Renesas Electronics Corporation (6723) Earnings Call Transcript & Summary

Thank you very much for taking your precious time to attend Renesas Electronics Fiscal 2026 Third Quarter Earnings Call. We thank you very much indeed. [Operator Instructions]. Mr. Shinkai, please turn your video on. Today's session is attended by our CFO. Mr. Shuhei Shinkai, as well as other staff members of the company. After a few words from Mr. Shinkai, we would like to provide you with the explanation of the third quarter results, which will be followed by a Q&A session. We expect to finish the entire session in about 60 minutes. The materials to be used for today's presentation is already posted on the IR side of our corporate homepage. Mr. Shinkai, please turn your microphone on and begin your presentation.

Thank you. I am Shinkai, CFO of the company. Going from this time around. The earnings call update method was reviewed in June of this year at the Capital Market Day, mid- to long-term business direction and strategies as well as the aspirational financial targets were presented to you in a comprehensive manner. So the progress of those mid- to long-term things will be explained during the full year earnings call also at the Capital Markets Day from Mr. Shibata. But the recent -- or the quarterly performance of the company will be explained mainly by myself. So please be aware of that. Now if I could begin the presentation using the presentation slides. But before that, in the third quarter of this year, we would like to just briefly talk about the highlights of the third quarter results as well as the outlook for the fourth quarter. The first -- third quarter actuals with the industrial and infrastructure, sales came in higher than the projected numbers. On the actual apple-to-apple basis without the impact of ForEx, it was 1.18% increase compared to the plan. As for the third quarter, on the first of July, the timing business was transferred. We completed the dresser -- so the GAAP-based operating profit, we recognize the proceeds from the sales of JPY 450.3 billion. For the third quarter, on a Q-on-Q basis, excluding the foreign exchange impact on apple-to-apple basis, 4.2% Q-on-Q increase was recorded. The details was driven by the growth of automotive, SoCs and also the fourth generation took off -- started off and also the MCU 28 millimeters adoption spread. So that was also a factor. And also industrial infrastructure continued to be strong.. The fourth quarter outlook. So if I try to summarize, for the full year of 2026 on a year-on-year basis, 26.4%, revenue increase is expected for the landing. There is also a foreign exchange favorability. But on a year-on-year basis, the 20% increase is expected for the full year. Now -- for the mid- to long-term aspirational targets towards these goals, we will continue to grow. And we are also tackling to increase the production capability. The in-house production will be expanded through capital expenditures. In the third quarter, fourth quarter, we will continue to make those capital investments. So now I would like to go into the explanation using the presentation slides. Now if you can go to Page 3, this is a disclaimer here. as I said at the outset, on the first of July, the timing business was transferred. So those were excluded from the non-GAAP numbers. And the GAAP-based third quarter numbers recognizes the proceeds from the transfer of the striving business, the gains from the sale. The fourth page. The third quarter actuals are presented here. If you look at the shaded part on the left, those are the third quarter. So if you can look at that for the revenue, JPY [ 435.2 ] billion. Gross margin, 59.4%, operating profit, JPY 150.5 billion. Operating margin, 34.6%. EBITDA, JPY 173.4 billion and profit attributable to the owners of parent, JPY 125 billion, foreign exchange, JPY 161 to the dollar, JPY 185 to the Euro. As always, the timing business, excluding all that, the year-on-year comparison, excluding timing business is presented on the right-hand side of the screen. And then for the third quarter, there was one-off accounting related factors. So excluding that, we wanted to show this apple-to-apple as much as possible so that we can explain the real strength. So excluding the foreign exchange and the one-off factor, if you look at the second column there, that's already presented. So it's the one that says that, excluding foreign exchange and also the foreign exchange impact and also the one-off factor. The chip and David that translation transaction-related adjustments are this one-off factor. The chip and David. We have made a quotation for the provisions and then based on the actual sales of the customers we have settled that. So we have changed the methodology for the quotation. So that's the reason why we have decided to make this adjustment one-off year. The number was quite significant. So that's the reason why we have decided to exclude this from -- as a one-off factor. And so it's just a technical adjustment. If you can look at the next page, this is the comparison vis-a-vis the plan. The third quarter revenue, gross margin and also the OP margin, I would like to explain them one by one versus the plan. If you look at the column versus the plan, revenue was plus 1.2%. However, on a like-for-like basis, was higher. So it came in higher on apple-to-apple basis are higher than the plan. But because of the foreign exchange impact and also the one-off factor, those factors canceled out each other. Now the actual demand, 1.8% incremental revenue. If you look at the actual demand, automotive compared to plan was slightly higher infrastructure, IoT, industrial and IoT was higher. So therefore, the vast majority came from the contribution of IoT. And then there are 3 major factors here. Data center actual demand increased and also consumers and also the back-end supply improved. Therefore, we were able to have an increase in collection. And also as for the mass market in the industrial sector, AI and semiconductor-related demand increased. So those were the 3 major factors behind this upside compared to the plan. Now as for the gross margin compared to the planned 1.9 percentage point increase compared to the plan. And weaker yen mix improvement and the cost reduction for production were the major factors. In cheaper -- weaker yen, 20% mix improvement, 50% and also the cost reduction, 30%. Those are the contribution towards this improvement versus the plan. As far as the mix improvement is concerned, the data center and also the supply improvement, that was the factor behind the revenue improvement. And so likewise here, the digital power DPU improvement for the was a contributor for the mix improvement. And also when it comes to the production cost reduction, the write-down and write-off of inventory did not occur as much as what we had planned. So that resulted in lower-than-expected expenses. And also for the OP or operating margin, compared to the plan, 2.1% higher compared to the plan. The gross margin -- those -- the upside factors for the gross margin was the same here for the OP margin. And there were an increase in expenses, but the increase in the revenue. So those canceled out each other more or less. The decline -- was the decline of expenses due to the freezing or the review of the hiring plan and also AI infrastructure investment inside the company and also the increase of the STI-related provisions offset those favorability. So the actual lending numbers came in or less in line with the plan. And if you look at the right-hand side, on a Q-on-Q basis, gross margin was more or less in line with the projection and also for the operating margin on a Q-on-Q basis, we anticipated expense increase, and we landed according to the plan. By segment, IIoT on a Q-on-Q basis, there has been a significant increase, as you can see here. But when it comes to the gross margin foreign exchange mix. Foreign exchange and mix was also a factor. And also for the operating profit, the scale increase was the major driver behind the good performance. If you look at the next page, this Is the quarterly performance of the revenue. Overall, year-on-year, a 30.2% increase on a Q-on-Q 7.4% increase. The numbers on the brackets are the actual apple-to-apple excluding the for factor and foreign exchange increased year-on-year and 8.6% increase quarter-on-quarter. The next please, inventory. Left-hand side is the DOI and Q-on-Q third quarter work in progress and completed is increasing and -- bank increase and production increase to and work in progress also increased. These are the major factors. Fourth quarter quarter-on-quarter, there is increase to be expected. DaiBank and production capacity fulfillment by which both in progress will be increased and fourth quarter has inventory increases to be expected. In addition, on the right-hand side, sales channel inventory shows third quarter Q-on-Q. Inventory increases and auto and industry has been increasing in inventory. On the other hand, for automotive, more than assumption, the sell-through is increasing. So for fulfillment, it's not so large. But it has been increasing as a trend. Fourth quarter channel inventory fulfillment is to be continued for auto. As mentioned at the beginning, Nano and Alka mainly will be fulfilled, so that demand for operation will be made or industry infrastructure, data center is still at low level in inventory levels. But in a month, it will be increased, and we will work on that. Next page, please. For utilization and process is way from third quarter is as assumed. Triplane is quake impact, wafer input has been delayed, but the impact is very small. And it is 59%. As a result, the fourth quarter expects some increases. On the right-hand side, there is a CapEx situation third quarter has MCU and local government power to be increased in production and in-house factory utilization increases and R&D investments that have been housed which is JPY 111.2 billion to be fixed. Increases in production is 80% of overall domestic lack of plant and for PAA mainly for the post-end process for Malaysia factories to be handled for increase in production and domestic Sigo factory where production will be increased. And the post process and interim processes is where it will handle those processes. The third quarter continues for AI infrastructure post process is mostly an in-house factory capacity increases will be worked on. Next page. Fourth quarter and full year forecast for the fourth quarter on the left-hand side, there is a shaded portion to be referred to revenue and profit, JPY 454 billion for revenue and ratio, 58.0%, [ 32.7% ] for opening and JPY 157, and euro is JPY 178 expected. Respectively, the contents will be explained. Revenue JPY 454 billion is shown at the center year-on-year. On the right-hand side is 29.4% Q-on-Q is 4.3% of increases expected. Q-on-Q, 4.3% will be explained where yen appreciation factors. And third quarter onetime factor may be included. But excluding that, it will be around 4.2% of increase to be expected in revenue as written at the revenue, excluding ForEx and onetime impact. This 4.2% Q-on-Q increase for the revenue for data center and industrial increases are mostly the portions for automobile 27 MCU deployments and Japan deployments are the main drivers for the growth. gross margin, 58% is Q-on-Q, 1.4 points decrease to be expected yen appreciation and mix and production expense increases are included when 50% is mix factor and the remainder is ForEx and production expense increases or the production expense in CapEx as has been explained. Gradually, there is more investment into production increases. So investment-related expenses in the fourth quarter is increasing. Year-end maintenance is also necessary. So repair works expenses will concentrate at the end of the year, 32.0% of operating margin, 2.6% reduction occurs in the fourth quarter. OpEx increase is expected. And there are about 3 factors to this. One is the office upgrading and infrastructure, internal IT and AI infrastructure to be prepared for and investments for that are necessary and R&D investments. There are some seasonal factors where it's concentrated towards the end of the year and other portions are also included. Q-on-Q, operating expenses is increasing thereby. At the bottom, there is the sensitivity of ForEx. Fourth quarter ForEx sensitivity as it were JPY 1 -- $1 to the yen fluctuation and impact to operating profit is shown in dollar case, is JPY 2.2 billion and operating profit, JPY 1.1 billion in Euro, in sales, JPY 0.2 billion and operating profit impact is JPY 0.1 billion. So [ $1, JPY 100 and euro JPY 120 ] means the performance forecast, 32.0% is 26.2%. In addition, for the appendix, please jump over to Page 17. Operating profit defer from the top, JPY 563 billion. And as mentioned at ease, timing business transfer proceeds is booked here equal to JPY 430 billion. So that is the conclusion of the slide explanation.

[Operator Instructions]. Takayama-san, please begin. Please unmute yourself and begin your question.

Thank you. My first question is the revenue for data centers and also digital power that accounts -- that is a portion of that. In the third quarter and also for the fourth quarter. Can you give us the outlook for the fourth quarter? And also as you ramp up your production inside the company, what is the output that can be expected for the first quarter of next fiscal year? How further can you increase your production? I would like to confirm these points. And then when it comes to the profit margin. In the third quarter, cause IIoT profit margin has been increasing. So I'm sure the data center performance is improving. But other than memory interface, the digital power is also, I believe, is improving. Can you explain those trends, if you could? And also, also related to data center, agent impact, if you see any impact from that, if you can comment on that point as well? That's my first question.

All right. Agentic AI impact. it's not possible for us to quantify that yet. However, the industrial and also the mass market business of ours. It's indirectly affected by that in the form of revenue increase. That's how we see it. We need to further analyze and study this impact. And also digital power and all memory interface, trends in the third quarter to the fourth quarter, we're expecting the growth quarter-on-quarter. And data center overall, at the whole company level in the third quarter, 21% was a contribution to our total sales. And in the fourth quarter, its contribution will rise further from the 21% level to a higher level. Therefore, this will be a 1 driver of our growth. As far as CapEx is concerned, digital power front end and also digital power middle end and also the back end. For those needs, we are going to make investments. And also the memory interface front end currently from foundry, we are securing these from the foundries, but we are going to increase the capacity for test at the back end, and that is our plan. So therefore CapEx impact on revenue growth in that regard, digital power contribution will likely be higher in terms -- and also its scale will be larger. Its impact scale will be larger. And in a phased manner, the supply will increase gradually. The major -- on one of the major steps will be next year, first quarter at Saijo, those capacity increase investment output will come in, in full strength from the first quarter next year. So therefore, we expect that we'll have a boost to our revenues. And also digital power, if you single lockup portion only, Saijo production increase in investment and also the foundry capacity increase investment, including all these things. In 2026 compared to -- fiscal 2026 double to 2.5x at the run rate, a production increase is expected from next fiscal year first quarter. So that is the contribution that we foresee right now. And also, as far as the mix is concerned, memory interface digital power, the customer active platform, those are quite diverse. So therefore, the cost configuration and also gross margin breakdown is quite different from customer to customer, from platform. So just like market share, this changes quite dynamically. So that was the major factor -- that will be the major factor behind the change of the mix. So as a general trend gradually, as the product matures, the yield will also improve and also depending on the maturity of the production, the gross margin will also improve. But in the near term, it will be affected by the mix and that may seem to be significant.

A supplementary question regarding the data center breakdown. You mentioned the breakdown. On a Q-o-Q growth third quarter versus the fourth quarter, what is your projection for that? And also, and that is going to result in increasing in the first quarter on a run rate basis. Is that what you see? Is that correct?

For the fourth quarter comparison. If I give you some numbers, we are expecting an increase approximately and some percent mid-teen percent is the growth that we are expecting. We can fairly say that if you consider the comparison between third to third quarter to fourth quarter, mid-teen level of increase is what we project. And also from '27 onwards, fiscal '27 onwards, especially when it comes because we are going to increase the capacity mainly for digital power with increased production capacity, so we are expecting a significant increase growth from '27 onwards. So third quarter, fourth quarter Q-on-Q increase of mid-teen level. And the first quarter will -- you'll be able to expect a higher growth rate because of the increased capacity. The capacity of the overall data centers, digital power is the area where we are going to increase the capacity, and that will come for, let's say, less than 50% of the total. So digital power will increase due to the capacity increase. But for others, it will grow at a normalized level. So if you can understand it that way, that would be good.

Thank you very much. The second large question is about with the time, JPY 450 billion of proceeds expected. And for its use 3 months or 6 months the treasury stocks or some kind of investments were mentioned. We would like to know what are your thoughts about this from a more wider perspective. I suppose performance, expense and valuation and stock prices are rather difficult to link together. What are the factors by which improvements and evaluation increase can be gained. Including that, including the treasury stocks to be required, what is the intent of the company.

Proceeds was booked, but half is cash and half is in stocks that we acquired. And the stock portion is not cash. On the other hand, the cash portion has been acquired for its use capital allocation framework basically, accordingly, is applied in order so that it can be used. So CapEx and delivery and also investments towards growth areas would be considered. Presently, as mentioned within this slide, our in-house capacity will be increased so that CapEx will be reinforced for that same is our thought. Other than that, growth area investment possibilities will be searched for continuously, and we will prioritize determine what is most important. And accordingly, whether we will acquire treasury stocks or not will be determined. At this moment, CapEx is what we prioritize more and for valuation, always, Capital Market Day timing is where we talk about metric, and it is as in line with that metric. Organic growth through which Sales growth maybe gain and scale expansion to be materialized is one point. And valuation gap will be filled in and further reinforce and then there would be payout out of that to be worked on and business itself. We'll have the mixes to be changed through digitalization, composition of the businesses will be changed. Those are the plans we have. That's all.

So is there some kind of delay in the payout for them? Because the cash, there is ample amounts and there is some kind of additional portion to be considered investments. Is it so heavy next year or after the year has ended, maybe you can think in more neutral terms to use them in other ways. It is the latter policy. What kind of items or investments we have as in balance with the annual budget, we will consider? In addition to that, if it's M&A, there are opportunities for various projects. that may be arising. And we will look at them carefully at appropriate timing, we will decide what is best one timing is at the end, and that may be one of the milestones. Thank you very much.

We can move on to BofA Securities, Hiraka-san. Please unmute yourself and begin your question.

My name is Hira. I have a question relating to automotive semiconductors. On a Y-on-Y basis, 19% increase. So you are seeing signs of recovery. Two questions here. One is that in this. What is the actual demand recovery? And if you divide with that with the inventory elimination, what is the contribution of these 2 factors for the increased performance. And as far as the demand recovery is concerned, you said Car 4 -- and 28 nano, I think you talked about the possibility of share gain, share improvement. So the market improvement and also the share gains. If you look at your own opportunities for business expansion. Can you just sort of what is the contribution of those 2 due to these 2 factors for your performance improvement? And if you can also talk about the sustainability of this performance that would be appreciated.

So the automotive increase of a year-on-year increase of 19%, how we analyze that? That I think was the question, right? So the foreign exchange, the weaker yen favorability is also included in this number. So if you exclude on a year-on-year basis, 13.3% increase in revenue, is the result for the third quarter. And so the inventory in the channel, we are sad that we have been building up the channel inventory. But when you look at the sell-through. Only half of that level is the sell-through. So the actual demand has been improving. And that accounted for the half of the 13.3% increase, and the remaining half is due to the increase of inventory the sell-through improvement, which translates into the actual demand improvement. The driver behind this was the -- as I said earlier, the 28-nano MCU, especially in China. China's OEM is adopting this more broadly. That's one factor. And also, SoC, the new gen 4. Recently, I think this is primarily expanding in the Japanese -- among the Japanese customers. So in the third quarter to the fourth quarter, those are all increasing. 28-nano MCU, mainly among the Chinese customers, we are expanding our sales, and that is also projected going forward. And also the car beyond Japanese customers. The adoption by other regions, customers are expected going forward. And overall, the legacy decline is muting the growth to some extent. So to some extent, there has been offset factors from that, but still our unique growth drivers are the MCU aspect of 28-nano and Gen 4 Arcar. That's the 2 major distinctive driver for us.

Follow up on that, 28-nano MCU expanded adoption by the Chinese OEMs. Is this only 1 company or multiple companies? What's multiple companies?

Multi-companies.

Okay. Got it. Then my second question, this relates to all segments of the business. Currently, truck and the lead time product lead times for each subsegment. Can you talk about the current status of your lead time, if there's any difference between different segments? And also, in 2027 towards early 2027, given the market situation and how has the order faring, if you can give us some guidance towards 2027 up to, let's say, half years into 2027 the backlog, the backlog for each of the segments.

Basically, it's performing very favorably internally, the data center related and also others. We classify into these 2 different categories. and look at the general trends. But also for these other segments, we continue to see strong backlog demand, backlog coming in quite strongly and also for the infrastructure I'm sorry, the data center backlog. I'm sure the lead time for data center, sorry. It is also getting longer. And therefore, the backlog cover until the first half of next fiscal year. It's already there. So that is the current status. So on an ongoing basis, until the first half of next year, we have coverage with the backlog already. Okay. So that applies to nondata center related -- for automotive and IoT, you believe the current market conditions will continue into the first half of next fiscal year. To be more precise, the data set, the lead time is getting longer. So we have a first half coverage already. Other than that, the situation is mixed. But backlog, generally speaking, is building up favorably even for other segments. That's what I wanted to say.

UBS Securities, please release the mute and post your question. Thank you very much.

Yes -- is my name. There are 2 for myself. The unit price increases is the first question around from this month. Each competitor has started to increase prices as you said. When conclude the effects rise. I think it should be around July or thereabout. Is the effect of the unit price and also the gross margin increases should be expected? Is there such an effect for unit prices.

We have been looking at them very carefully. And basically, the cost increases. In supply chain and others has been considered in order to work for that. What about the third quarter was the question? To that -- it's not so much, but slightly unit prices have been revisited. And that in the third quarter has been impacting. On the other hand, gross profit margin to be improved significantly is not the level of impact has been reached. It depends on the levels of 0.5%. For example, of contribution, is that the level of contribution that was achieved not to that level. Please understand that it is not to that level.

There are various products. It's not for all -- on the other hand what is lacking should be rising in unit prices. What is the product that is easier to raise the unit prices?

Generally speaking, mass market products have unit prices that are quite easy to increase. On the other hand, there are cost increases to be added on from that perspective. Also according to products, exposure or cost structure maintain according to how easy it is to see that the costs are increased. All in all, on an average basis, mass market products. are easier to revise the prices.

The second question is about data center. Digital Power, considering the cost is to 2.5x to be expected for next year. Memory interface or -- having a major strength is what I have heard about. Capacity considered, what is the sensor level and in digital center mass market are growing. And I'm not sure of its definition. What is the sense of scale of the data centers, mass market is it? And what kind of products are included in that? Can you give some insight?

Digital power 2 to 2.5x the onetime production capacity. And it's not that it will contribute clearly next year. It will start up in order. So that is one point I needed to revise and comment on. For data center or memory interface, it is where the front-end process can be considered and capacity for that to be expanded and acquired is where presently, we are working on what if we have the capacity it's reverse the actualities about the capacity to be more content and the mass market. For example, for data centers, air conditioning, application is not grasped in many areas, which are in the mass market. that in AI, data centers, semiconductor production equipment is where they will be applied into. That is what we assume. And this has to be reviewed more deeply, and I would like to explain more details when things are more clear. Intuitively, industrial is where mass markets are included.

Is that the case? That is so. Thank you very much.