconductor tester market to grow by about 44% year-over-year at the midpoint in calendar year 2025. Takada-san will now provide an overview of the Q2 FY '25 financial results and the full year forecast. Takada-san?

From now on I will explain the Q2 results and the full year outlook. Starting with the Q2 results. In Q2 FY 2025, amid a favorable business environment, we recorded sales that were nearly flat Q-on-Q and delivered results exceeding our July forecast. This was mainly driven by increased tester sales for non HPC/AI devices. Additionally, the depreciation of the yen against the U.S. dollar compared to the exchange rate assumed in July also served as a tailwind. I'll go over details of the results in the subsequent slides. Starting with sales by segment. Top right, Test System sales business. SoC Test System sales were JPY 173.7 billion, a decrease of JPY 17.6 billion Q-on-Q. Sales saw a decline, particularly for HPC/AI-related devices due to a pull-in of product deliveries in Q1. Meanwhile, sales for non-HPC/AI devices, including smartphone Application Processors increased quarter-over-quarter. Overall, SoC Test System sales remained elevated in the second quarter. Memory Test Systems sales were JPY 43.9 billion. Sales of high-performance DRAM, including high-bandwidth memory increased. For other systems, sales of device interfaces and test handlers have increased. Next, bottom right, services and others. In addition to the growth in support services sales driven by an increasing installed base, sales of nanotechnology products also increased. Next, sales by region -- ship to region. Taiwan, we saw sales decline Q-on-Q, mainly for high-end SoC applications. On the other hand, for Korea and China, in addition to the growth in SoC Test System sales, sales of memory test systems also increased. In the second quarter, the decline in sales in Taiwan was offset by growth in other regions. As the need for semiconductor quality assurance continues to grow, we believe our company is well positioned to benefit from the increasing global demand for testing. Next, sales, growth and profits. Second quarter gross margin declined quarter-on-quarter due to a decrease in sales of highly profitable SoC Test Systems, but remained elevated at over 60%. SG&A, including the total of other income and expenses increased by JPY 7.5 billion Q-on-Q. This was mainly due to the recording of approximately JPY 2.5 billion from the partial transfer of business in Q1 as well as lower SG&A expenses in the previous quarter. In the second quarter, we booked approximately JPY 2 billion of expenses related to initiatives to enhance our mid- to long-term competitiveness. As a result, the operating profit margin in Q2 reached 41.3%, maintaining a level above 40%, consistent with the previous quarter. Next, investment cash flow. As you can see on the left-hand side, in the second quarter, R&D expenses were JPY 18.3 billion and CapEx was JPY 9.4 billion. On right-hand side, you can see the cash flow. Free cash flow was JPY 79.3 billion. Balance sheet. Cash and cash equivalents were JPY 298.2 billion, while inventories remained at the same level as the previous quarter at JPY 210 billion as of the end of September. Ratio of equity attributable to owners of the parent was 62.8%. The share repurchase program announced in April this year was completed in September. The total number of shares acquired was approximately 6.64 million shares for a total cost of approximately JPY 70 billion. We will continue to manage our balance sheet with a focus on maintaining optimal balance between growth investment and capital efficiency. From here onward, I'll talk about the full year guidance for this year. In light of the first half results and the outlook for the second half of the fiscal year, we are raising our full year forecast. Sales, JPY 950 billion; operating income, JPY 374 billion; income before taxes, JPY 371.5 billion; net income, JPY 275 billion; and basic EPS, JPY 378.06. We have raised our sales forecast by JPY 115 billion from the July projection. The trend among our customers to strengthen quality assurance, particularly for advanced semiconductors continues, and we expect this to drive further growth in testing demand. Amidst robust demand, we continue to focus on enhancing our product supply capabilities. We now expect FY '25 full year gross margins to reach approximately 61%, slightly higher compared to the July projection due to improved product mix. Following the upward revision to our sales forecast, we expect the operating profit margin to rise to 39.4%, reflecting economies of scale and an improved product mix relative to the previous forecast. The exchange rate assumptions for the second half of FY '25 are JPY 140 for the U.S. dollar and JPY 155 for the euro. Our latest forecast for the impact of exchange rate fluctuation on FY '25 operating income is positive JPY 2.9 billion per JPY 1 depreciation against the U.S. dollar and negative JPY 0.3 billion per JPY 1 depreciation against the euro. Next, segment sales for the year, starting with Test Systems. For SoC Test Systems, we have revised our FY '25 sales forecast upward by JPY 91 billion from the July projection. Customers' robust appetite for capital investment continues, fueled by growing complexity, performance improvements and production volume growth of HPC/AI devices. Now that we have better visibility into demand compared to 3 months ago, driven by the migration to next-generation devices beyond CY '26, we expect the temporary digestion phase in the second half to be more moderate than anticipated in the July projection. Beyond HPC/AI devices, test demand outlook appears to be gradually improving heading into FY '26. This is supported by the Q-on-Q increase in sales for Application Processors in Q2 as well as early indications of bottoming out in the automotive and industrial equipment sector. Memory Test Systems. We have revised our FY '25 sales forecast upward by JPY 14 billion from the July projection to JPY 153 billion. In addition to HBM, tester demand for high-performance DRAM such as DDR and GDDR is also expected to increase. Finally, services and others. We have revised our forecast upward by JPY 5 billion from July projection to JPY 103 billion. This reflects the steady performance of support services and increased demand for tester interface boards associated with SoC Test Systems. With the second half of FY '25 already underway, we remain focused on execution in order to deliver recording high sales and profits. That concludes my presentation. Next, Douglas will provide an update on MTP3.

Thank you, Takada-san. As we are now 50% of the way through our 3-year midterm management plan, I'd like to give an update on our progress and highlight some revisions we are making. First of all, as we experienced last year and continue to experience this year, the demand for semiconductor testers has surpassed initial projections established at the outset of our midterm plan 3, fueled by both rising volume, increasing complexity of high-performance compute AI semiconductors. In addition, our ATE market share has also outperformed prior assumptions, propelled by enhancements in our customer support infrastructure and continued improvements on our product supply capabilities. We recognize that the AI industry is dynamically evolving, which makes forecasting future demand for our solutions inherently challenging. However, our customers indicate a likely continuation of a favorable business environment for the remainder of the midterm plan 3 period with test content continuing to grow. After reviewing these factors, we have revised the previously disclosed management indicators. Meanwhile, we are making solid progress across the strategies and other key initiatives under our midterm plan 3. Accordingly, no major changes have been made as our strategies related to growing our core businesses, adjacent expansion, operational excellence and sustainability are serving us well. Therefore, we will only be updating the financial metrics today. Also, while our existing shareholder return policy will remain unchanged, as a priority, we remain firmly committed to accelerating innovation-led growth by increasing R&D and strategic investments. Now I'll explain the revised management metrics. FY 2024, the first year of our third midterm management plan delivered record-breaking results, driven by robust tester demand for AI-related semiconductors. In FY '25, robust demand from HPC/AI-related customers has sustained momentum, positioned us for another record-breaking result as noted by our CFO earlier. Taking into account these developments and our current outlook for the business environment in FY '26, we are raising our midterm plan 3 management target ranges as follows: sales, JPY 835 billion to JPY 930 billion. And please note that we are leaning toward the higher end of the range, partly due to the exchange rate assumption for FY '26. Operating margin, 33% to 36%; net income, JPY 207 billion to JPY 248 billion; ROIC, 34% to 39%; and basic earnings per share, JPY 284 to JPY 341. AI is gaining strategic importance across a wide range of industries and companies, driving intense competition among leading AI enablers and magnifying the influence of their capital investments on our business performance. In order to account for potential demand fluctuations, we have formulated a range of our revised targets. Looking ahead through FY '26, our base case scenario anticipates continued robust tester demand, driven by high-performance logic and DRAM, although we may have -- we may experience demand fluctuations on a quarterly basis. I will share our approach to shareholder returns before moving on to financial models and growth investments. Our shareholder return policy remains unchanged, reaffirming our commitment to shareholders. It is built on 2 pillars: First, stable and continuous dividends; and second, opportunistic share repurchases. In line with this policy, we will increase the interim dividend for the first half of FY '25 to JPY 29. Please note that our minimum annual dividend threshold is JPY 30 per share. We have executed 2 repurchase programs so far during the midterm plan 3 period. And today, our Board of Directors has authorized a new share repurchase program as outlined on this slide. This slide shows our cost and profit target model, which provides a simulation of profitability at the JPY 1 trillion mark, an eventual milestone and also a nice round number. The increased complexity of both semiconductors and our industry at large presents us with a greater opportunity, yet it also poses a formidable challenge in the form of heightened uncertainties and new risks. To navigate this complex reality, I would like to reaffirm the 2 key priorities we have emphasized since the start of our Midterm Management Plan 3. First, operational efficiency and resilience. Operating leverage improvements are materializing as projected in our plan 16 months ago, and we remain intensely focused on operational efficiency. By continuing to streamline operations and enforce cost discipline, we are building a more resilient and flexible cost structure that delivers stronger profitability across all phases of the business cycles, especially during downturns we may face in the cyclically up industry. Secondly, R&D investments. Our R&D investments have powered sales growth and gross profit margin improvements. Our success today reflects years of sustained R&D investments. In the cyclically up industry, we firmly believe that continued investment will further fortify our position and enable us to reach new heights. To achieve this vision, our commitment to prioritizing R&D remains unwavering. We will continue to increase R&D spending for future growth through the Midterm Plan 3 and beyond, even during periods of market softness. As our sales have expanded rapidly, our modeled R&D rate may appear modest. However, our R&D spend will increase by more than 40% from our last midterm plan. Over time, I would expect this rate to grow from the rate in the current model. Therefore, taken together, the operational efficiencies and continued R&D investment at JPY 1 trillion revenue level have us aiming for gross margin above 60% and operating margin in the high 30% range. I would highlight this model does not assume any inorganic growth. Let me conclude by outlining the direction of our growth investments. From this year onward, we believe the semiconductor industry will see rapid adoption of new architectures and packaging technologies. For example, transitioning from FinFET to gate-all-around along with backside power delivery, panel-level packaging and silicon photonics. These changes will make devices far more complex. And as complexity of semiconductors rise, time to market pressure and the cost of design and manufacturing errors will heighten the importance of yield. We anticipate that our customers will intensify their search for better test environments and optimize test flows. They will require higher precision measurement, greater throughput and automation of test. To lead this transformation, our growth investments focus on 4 priorities: first, fortify our core business in the high-performance compute AI area, enhancing competitiveness where growth potential is greatest. Secondly, continue to expand adjacently into areas that complement our core strengths. Third, fortify our supply chain with partners, suppliers to secure capacity, resilience and quality. Fourth, accelerate strategic partnerships to innovate in creating compelling test solutions. We will actively reinvest cash in these themes alongside increasing R&D expenses. In the first half of the midterm plan 3, we have already invested several tens of billions of yen in strategic partnerships with leading probe card manufacturers and will accelerate seeking to further such partnering opportunities. Advantest's long-term goal is clear. We will continue to promote initiatives that lead to sustainability while focusing on solving customer challenges, especially the increasing complexity in semiconductor testing. Through these efforts, we aim to expand the economic and social value we provide to each stakeholder in a well-balanced manner. We remain committed to creating greater value by relentlessly driving these growth investments through the Midterm Plan 3 and beyond. Thank you.

Thank you, Doug. Finally, we would like to share the latest updates from Investor Relations department. First, we plan to publish the 2025 integrated annual report on our website next month. This report will cover our corporate philosophy, strategies, governance and more. It is designed to be a valuable resource for shareholders, investors and a wide range of stakeholders. Second, we are planning to hold a virtual IR event on November 17 for institutional investors and securities analysts. In this event, our top management will present a fireside chat to discuss MTP3 updates and future growth strategies, followed by a Q&A session to address questions from participants. Further details of the event will be shared soon. Last but not least, on the 7th of this month, Japan Exchange Group announced the results of its regular selection for the TOPIX New Index Series and the list of constituent stocks. Our company has been selected to be added to the TOPIX Core 30 index on October 31. This concludes our presentation. Thank you for your attention.