ATEYY - Advantest Corporation (ATEYY) CEO Yoshiaki Yoshida on Q1 2022 Results - Earnings Call Transcript

Advantest Corporation (ATEYY)

Q1 2022 Earnings Conference Call

July 28, 2022 02:30 AM ET

Company Participants

Yoshitake Kobayashi - Head of IR

Yoshiaki Yoshida - President and CEO

Atsushi Fujita - CFO

Kimiya Sakamoto - Chief Customer Relations Officer

Yasuo Mihashi - Co. Chief Stakeholder Relations Officer

Conference Call Participants

Tetsuya Wadaki - Nomura Securities

Yu Yoshida - CLSA

Shuhei Nakamura - Goldman Sachs

Mikio Hirakawa - Bank of America Securities

Masahiro Nakanomyo - Jefferies

Yoshihito Hasegawa - Mitsubishi UFJ Morgan Stanley

Damian Thong - Macquarie Capital Securities

Masahiko Ishino - Tokai Tokyo Research Center

Presentation

Yoshitake Kobayashi

Thank you very much for joining Advantest Corporation's FY 2022 First Quarter Financial Briefing. Please allow me to introduce the participants from the company. To secure the clearance -- clear voice, our participants will not be wearing masks. Please understand the situation. First of all, President and CEO, Yoshida; CFO and CCO, Fujita; CCRO, Sakamoto; Co-CSO, Mihashi.

And I will be your moderator. I am the Head of IR, Kobayashi.

First of all, Fujita will give a presentation about the FY '22 first quarter followed by Yoshida giving the presentation about the FY '22 business outlook and the update of the second midterm management plan. After that, we will be receiving questions from you. We are planning to end this meeting by 4:45 p.m. Today's presentations material will be posted on the TDNet and our website. For those who are participating via telephone, please download our material and refer it.

Before we go into the presentation meeting, there are some matters I have to mention. This presentation contains forward-looking statements that are subject to risks and uncertainties. Please understand that there may be a difference between the actual results and the projections. Now Fujita will start his explanation.

Atsushi Fujita

This is Fujita. From my side, I'd like to explain about the financial results for fiscal year 2022 first quarter. Please turn to Page 4 of our presentation material. Today, there are growing concerns about the deterioration in the global economy, but thanks to the progress of the digital transformation, our business environment in the first quarter of the current fiscal year remained favorable. Compared to the same period in the previous fiscal year, sales increased 40% to ¥135.9 billion.

Operating income increased 71.4% to ¥44.8 billion. Income before income taxes increased 88.1% to ¥48.4 billion. And net income increased 88.7% to ¥36.5 billion. All recording quarterly highs mainly driven by expanding investment in data centers and 5G smartphone performance gains. Strong demand for Advantest testers continued principally from SoC semiconductor manufacturers.

The shortage of semiconductors and other components has not improved dramatically and production difficulties continued. We made great efforts to stabilize parts procurement. As a result, we were able to achieve our internal sales forecast of 3 months ago. Please go to the next slide. This is the first quarter sales by segment.

First of all, for the Semiconductor & Component Test Systems. So it has increased by 18.3% quarter-on-quarter to ¥96.1 billion. Sales of SoC testers reached ¥78.8 billion, an increase of ¥14.7 billion from the previous quarter. Sales for the high-end SoC devices, especially high performance computing devices and application processors APUs, which are the key components of smartphones, grew significantly lifting up the overall sales growth. Memory tester sales had a high level of ¥17.3 billion, similar to the previous quarter.

For the Mechatronics Systems, it has increased by 47.6% quarter-on-quarter to ¥15.4 billion. Sales of device interface products, test handlers and nanotechnology products increased due to strong customer motivation to invest in testers and more widespread adaptation of EUV lithography technology. In Services and Support & others, the sales was flat against the previous quarter at ¥24.5 billion supported by the strong demand for semiconductor testers, recurring sales, maintenance revenues and SLT sales also stayed at a high level. Please go to the next slide. This is the sales by region.

Sales grew quarter-on-quarter in all regions except Japan raising a percentage of sales services customers to 93.3%. In Taiwan, sales of SoC testers increased significantly, principally for smartphones and SBC related products. Next slide, please, for the first quarter sales related numbers. First in terms of gross margin, it was 58.1%. Although gross profit margin experienced some impact coming from the rising procurement costs, a shift to a more profitable sales mix compensated that.

In terms of SG&A et cetera was ¥34.1 billion. We rolled over a portion of our first quarter budget so SG&A increased only slightly from the previous term. Operating income was ¥44.8 billion and the operating margin was 32.9%. So exceeding the 30% has been achieved since the first quarter of -- fourth quarter of 2005. Going to the next slide, please.

This is about the R&D expenses, et cetera. In terms of R&D expenses, it was ¥13.3 billion. CapEx was ¥4.4 billion. Depreciation and amortization was ¥4.9 billion. Following the acquisition of R&D Altanova Inc., purchase price allocation was completed in the first quarter and amortization of intangible assets has begun.

In terms of the situation of the cash flow. Free cash flow was the cash out of ¥0.3 billion.

It decreased by ¥11.8 billion year-on-year due to an increase in inventories, income tax payments and other expenditures. Next slide, please. For the balance sheet for the period ending in June 30, 2022.

Total assets, ¥531.1 billion; cash and cash equivalents, ¥107.5 billion; goodwill and intangible assets, ¥96 billion; equity attributable to owners of the parent, ¥327.9 billion; ratio of equity attributable to owners of the parent, 61.7%. So that was about the financial performance.

Yoshiaki Yoshida

So this is Yoshida speaking. From myself, I'd like to provide you detail about the FY 2022 outlook and the revision and review of the MTP2. So please turn to Page 11 of the material. First, business environment and semiconductor tester market trends. Compared to 3 months ago, we believe that our business environment is now affected by greater uncertainty future of the global economy.

In addition to concerns such as the spread of new COVID-19 variants and increasing geopolitical risks, rising inflation and tightening monetary policy around the world have raised fears of recession. As these factors impact the semiconductor market, final demand for some consumer products such as smart phones, PCs and televisions is expected to weaken further and devices for these products have entered into an inventory adjustment phase. On the other hand, the digital transformation is continuing and chipmakers continue to actively mass produce HPC high-performance computing devices for data centers and AI-related semiconductors and develop new devices of this type. In addition, there are still shortage of semiconductors for automobiles, more and more of which are EVs and industrial equipment.

There are also concerns about falling tester utilization rates, but we believe that the trend for higher functionality and stronger quality guarantees for high-end semiconductors such as data center HPC devices and high-end memory to support tester demand remains very solid.

Compared to our estimate 3 months ago, the expected range of growth in the SoC tester market has been adjusted due to actual and expected product sales and large makers tester installations. We expect year-on-year growth in the high single-digits percentage-wise on a dollar basis. Our outlook for the memory tester market has shrunk in USD terms due to yen depreciation. But if the effective yen depreciation is removed, the actual outlook remains the same as it was 3 months ago. Please turn to Page 12.

This is a forecast for the whole fiscal year '22. Based on our first quarter results and future outlook, we have raised our full year forecast to ¥550 billion in sales, ¥170 billion in operating income, ¥174 billion in income before income taxes and ¥130 billion in net income. Around 60% of our ¥40 billion upward revision of our sales forecast is the effect of yen depreciation tailwinds. 3 months ago our earnings forecast assumed that the ongoing parts and component shortage would be mitigated in the second half of the fiscal year. But at the present time, the difficult procurement situation shows no prospect of resolving within the fiscal year.

Full year gross profit margin is expected to be about 58%, unchanged from our previous outlook. This forecast is based on exchange rate assumptions of USD to ¥130 and EUR 1 to ¥140 for the 9 months from the second quarter of the current fiscal year. Our latest forecast for the impact of exchange rate fluctuation on fiscal '22 operating income is plus ¥1.3 billion per ¥1 of yen depreciation versus U.S. dollar and minus ¥0.2 billion per yen for ¥depreciation versus the euro. We will continue to make the greatest possible efforts to secure parts response, first play to external changes such as geopolitical risk and macroeconomic risks and aim to set new records for both sales and profits for third consecutive year.

Page 13, please. This is the outlook by the businesses. SoC testers full year fiscal '22 sales forecast has been raised by ¥28.5 billion from the forecast published in April to ¥314.5 billion. SoC tester revenue are strongly influenced by yen depreciation compared to some of our other businesses. Test demand from some customers for consumer products such as smartphones and PC is trending weaker.

However, amidst further miniaturization and performance improvements in HPC devices and application processors, advanced SoC semiconductors are increasingly being manufactured at advanced nodes. In addition, increasing semiconductor production volumes due to wider adoption of EV is expected to continue to drive demand for testers. Our full year fiscal '22 sales forecast for memory testers has been raised to ¥70.5 billion, an increase of ¥1.5 billion from the forecast published in April. Demand for higher speed DRAM and wider bandwidth is steadily increasing in response to strong demand for data center HPC devices. DRAM test demand is expanding faster than nonvolatile memory at present due to technological changes.

So DRAM accounts for a larger portion of our sales breakdown by application in this forecast than it did 3 months ago. Page 14, please. This is about Mechatronics, Service and Other businesses outlook for fiscal '22. Full year fiscal '22 sales forecast for Mechatronics has been raised by ¥4 billion from the forecast published in April to ¥54 billion. We anticipate that continued demand for high level device interface products, which are correlated with our tester business, the wider adoption of EUV lithography and increased demand for masks for mature processes will drive demand for SEM metrology products.

Full year fiscal 2022 sales forecast for Service, Support & Others has been raised by ¥6 billion from the forecast published in April to ¥111 billion. Increasing needs for device reliability are driving an increase in the number of product types that require system level test and an increase in demand for high-precision consumables. Demand for maintenance services is also increasing due to steady growth in our installation basis. Regarding our efforts to expand recurring sales such as field services, we aim to reach the ¥100 billion sales milestone in fiscal '22. Next I'd like to talk about second midterm management plan updates.

Turning to Page 16, please. This is Advantest's purpose, mission and growth strategy. Our corporate purpose and mission is to enable leading-edge technologies. To continue to be a company that embodies this policy, we formulated a 10-year medium- to long-term management policy, our Grand Design, in fiscal 2018. At the same time, we codified our corporate vision of adding customer value in an evolving semiconductor value chain.

To realize this vision, since fiscal 2018 we have consistently striven to expand our business domains to related markets while identifying semiconductor wafer test and final test as our core business domain. Page 17, please. This is MTP2 first year progress. In addition, we have formulated consecutive 3-year midterm management plan to achieve our Grand Design goals.

In fiscal 2021, we updated our Grand Design in line with our business performance and evolving external environment and at the same time formulated our second midterm management plan from fiscal '21 to fiscal '23 or so-called MTP2 we call it and the entire company has been working together to implement this plan.

This slide shows MTP2 fiscal 2021, the Grand Design 5 strategies and its progress. Last year throughout the year, securing materials and responding to support for expanding customer demand became our highest priority. In addition, the prolonged COVID-19 pandemic gave rise to various difficulties. However, even in such an environment, as you can see, all group employees were able to make progress on various mid- and long-term efforts. That was our year.

Turning to Page 18. As was mentioned earlier, this is the figure of the Grand Design renewed, upgraded. Since fiscal 2018, we have been proactively engaging in M&A and alliances in line with our Grand Design vision. As explained at the beginning, this graphic shows how these steps are organized by expanding into the SLT field starting from our core businesses and strengthening recurring business. Our business domains have expanded both horizontally and vertically.

In the vertical direction, we are currently in the process of acquiring CREA of Italy in preparation for the future growth of the test demand for high-power analog ICs such as SICs and GAN, which are currently attracting great interest. In addition to strengthening these hardware businesses, we have also developed and expanded our Advantest Cloud Solutions business in the upward direction that is in the area of cloud services and data analytics. Next, Page 19, please. This slide is unchanged from when we announced MTP2 last year. We explained that the role of testers will become even more important in the future as the semiconductor market continues to grow.

Even now that view remains unchanged. The number of semiconductors produced continues to grow. In parallel, the technological evolution of the semiconductors continues. The increasing complexity will increase test needs both qualitatively and quantitatively. These 2 factors ensure that the demand for semiconductor testing will continue to grow.

Page 20, please. I'll talk about the future focus of MTP2. There's just over 1.5 years remaining in MTP2, our 3-year medium-term management plan. We will aggressively develop growth measures. In SoC testers, we believe that the progress of miniaturization, advanced packaging and the rollout of 5G millimeter wave devices will provide greater opportunities and we will work to expand the sales of the V93000 mainly for the HPC applications.

In addition to cutting edge space, SoC tester market has many growth themes. We will promote designing activities to the leaders in each area and build a structure that will ensure we can capture future demand opportunities. In memory testers, we will continue to claim a majority share of the market by leveraging our position as the only tester vendor that can provide solutions for all players in all testing processes. In the Mechatronics business, we will expand sales opportunities by providing test cell environments that deliver better test quality by leveraging the technological resources we have cultivated over many years such as high-precision thermocontrol and signal transmission technologies. In the Services, Support & Others business, the number of applications that require SLT continues to increase.

We will work to increase the number of applications and customers. In the area of data and analytics, we will work with customers to develop innovative solutions that integrate hardware and software based on ACS. Page 21, please. We now turn to the financial side of the story. The momentum of the semiconductor market is rapidly changing.

Despite our efforts to gather information, we must state that -- we must say that the visibility of the FY 2023 tester market outlook is currently long. However, some semiconductors whose end market is consumer electronics have already entered an inventory adjustment phase and some customers have revised their aggressive stance towards the future accordingly. Under such circumstances, it is necessary to consider the possibility of a slowdown in our sales in FY 2023. On the other hand, the degree of adjustment varies from customer to customer and application to application. Demand for testers is expected to remain constant in the businesses related to the automotive and the industrial equipment areas where semiconductor shortages continue and in the businesses for high-end SoC and memory semiconductors where customers have a strong appetite for technology investment.

In addition, our business' structure has changed over the past several years and we do not currently anticipate a large scale decline in sales as we have seen in the past. We may also continue to benefit from strong investment in advanced technology without the significant deterioration in utilization rates at our major customers. Based on these factors, we currently expect FY 2023 year-on-year sales growth to be in the range of approximately negative 15% to positive 10%. Given this market outlook and our past performance, we have revised our MTP2 targets and related indicators. Page 22, please.

As I described, this is the outlook for FY 2023 sales outlook. In order to evaluate the growth of the plan from a mid- to long-term perspective, we use 3-year averages for our management metrics to minimize the impact of a single year performance fluctuations. We summarize our sales trend in a year-over-year basis. At the time of forming MTP2, we initially forecasted ¥350 billion to ¥380 billion of average sales during MTP2 3-year period beginning in FY 2021. However, based on the results from FY 2021, upward revision of FY 2022 forecast as disclosed today and current sales assumptions for FY 2023 in the range of negative 15% to positive 10% on a year-over-year basis; our MTP2 sales target has been revised to be ¥450 billion to ¥520 billion on a 3-year average basis as can be seen in the graph.

Next page, please. Based on the previous page's sales size, we revised management metrics as shown on the slide. The numbers have changed significantly since last year. We believe that the operating margin, net income, ROE, EPS are moving upward. We believe that stronger growth in the semiconductor tester related market than expected in the past, our share gains and the reinforcement of recurring sales will contribute to growth of our financial results.

Next page, please. MTP2 is positioned as a phase of strengthening our foundation for further growth. Since semiconductor tester demand is expected to grow over the mid to long term, we will further boost our R&D investments, the source of our growth, from our previous plan. On the other hand, future uncertainties in the global economy and our business environment are rising due to the spread of COVID-19 variant, prolonged shortages of semiconductors and other components, geopolitical risks, inflation and the declining consumption. In the event of an emergency such as macro scale deterioration in our external environment, we may flexibly implement cost controls.

Next page, please. I'll talk about the revised growth investment and the shareholder returns policy. Based on our mid- to long-term market outlook, we have reviewed the scale of our growth investments of other than R&D. We will increase capital investment, the foundation for business expansion, to ¥70 billion and we have already started making some of these investments. Strategic investments such as M&A are expected to total ¥100 billion, same as what we have announced last year.

Regarding shareholder returns, we will maintain our returns policy for the MTP2 period as revised and announced last year. Initially, we expected shareholder returns for the MTP2 period to total ¥150 billion or more, but we now expect total returns to be ¥210 billion or more. Next page, please. I will talk about capital policy and capital allocation outlook revision. First, regarding balance sheet management, we are using a shareholder equity ratio of 50% or more as a benchmark for financial soundness.

Our capital efficiency target is ROE of 30% to 35%. Cumulative operating cash flow for the MTP2 period is currently expected to range from ¥280 billion to ¥360 billion. It really depends on the range of the 2023 revenue. Treating this as a basic resource, we will allocate funds to growth investment and shareholder returns as appropriate. Regarding cash management, our minimum cash holding level is expected to be around ¥100 billion for the MTP2 period.

Going forward, barring unforeseen developments, we increased the growth of our performance, we have increased the amount by ¥2 billion. Next page, please. Given the revised MTP2, let me explain our shareholder returns policy. First, regarding our dividend. Regarding our partial interim dividend, we expect it to be ¥65, an increase of ¥15 from last fiscal year.

We will acquire up to ¥50 billion of treasury stock in the 5 months from August to December '22. The maximum number of shares to be acquired is 10 million, which is about 5.3% of outstanding shares with dividend and treasury stock. Based on the above, we plan to have a total return ratio of 50% or more for the 3 year as set forth in MTP2. Finally, we will cancel 8 million shares of the treasury stock that we acquired in the past to improve shareholder return. This amounts to approximately 4% of outstanding shares.

Out of the treasury stock we currently hold, we will retain the number of shares required for stock compensation and cancel as many of the rest as possible. Next page, please. This is my last slide. I will talk about ESG and external evaluation for fiscal year -- for the current fiscal year. Finally, the first enhancement of ESG initiatives is one of the 5 strategies set forth in our Grand Design.

Through further enhancement of ESG initiatives, we aim to grow our corporate value and at the same time contribute to the development of the semiconductor industry and global sustainability while meeting expectations of our stakeholders. This slide shows our most recent major achievements. We will continue to enhance our efforts in the future. Thank you for your attention.

Yoshitake Kobayashi

[Operator Instructions] We are utilizing simultaneous interpretation from this meeting. When you are asking your questions, please ask your question slowly and in a concise manner. And please refrain from asking questions about specific companies. The presenters are answering through the Japanese line so in terms of the questions, it will be only -- we're only receiving Japanese questions. Please understand.

Let's go into the Q&A session.

Question-and-Answer Session

First from Nomura Securities, Mr. Wadaki, please.

Q - Tetsuya Wadaki

So this is Wadaki from Nomura. Thank you very much for a very powerful result. So the first question is -- that said, so I think basically there's a lot of noise in the market because there's a lot of cancellations coming from the semiconductor makers and you have not changed the outlook about the memory testers. Is there any impact? Is there any cancels?

We have heard that there's a cancellation for the testers, but what about you? Are you having that kind of situation?

Kimiya Sakamoto

Wadaki-san, this is Sakamoto. I'd like to respond to your question. So please let me respond to your question. So Mr. Yoshida talked about the situation in terms of the consumer electronics application and semiconductor inventory adjustment and the end market demand is declining.

I think there are some factors in play. But in terms of cancellation, basically there has been some coming from the customers' cancellation and for instance some delay in the checkers.

So it will be coming from the SoC customers, but it has not actually been realized. As you know, our lead time of the product is very long so from the customer's point of view if they cancel, they will have to wait a long time to be able to capture the next slot. So I think there's a lot of customers who are very hesitant or very, very cautious about canceling.

So you talked about -- you pointed out the memory customers. In terms of memory customers, there's no talk of cancellation because our lead time is not -- there's a wide gap between our lead time and their request for the shipment. And they are asking for as early shipment as possible and we're trying to improve the situation as much as possible. So in that sense, going forward going to the second half of this year, we do think that there is a risk in that area. But in practicality, we do not think that this will have a major impact on our sales at least at this point.

That is our idea. If you look at the whole lead time of our system and it's not -- it's a mismatch between the requirement from the customers. So if there are some cancellations and requests for delay, maybe we can change where we ship our products. We can do that meaning that the impact towards ourselves is limited. That is my idea right now.

Tetsuya Wadaki

So this is a follow-up question related to this question. So the makers who are putting cancellations so I think basically they are saying that the testers should be delivered more quickly. But maybe next year that will happen. But between memory and SoC testers, what is the outlook that you have roughly for 2023?

Kimiya Sakamoto

For 2023, I think this has been mentioned briefly, so I think the visibility is very clear. But because our lead time is long and depending on the customers, it's 9 months or 12 months in the future, and we are conducting business negotiations for that level of lead time.

In terms of SoC, so maybe mobile in terms of the -- I think the overall outlook is a bit weak for that market, but more than offsetting that is that the PC business -- HPC business, excuse me, that business is very strong or robust and growing very strongly and will grow strongly.

So this will be the cutting-edge node is going to be used and this business is going to drive the SoC business very strongly.

In terms of the memory business, I think there are some noise that the price is going down. The CapEx is going to be delayed. There has been some reports surrounding that type of situation. But when we talk with the customers, we do not get that impression at all. So from 2023 onwards for even 2024, I think there's a strong CapEx appetite from the customers.

2023, well, compared to SoC, the memory growth for this year may be seem a bit weak, but -- this is because of supply situation. But so for 2023, both SoC and memory, we don't think that there will be a major decline in these businesses.

Yoshitake Kobayashi

From CLSA, Yoshida-san, please.

Yu Yoshida

This is Yoshida from CLSA. This is related to earlier question. Next year's sales minus 15% to plus 10%, the midpoint is going to be small reduced. You mentioned about it. But from the quantitative your point about product, what does the mean or median sales making this range?

I think there are product mix. What would be the driver and what would be a big mover of product out of our other products?

Yoshiaki Yoshida

Yoshida-san, thank you very much for your question. For fiscal '23 figure, our sense how do we feel about it. As for SoC, yes, we think that advanced semiconductor technology is advancing and of course the automobile semiconductor is very strong and that is added. And earlier mentioned was I think maybe in the plus range of 10% or so would be the growth and that is the market growth I believe. That's what we see.

But on the other hand, as for the commercial electronics are weakening, that is incorporated and we are giving that figure with that 10% in the mid. Still then we can expect mid 10% growth. As for memory, unit price and the market seems to be a bit darker. But my feel is that basically HBM and DDR pipe transfer so the technological evolution from memory semiconductor I think will be the driver for our testers. So in this respect, single-digit growth is expected.

That's the current outlook for us.

Yu Yoshida

Let me confirm, SoC tester 10% -- mid-10% growth and memory single-digit growth. And then the mean of the average lesser -- I think is stronger than what you had identified here.

Atsushi Fujita

Yes. As was mentioned by Yoshida earlier that the macroeconomy, how is the market going to deteriorate. We don't have a clear answer or clear outlook here. So earlier for fiscal '23 that we had reported to you up is 10% and minus 15% plus macroeconomic viewpoint and the inflations. We had incorporated those effects more than the actual things.

So this figure itself I think is quite good and conservative rather.

Yu Yoshida

So in that sense, downside scenario is incorporating the macro risks, upside scenario is a basic scenario or I think ideal scenario, right?

Atsushi Fujita

Yes, that is the sense.

Yoshitake Kobayashi

Next we'd like to move to the next question from Goldman Sachs, Nakamura-san.

Shuhei Nakamura

I am Nakamura from Goldman Sachs. Can you hear me?

Yoshitake Kobayashi

Yes, I can hear you.

Shuhei Nakamura

Regarding CY 2022, your outlook is unchanged in most of the companies, but you made a upward revision. What's the reason behind that? You mentioned that 60% of upward revision is due to yen depreciation. Are there any other factors for that? So that's my first question.

Yoshiaki Yoshida

Well, our original outlook was ¥510 billion and actual volume is the order backlog. [Audio Gap] 60% of the ¥40 billion is due to exchange rate. And as we have seen in the efforts made in the production side in the first quarter, we have already been doing this, which is already reaching ¥10 billion in the first quarter. So if we are able to continue this, there could be some additional upward possibility. But for the time being, procurement for production is still uncertain.

As I explained, we still have certain risks behind that. So considering that, we decided not to make a significant change from our initial projection. So exchange rate plus additional revenue increase is also anticipated. So that is true.

Shuhei Nakamura

And I have a follow-up question. You talked about 2023 outlook is in the range of negative 15% to positive 10%. Is this range reflecting up to what point in time recently because your U.S. competitor announced -- had the earnings results meeting yesterday? And over the past several weeks, the business environment has changed dramatically.

Are you observing similar situation?

Yoshiaki Yoshida

Well, our competitors made the earnings results announcement yesterday and we have watched it. In calendar year 2022 starting from the first quarter, between us and our competitors, a sense of our market share has quite changed. And our view is looking at our customer base and also product portfolio to support the customer requirements is quite broad, which is our source of strength.

Shuhei Nakamura

And the negative 15%, where this number coming from?

Yoshiaki Yoshida

Well, within the semiconductor tester market, we have experienced many ups and downs. However, based on our historical 20 years of experiences save the special factors of the Lehman's crisis, the biggest drop was experienced in 2013 negative 15% drop in our revenue.

Other than that since I became the President over the past 6 years, sales decline only occurred in 2020 when the sales drop was a little over 2%. And our portfolio is also having the recurring businesses and field support stable source of revenues. So we have been stepping up in this side of the businesses and memory tester was a main driver of our business in the early part of the 2000 and with SoC where market is peak, we can also secure good market share.

So given all that, negative 15% of the sales revenue will be sufficient or adequate for potential deterioration of the global macroeconomy.

Yoshitake Kobayashi

The next question from Hirakawa from Bank of America Securities.

Mikio Hirakawa

I'm Hirakawa from BofA Securities. So you're talking about 2023 plan and your idea behind that and for 2024 you have said that with the memory testers you have the sense that they will having a strong demand for 2024. In terms of what you can see in 2024 maybe not as clear as 2023, can you talk about what you are thinking about 2024? What seems to be visible for 2024? I would like to hear your view.

Yoshiaki Yoshida

For 2024 market outlook. So FY 2023 second half and onwards with the TSMC's miniaturization and 3 nanometer service stuff is going to be continued so I think basically the products is going to come into the market. So if you consider that for FY 2024 for the cutting edge products, the tester demand is going to be quite solid and I think it depends on how the macroeconomic situation looks in 2024. To foresee about that currently is very difficult. So from a technological front, I think that's the trend that we're going to see and I think that's a major focus for 2024.

Kimiya Sakamoto

Hirakawa-san, this is Sakamoto from the sales division and I just went ahead of myself and talked about 2024. But basically in terms of the memory market through miniaturization, the CPW chip per wafer is going to increase -- the volume is going to increase. And if you look at the fab situation and the high-end memory products and the ensuing quality and the coverage this time is increasing. I think these are elements to point that way on top of that specifically for DRAM. So we have been seeing the increase of the speed.

So I think basically we are going -- hitting the ceiling. So in terms of increasing the speed has been more and more difficult. So if that is the case, so [indiscernible] will increase, the coverage is increasing, the device number is going to increase. So it means that the number of the testers that are necessary is going to continue. So it means that the demand for testers will continue to be there.

So that is what I have meant through our opinions.

Yoshitake Kobayashi

Next question from Nakanomyo-san from Jefferies.

Masahiro Nakanomyo

Can you hear me?

Yoshitake Kobayashi

Yes.

Masahiro Nakanomyo

I'd like to know about the situation of the customer's utilization and operation on Page 13 in SoC category. You mentioned that the momentum is weak in the commercial DDIC, but SoC test 15% maybe faster volume. So those customers, how are they doing the work, the actual operation? What is the image like for testers? The reason why I'm asking this question is that these products are weak.

I think the utilization and operation is down now especially tester. Commercial though it's mobile, I think test steps stages are increasing phases. So compared to all, the utilization and operation is not declining although you have adjustment phase for inventories, it will not last long I believe. So that's the reason why I'm asking this question.

Yoshiaki Yoshida

Thank you for your question. As for the operation and utilization of the testers, we don't know actual figures though. But for example yes, smartphones, related drivers describers compared to the maximum level it is declining. And mobile related items, the actual number of smartphones being declining. So that is also weakening.

But other than that, HPC utilization rate operation is increasing and is enhanced and offsetting that weakening point. And also for the miniaturization in automobile, they have a very high utilization and they need more testers so they are asking us to early delivery -- earlier delivery. Memory high utilization, we can see.

Masahiro Nakanomyo

In addition, HPC originally based on strong demand assumption and I think tester procurement plan was very strong there. But by slowing down, is there any adjustment seen in the market and would that happen actually?

Yoshiaki Yoshida

Yes. As for HPC currently and the future outlook is very strong. More than now, we will have more numbers and I think that may change a bit. But according to our outlook, HPC related business is very steady and growing. And I forgot to mention earlier, the ISO utilization rate is down for OSAT Taiwan is still low, but for China OSAT is very high.

Yoshitake Kobayashi

Next question Mitsubishi UFJ Morgan Stanley, Hasegawa-san.

Hasegawa

Regarding next year our top line will be in the range of negative 15% to positive 10%. Your expenses such as R&D, capital investment and workforce. The direction for expenses, what view should we have? As business as usual, you will be increasing your revenue, but you might lose some revenue. But what is your stance towards the fixed cost?

Yoshiaki Yoshida

Our outlook for 2022 and 2023. During the period MTP2, I only explained for the period of MTP2. But we need to also look at our business in long-term perspective because semiconductor sales is now moving towards ¥1 trillion of sales in the midterm. Our growth opportunity varies. But in order to capture that, we have a shortage of workforce or advancement in AI deployment and not only using experts, but we have a shortage of engineers and that is not only happening to us, but happening across the world.

So continuous investment in people is absolutely required. So next year's revenue if it becomes visible for a potential decline in our revenue by 10% or so, at this point in time we are not thinking of cutting our personnel. If the decline in the revenue is greater than 10% and aside from another Lehmann crisis might occur in the future, but we need to develop our growth foundation with respect.

So we are not thinking about reducing our expenses. Of course with the weaker businesses, the travel expenses and the entertainment expenses, there is a room for cutting the small expenses. But we are not thinking about cutting personnel.

Hasegawa

I'm impressed with that. You are really sticking to your policy so that is my understanding. Thank you very much.

Yoshitake Kobayashi

Next question Macquarie Capital Securities, Damian Thong-san.

Damian Thong

So you have announced conducting a buyback in the second half this fiscal year. In the 3-year period in terms of the ROE target for the 3 years, it's between 30% to 35%. That's your current target. So next year for instance if you have a low end -- hit the low end in terms of the sales and the profit for next fiscal year in terms of the shareholders' return, are you going to secure the 30% ROE? Is that the message that you're trying to send out today?

What I want to say is that the 30% ROE or this range that you're talking about, this 30% is the lower range. It's a minimum. Is that the lowest minimum range that you want to achieve? I want to confirm that.

Yoshiaki Yoshida

So Damian-san, I think you were cut off at the beginning of your question. So could you repeat?

Damian Thong

So next fiscal -- so the MTP2 ROE target between 30% to 35%. I think on average, we'll be able to achieve more than 35%. So if next year the market declines and if there's a risk that you go under 30%, are you going to return more to the shareholders to support the 30% ROE? I just want to ask your commitment.

Yoshiaki Yoshida

Well, this is Yoshida speaking. This range of 30% to 35% of ROE target that is if we were able to achieve the lowest level of sales of 2023, we can achieve this. So this is what means for 30%. So FY 2023 sales it's not minus 15%, if it's minus 25% or minus 30%. Then to be able to maintain the ROE, will we conduct share buybacks or not?

Currently, we are not thinking that way. So we do not think that will be the kind of a commitment I can for ROE. So we think that just doing business as usual, we'll be able to go over 30% -- between the range of 30% to 35%. So ¥550 billion if we are able to achieve that this fiscal year, I think the ROE will be close to 40%. So this 40% and looking at 40%, last year's results and even if you go down to 2023 if it's within minus 15%, I think we'll be able to achieve average of 30%.

Yoshitake Kobayashi

The next question Tokai Tokyo Research Center, Ishino-san.

Masahiko Ishino

There are some very harsh or difficult situation for other companies. Towards next year, what would be a brighter story for us? Is there anything brighter story for us? SoC clearly I think it is in a trend to make a lower investment, but the advanced I think semiconductors investment is strong. You have new smartphones to DDI 5, there will be more demand.

So the demand -- according to TSMC's explanation, the demand is on a natural decline. So in that sense looking towards the future towards the next cycle, what would be something that would bring us growth? Can you elaborate on this?

Yoshiaki Yoshida

Yes. That is going to be just a qualitative type of story for us. But technology-wise, we have 2 gigas -- milliwave and 3D very complex semiconductors. So if they come and be launched, then it's going to be difficult for us to provide right testers. And who are the participants in that market?

As you can assume, yes; Korea, Taiwan, U.S.A. Not just those large companies, but the hyperscalers who use them including them. There will be lot of research going on and it is already been done. Hyperscalers or automobile-related device manufacturers, I think that's very complex and for quality wise, they are very cautious. So I think there will be more and more of such products coming out into the market.

So from the perspective of test or test flow or some portion of the semiconductor, then in that world together with those innovators in the world, we have to test new devices. And I think we should be able to be prepared to get into that new field together with them. So new innovations. Rather than Japan, it would probably happen in U.S. or maybe in Europe or maybe partially China.

So to those leading customers, advanced customers, we need to be prepared human resources wise and technology wise, being able to be involved and do those researches together with them. So I think we need to be prepared of course short term. Well, the economy seems to be darker and the stock price U.S. IT-related stocks is too high now price and I think there may be longer adjustment period. But I think technological evolution will occur more and more in the coming years.

So I think we should believe in that brightness and we should grow together with them. That I think will be support for us and motivation for us. Maybe it's too abstract, I'm sorry about it, but that was the answer.

Masahiko Ishino

That was difficult question. So the next cycle so do you think that it will be in 2023 or 2024 to bottom up and get into another cycle? Which do you think?

Yoshiaki Yoshida

Well, from the world economy wise, 2023 probably will be the bottom. But the new evolution and initiatives that we're participating with our customers has already started. Volume wise it may not be a big one, but it may lead to new customers or amongst the existing customers, we may come up with new possibilities. So there is a wave or cycle, we are already in there. So when maybe [indiscernible] may happen next year and it could happen 2 years later.

So that's what we are prepared for. But of course the world economy, we cannot go against it. So not just ourselves, but our customers and the customers' customers. I think we have wide range of customers now so we have to see what would be the influence of those to our customers. It's difficult to predict.

But relatively speaking, tester demand we believe will not dip or decline I believe.

Yoshitake Kobayashi

Our apologies. We are still getting other questions, but we are approaching towards the end of the meeting. So with that, we'd like to end the Q&A session. So with that, we'd like to end Advantest FY 2022 first quarter financial briefing. Thank you very much for joining our session despite your busy schedule.

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Advantest Corporation (ATEYY) CEO Yoshiaki Yoshida on Q1 2022 Results - Earnings Call Transcript