Advantest Corp Ord

Today, I would like to take the opportunity to thank you for participating in the 2023 financial briefing. I would like to introduce today's speakers.

Representative Director, Senior Executive Officer, Group CEO, Mr. Douglas LaFever. Representative Director Senior Executive Officer and President Group COO Mr. Tsukui Senior Executive Officer CFO and CSO Executive Vice President Corporate Strategy Group Mr. Mihashi Senior Executive Officer CCRO Executive Vice President Sales Group Mr. Nakahara Serving as the moderator for today, I am Kobayashi. I am Department Manager, Corporate Management Group. Today, first, Mr. Mihashi will present financial results for FMI2023, and then Mr. Lafeeva will present the FMI2024 outlook.

We will first take questions from institutional analysts first, as well as analysts.

And then, from 5 p.m. for 15 minutes, we will take questions from the press. We will end the briefing at 5.15 p.m., quarter past five. By the way, today's briefing session will be conducted both in Japanese and English. If you wish to listen to Japanese, please click on the globe icon at the left bottom of the Webex screen. A bubble will open, so please choose Japanese. Down below, there is a balance menu, so please move the slide bar to the right, which says, interpreter, you can listen to Japanese translation or English spoken. If you wish to listen to the original audio, you don't have to change the default setting. Today's presentation materials are published on our website as well as on TDNet. If you are joining on the phone, please download them for your reference. Also, only Japanese materials will be displayed on the screen during today's briefing. Please download English materials if you need them.

Before we start the briefing, I would like to make some disclaimers.

In explanations today, we may make some forward-looking statements based on our current projections, but they are subject to risks and uncertainties. Please note that actual results could be different from our outlook.

Thank you.

Shortly, in January this year, Group CEO position was assumed by Mr. Lafeeva. He will give opening remarks and then Mr. Mihashi will present 2023 financial results. Over to you, Mr. Lafeeva.

Okay, thank you, Kobayashi-san. First of all, I'm very honored to take on the responsibility of CEO. I want to first acknowledge Yoshida-san and the leadership he has provided and the results he's delivered during his tenure. I also want to emphasize the importance of the role of Sukui-san in the company. In his position as COO, he will oversee many critical operations of the company and provide critical support both globally and domestically in Japan. Sukui-san and I have worked many years together in Advantest. I also should mention that Mahashi-san, our CFO and CSO, also grew up together with me in Advantest. Mahashi-san today will go through our FY23 fourth quarter and full year results first. He'll also report on results of our second midterm management plan, which covered our last fiscal three years. Then in the second part, as Kobayashi-san mentioned, I will cover our outlook for the fiscal 2024 and share some assumptions and market share positions looking forward. With that, I'll hand it over to Mahashi-san.

Thank you very much.

Now, let me go through the financial results for FY23. At the outset, I'd like to give the overview about the results of FY23.

First off,

There are uncertain economic environment that continues at this point. I'd like to first appreciate and thank all of our suppliers, employees, and all of our stakeholders for their continued support of our business.

Now, compared to the record results of FI22, sales operating income and net income in FI23 are all reduced.

But we'd like to highlight that we gained market share in both SOC and the memory testers market. Despite a significant increase in sales for high-performance DRAM related to generative AI, SOC tests the sales declined due to the factors such as smartphone market conditions. and the slowdown in the third-party investment. Despite such softer market conditions, the degree of the decline itself was within the range of our guidance announced in July 2022 when we revised the second medium-term management plan, MTP2. However, in terms of profitability, the product mix changed significantly due to lower-than-expected sales of SOC testers for leading-edge processors.

FY23 was the final year of MTP2.

We will discuss the results of MTP2 later in today's presentation.

Turning to the next page, on page 5, this is the FY23 summary of results.

Sales opening income and net income decreased significantly year over year. Compared to the full-year guidance as of January 24, sales were slightly higher due to the higher than expected productivity to customers, in particular for memory testers. However, operating costs fell short of the four-year guidance due to an impairment loss for a portion of goodwill of approximately 9 billion yen posted in other expenses in the fourth quarter. However, core operating income excluding one-off items was 87.1 billion yen, and the core operating income margin was 17.9%. Net income for the year was also below the full-year guidance. Tax expenses for the year include approximately 3.8 billion of deferred tax assets in the fourth quarter, which are likely to be realized within a certain period in the future, resulting in a slightly lower effective tax rate of approximately 20%. Combining our year-end dividend forecast of 18 yen and the interim dividend of 16.25 yen already paid out, our annual dividend forecast is 34.25 yen.

On page 6, which shows FY23 sales actuals by segment or region. Over the three consecutive years until then, we've delivered on many products. And because of the higher demand, we faced a decline in the demand for our products due to excess capacity. And therefore, we had the lower numbers.

Now, by this segment, although sales for SOC testers for mature process devices, such as automotive, industrial, was solid, sales for advanced process devices for major customer appliances, such as smartphones and PCs, as well as for the data center related applications declined. Memory test sales exceeded the previous year due to strong test demand for high-performance DRAM and growth in sales to Chinese memory companies. By region, on a shift to basis, since Taiwan fell sharply, particularly for high-end ISOCID. Page 7.

which is about the fourth quarter FHMG3 summary of results.

This slide is describing the results, and the details of the performance will be explained in the subsequent slides.

On the next page, page 8. This is the call receipts by segment.

Semiconductor and component test systems, the SLC testers, sales were 58.7 billion, a decrease of 4.7 billion yen on quarter on quarter.

And for application processors,

Sales declined partly due to small pull forward in the previous quarter. On the other hand, sales for advanced process devices was down only slightly on quarter-on-quarter, only to the sales growth for high-performance computing and AI-related semiconductors. On the other hand, sales for mature process devices, such as automotive and industrial, which was solid in the first half, however, it softened in the second half, resulting in a decline in sales for two consecutive quarters. Sales of memory testers were 32.8 billion yen at an increase of 7.9 billion yen quarter-on-quarter. In addition to strong demand for high-performance DRAM related to generative AI, sales to Chinese DRAM companies also increased. Megatronic systems sales increased due to a healthy number of shipments in SE and memory products. Service support and others in the system-level test businesses, which has high sales exposure to specific customers, sales decreased due to a high comparison base following high-level product deliveries in the previous year.

On page 9, this is the fourth quarter sales per region.

As is expected, in the previous page, there was a sales curve forward in the third quarter, as explained, and sales of SOC testers decreased significantly on a quarter-on-quarter basis. Moreover, sales of system-level testers decreased as well. For China, sales increased in SOC testers and memory testers, respectively.

In South Korea, proposed customer investment continues and memory tester sales increased. Page 10. This is the fourth quarter sales, gross profit, and operating income. First margin increased slightly quarter to quarter.

SG under A increased by 9.5 billion yen per quarter. And this is due to the impairment of a portion of the 9 billion yen in other expenses item, as mentioned previously.

The impairment is related to SI Inc., which we acquired in FY 2019-10.

Due to a more than expected sales outlook of their test socket business to a major customer, the future cash flow projection was deteriorated. The core SG&A was almost flat quarter-on-quarter. On page 11,

FY23 fourth quarter R&D expenses and others.

So this chart shows buses, and because this is the end of the year, R&D capital expenditure increased.

The fourth quarter, FY23, operating cash flow increased because of the absence of income tax and bonus payments in the previous quarter, as well as a slight decrease in inventories.

On page 12. Now, as for the balance sheet for the period ended in March 31, 2024, on asset side, inventory decreased slightly compared to the previous quarter, and on the liability side, short-term borrowing was refinanced into long-term borrowing in the view of the Throughout FI23, we worked to strategically build up inventories for the medium- to long-term view and to increase supply capacity in the areas where demand is strong, and particularly for high-performance DRAM. In addition, inventories increased significantly compared to the previous year, partly in response to push-out requests from customers, especially for SOS detectors. To address declining capital efficiency, we will drive our efforts to upgrade supply chain management and seek to monetize inventory in a timely manner.

Lastly, I would like to discuss the results of the second MedTran plan, MTP2.

Regarding the results of the second mid-term plan, MTP2, as shown in the slide, while we were able to meet all the original targets set in May 2021, we did not meet the revised targets set in July 2022, with the exception of sales. Looking back over the past three years, the business environment has changed significantly in a short period of time. In the first half of the period, the increasing digitalization of society to the advancement of semiconductors, while simultaneously pushing for increased semiconductor supply capacity. In the second half, however, the semiconductor market for major consumer applications entered a correction phase. And the tester market, which had experienced rapid expansion, previously ended up slowing down, although there were areas of strength, such as high-performance semiconductors related to generative AI. Even under such an environment, we have increased our market share for three consecutive years in the MTP2 period. by successfully capturing the test demands of leading customers and new entrants working on advanced technology development in the area of high-performance semiconductors and increasing complexity such as HPC, AI, and HBM.

Regarding this part, Doug,

I will thoroughly explain it in his presentation part. Despite the short-term cyclicality of semiconductor supply and demand, we see a continuing trend of increasing complexity in the pursuit of higher-performance semiconductors. Including the emergence of new semiconductor market entrants, the semiconductor tester market is likely to continue to grow in the mid-long term, just as MTP2 results exceeded those of MTP1. We recognize that the key challenge for us going forward is how to ensure strong profitability, which can withstand changes in the product mix. With regards to our shareholder returns, after taking into account the company's minimum cash holding level of 100 billion yen, working capital requirements, and growth investment opportunities, we decided to implement shareholder return based solely on dividends for FY2023. Therefore, the total return ratio was below 50%. However, the total return ratio for the three-year cumulative period of NTP2 exceeds 50%. That concludes the presentation from my side. Thank you, Mahashi-san.

So, let me begin by touching about some of the semiconductor market trends. From our first midterm plan to our second midterm management plan, the tester market size in terms of a three-year average increased by 35%. The market size assumption for our third midterm plan is currently under formulation. After hitting a bottom in the calendar 23, tester demand will be driven by complexity growth of semiconductors triggered by AI from 2024 onwards, and we expect it to be cyclically up. With the solid high-performance compute and AI demand starting to expand, this year's overall test for market size is expected to be slightly up year on year. Due to a slow recovery in end markets such as smartphones and PCs and softness in automotive and industrial equipment markets, it should only be slightly up. In calendar 2025, overall demand for semiconductors is expected to pick up and reach a new record peak underpinned by a strong demand for advanced logic devices, including those used in high performance compute. demand recovery for mature C nodes, and further growth in demand for high-end memory devices. Driven by solid HPC AI-related demand, semiconductor tester demand is expected to hit consecutive record peaks in calendar 2025 and possibly again in 2026. In both years, further volume growth and performance improvement in advanced logic and high-end memory will also drive demand for our system-level test equipment and test peripherals, particularly for high-end SOC. Now let's look at our sales trend over the past two midterm management cycles. From the 1st, midterm plan to the 2nd, midterm plan, our sales in terms of a 3 year, average increase by 68%. Our sales growth outpaced the tester market due to market share gains and some partial. Foreign exchange impact. The overall market expansion is an opportunity for us as we leverage our historical strength and high end applications, such as high performance compute as well as all around capability of our solutions portfolio. Our midterm baseline is to secure secure greater than 50% of the semiconductor test market share, but we'll aim for even greater heights as we have in the past. Now let me turn to our market share position. In calendar 2023, total semiconductor tester market is estimated to have finished around 4.4 billion US dollars. This is down approximately 15% year over year with the SOC tester market accounting for about 3.3 billion US dollars and the memory tester market accounting for 1.1 billion US dollars. While technology advances in high-performance semiconductors drove demand for testers, the market size shrank for the second consecutive year due to the digestion of excess capacity and so some prolonged effects of the decline in demand for semiconductors in key consumer electronics applications. We estimate our market share was 58%, an increase of about a single percent point year over year. We believe we have won the number one market share for the third year in a row, including a 59% share of the SOC tester market and 56% of the memory tester market. In calendar year 2023, despite the market contraction, we expanded our sales and gained market share in the tester market, especially for high-performance semiconductors such as HBCAI and HBM, which are critical markets for our future. Looking forward now into 2024, Let me provide some comments on the business environment and test market trend. In 2024, uncertainty remains over the timing of a recovery, as demand from key consumer electronics applications such as smartphones and PCs have remained sluggish for a prolonged period, while expectations for an increase in demand remain intact for high-performance semiconductors, including high-performance compute and high-performance DRAM such as HBM. The SOC market tester size in calendar 2024 is estimated to be in the range of $2.9 billion to $3.2 billion. A downward revision of approximately $400 million from our estimate three months ago. In the automotive industrial equipment applications, given the high levels of capex spending until recently, we anticipated a slowdown in customer capex spending for mature semiconductors and weaker demand for new testers as existing test capacity gets digested. In calendar 2024, memory tester market is expected to be in the range of US $1.4 billion to $1.7 billion in upward revision of about $100 million. In the area of high performance DRAM, robust customer demand is expected to continue through 2025 in conjunction with increased customer production plans and higher quality assurance leading to high growth rates. Demand for testers for non-volatile memory is expected to recover gradually in the second half of the year. Taking all these factors into account, the semiconductor tester market is expected to increase by 5% year-over-year at the midpoint in 2024. Looking beyond 2024 into 2025, we can say with relatively high confidence that the market size will grow. Now, moving to our fiscal 2024 forecast in light of the tester market recovery, our 24 forecast calls for increase in sales and profits with sales of 525Billion yen operating income of 90Billion yen and net income of 67Billion yen. In the first half of FY24, sales are expected to decline on a half-over-half basis due to soft CapEx appetite of customers in the traditional automotive, industrial, and consumer applications despite robust high-performance DRAM demand such as HBM. However, from the second half, demand for high-performance compute, such as high-performance compute AI, is likely to absorb excess capacity in the market and drive new tester demand. Gross margin for the full year is expected to decline a bit year over year to around 48%, mainly due to changes in our product mix. Operating margin is expected to be 17.1%. With that, we will continue our R&D and investment efforts to enhance the added value of testing by evaluating new test solution offerings aimed at solving customer problems. We are targeting high-growth semiconductor areas that are driven by complexity. This forecast assumes exchange rates of one US dollar to 140 Japanese yen and one euro to 155 Japanese yen. Our latest forecast for the impact of exchange rate fluctuations in FY24 is that operating income is affected positively 700 million per yen of Japanese depreciation versus the US dollar and a negative 300 million yen per depreciation of yen versus the Euro. For our semiconductor and component test outlook, SOC tester sales are expected to be flat year on year. Within this segment, for HPC AI, we are sensing robust demand on the back of increasing production volume and complexity growth for generative AI. Furthermore, demand from new customers is expected. As such, the product mix within SOC testers is likely to turn around. On the other hand, for smartphones, although we expect complexity growth, such as 3 nanometer migration to increase test demand, recovery of the demand remains somewhat uncertain as smartphone conditions remain slow. For traditional industrial and consumer applications, demand is expected to remain somewhat weak this fiscal year. With lead times for SOC testers running now back to normal to three to four months, visibility on tester demand is also getting shorter compared for information to us from our customers. This makes it a bit more challenging to formulate the full year forecast accurately. We will continue to work more closely with customers and increase the certainty of our business pipeline. For a memory tester, sales growth is expected, driven by high-performance DRAM related to generative AI. However, I should say the current profitability of the memory test business is not at a satisfactory level, and I recognize that improving and increasing its probability is one of the most important issues I need to address as CTO and confident we will do so. Now turning to our mechatronics service support and others segment. In our mechatronics business, solid sales are expected for our device interfaces and handlers, supported by tester sales growth. Our nanotechnology product sales are expected to increase slightly as well. For sales and service support and others, they're expected to be similar to the previous year. Within our service segment in our traditional maintenance services, demand is likely to be firm due to the steady growth of our installed base in the system level test sub segment. Sales are expected to decrease a bit year over year. In 24, despite the growing customer base adoption of. Uh, this business is affected by certain customer involved in consumer electronics applications, specifically mobility, leading to some soft demand growth in recent times. The system level test is still a nascent business area and I've been working to expand this business, including through. In FY23, we gained several new customers and new applications such as automotive and compute. The system-level test business is critical for our strengthening of quality assurance for complex semiconductors, which is an area of high growth, and I remain confident about its future growth prospects. Next, I would like to address key measures for fiscal year 2024. The first key measure for 2024 is to deliver high value added solutions and expand our supply structure. We will further expand our supply for high growth devices such as HBM to meet rapidly growing tester demand. We aim to accelerate development of integrated test solutions to enable our leading edge customers to overcome challenges in developing cutting edge technology. We will create value through automation initiatives for end-to-end test processes, which coverage is ranging from complex semiconductor design all the way to system level test with the data analytics in between. The second key measure is to drive profitability improvement measures. We will maintain our advantage in our already well-established position in the testing of high performance semiconductors, such as high performance compute AI and leading edge memory. Lastly, we will also continue with our work on upgrading our supply chain management to keep up with future demand fluctuation and enhance our production structure. Through the management, uh, midterm plan number 1 and 2, which covered the last 6 years for advances, we have reinforced foundations for growth, including product portfolio, expanded business domain and rich engineering support. We are currently formulating our mid to long-term management policy and growth paths that are underpinned by the aforementioned achievements. Some of the core strategies are outlined below. There are four strategies I would like to share with you today. Firstly, we aim to continue to outpace the future growth rate of our core market by providing greater efficiency through automation for increasingly complex semiconductor devices. Secondly, we will drive operational excellence to the organization to ensure earnings growth. Third, we will continue to explore adjacent new businesses. And fourth, we will enhance sustainability initiatives with a focus on our net zero transition. We plan to hold a briefing in June to explain our mid-long-term management policy and provide details, including targeted management metrics. Thank you very much.

Thank you very much.

Now, we'd like to start Q&A session. And the following is how to access the questions. On the website screen, if you click the Dispense icon, please press the raise hand button. And when you're designated, you're allowed to select the unmute. And therefore, please unmute yourself and start your questions. State your name and affiliation and raise questions. And we want to entertain questions from the broader range of our audience today. Therefore, I'd like to limit only one question to be allowed per person. If time is allowed, we'd like to... for the questions for the next round. And we are broadcasting using translational translation, and therefore, please be succinct and clear in raising questions. Please refrain from raising questions to a particular competitor. We will accept questions both in Japanese and English. Now, we'd like to open for the question. Murugan-san, MUFG, and Wadachi-san, please.

This is Wadaki of Morgan Stanley MUFG Securities.

because only one question is allowed, and therefore, the SOC tester market for the three consecutive years is making negative growth.

However, what we would like to expect is that perhaps there are replaced leads for the clusters, and perhaps smart is now accommodating with the generative AI, And also, in the midst of a U.S.-China economic conflict and perhaps for the back-end process capacity may be posed to increase in the global market and therefore test that investment rate be increased. And I think about all these possibilities. I wonder, at some point in the near future, there might be some additions of the sales and performance on your end. What is your take, if I may ask?

Mr. Wataki, can you hear me?

Can you hear me? Yes, now I can hear you. Sorry, the audio was breaking up. Now, in regard to SOCs, as Mr. Bodaki, you are fully aware that our major customers is, for example, foundry and OSAT and such service providers are our customers. And to your question, what is key for us is the improvement of the operating rate and utilization rate. And in FY23, we recall there was an idle capacity and changing the users from smartphones to AI, HPC, and there were so many businesses for the purpose of upgrading. But in regard to the utilization rate, though it is improving, particularly for the Taiwanese customer, Some of the customers are approaching to their full capacity operation.

And for the system orders, compared to six months ago, the order level is increasing, as we are aware of.

Yet, we would like to carefully monitor the situation because there are some funders who are not on the full capacity yet. Because of this reason, TAM is now being estimated at this point, like you heard in the presentation. But the market condition has changed drastically. We need to carefully monitor three months to six months. We need to have a full understanding of the decision, and we need to update our outlook.

In regard to the smartphones, the sales of smartphones is not as robust as you would hope to be. However, in the second half of this year, our customers will once again migrate to the advanced process nodes.

It is very likely that they will advance to the higher nodes.

Therefore, a TAM time is now published in six-month basis. Probably in the second half of this year, there might be some new trends appearing in the market, as I expect. We will be very careful in monitoring the situation, and we'd like to make judgment on our own. Thank you very much. In regard to the global decoupling, like I asked, the test house and OSAT in the United States and the capacity building, what is the impact on that? Well, migration of supply chain is actually happening. And because of the decoupling, for instance, from China to

Malaysia or from Taiwan to Malaysia, that there are some supply chain migration.

And the tester demand for us is now becoming visible at this moment. Having said that, though, some of the factories are being built up, and we need to carefully monitor the situation at this moment. Thank you very much. You have answered your question.

Thank you very much.

Mr. Watanabe, thank you very much.

Next from CLSA Securities, Yoshida, please go ahead.

Hi, this is Yoshida from CLSA. I'd like to ask Douglas about your market share outlook in calendar year 2024, and if possible in 2025 as well, at both memory and SoC testers. I think the market growth potentials are more favorable for your company, but Teradyne also commented that they're going to take some market share at HBM and also AI ASIC. So do you think the recent increased market share can be maintained or further strengthened going forward? That's my question. Thank you.

Thank you very much, Yoshida-san. Yeah, our outlook for calendar 24, I should say, as I mentioned, is slightly up. But as you mentioned, there's going to be a large focus on memory as part of that total tester market for this coming year and into 2025. For 2025, we do expect a higher growth rate than we've seen in the past for memory versus SOC. And into 26, it's potential to continue. In June, we will be very more clear about the the actual market sizes for 25 and 26 and how we're modeling those assumptions. Specifically on HBM, I can comment that we're very comfortable with our position that we have. We've been working with our customers closely for so long. In fact, HBM, I think we started more than 10 years ago. And so we have very deep relationships, but we also understand that we have to maintain competitive balance between ourselves and how we're supplying into the system and manage our marginal profits there. Our first objective right now, our first responsibility is to make sure that we have adequate supply at the performance and quality levels expected by our customers. And by the way, those customers happen to be our SOC customers as well. And so we have our obligation and responsibility for the entire industry to make sure that we have adequate supply. So as I mentioned in my prepared remarks, we are opening up our supply chains in order to grasp the opportunity of the HBM and the high-end DRAM side. So while I can't talk specifically about customers or exact market share levels for 25 and 26, I guess I'll leave the remark at we're very comfortable with our position at this point. Thank you.

Do you think that market share condition for SOC tester side is also similar to this in HBM memory tester?

I think historically what we've seen over the decades is that when there's large waves that happen, if it's BC and mainframe moving to mobility and now with this era of AI, we've seen a large expansion in the memory business as the computational architectures have changed. And we're seeing that now. And that's why there's such expansion of HBM and high-end DRAM. Normally, after that, it follows with a large ramp up in SOC. And so what we're expecting to see now is continued growth in the data centers and the cloud. And then there's going to be some migration into the edge compute and so you're going to start seeing more applications of at the edge, which then will support the volume growth of in consumer and mobility. So our SOC business is still quite strong in our view, given the cycle, because of the HPC. And as that migrates from cloud to edge, we should see that layered on to our business model.

Thank you very much.

Thank you very much, Yoshida-san. Next, Nakamura-san from Goldman Sachs, please. Go ahead. Thank you very much. I'd like to ask about the profitability and the outlook, as well as trends. Earlier in the presentation, 48% is the gross margin you spoke of, and compared with the previous year, it will be down slightly. So in the new fiscal year, the sales is going up and there will be a goodwill impairment. And also, if you exclude that, operating profit is flat. Is it just because of the product mix situation? And if that's the case, memory tester profitability may be lower than we anticipate. And earlier, Adagusan talked about improvement of profitability. That is one of the key responsibilities. And what sort of schedule or timeline do you have, and what sort of a level do you think you can raise it to? Thank you. Thank you very much, Nakamura-san, for your question. First, I, Mihashi, would like to respond to this question.

As you rightly pointed out, 520 for a profit may look slow.

The reason why this is the case is because of the product and mix. I cannot just say it is all because of product and mix.

But for Adesia, in FY24, memory tester sales ratio will be very high.

That is our projection.

20% to 30% is the memory, historically speaking.

That is why FI24 will be much higher than 20% or 30%. So the product mix will be the largest factor that can impact our performance as well as profitability.

And as for profit, and as to how we can improve the profitability, first and foremost, in relation to memory, especially HBM, the generation changes speed compared with the DDR, commodity DDR. Unlike the generational creation of business, we have to work with our customers with a very hands-on approach. to deliver new devices without depending on the death. So the cycle time will be faster.

So from the second half of the year, HBM-3 will come in, so the generation change will happen. So at that time, along with the evolution of devices, on our side, we plan to deliver Higher value-added system configuration and our technologies that will be used as a result. Our profitability should improve. I believe we can expect that to happen. And earlier Mr. Afiba, Group CEO mentioned that to improve our profitability, we will strengthen our supply chains to a great deal, and then our procurement and cost will be managed very thoroughly, and also our production will be made more efficient. By doing so, we'd like to push up our profitability. Such activities will be conducted this year. Thank you. Thank you very much, Natsis. HBM sales will go up going forward, and as for FI25, do you believe that the profitability will go up in FI25? Yes, that is our assumption. Thank you. Thank you very much. Thank you.

Nakamura-san, thank you very much for your question.

Jefferies Securities Nakanomiya-san, please. One question. Impairment is my question. Is that coming from the large accounts where their sales forecast was changed? As I understand from your presentation, But was that significant enough to pose a large amount of impairment? What is your forecast? Do you need to continue to incur such a loss of sales going forward? And also, if that particular customer is not the one to sell to, I believe that you still have some potential to expand the business, but yet you are posting the employment. Would that be just a conservative approach, or why did you post such a large impairment?

Thank you for the question. This is Doug. I'll do my best to answer the question. I think I understand. The impairment that we took, yes, was related because of some overexposure to a certain large customer. We do not have plans to take any further write-downs. We do remain confident in this particular business, which has to do with high end sockets. Um, and as we, uh, transition to a broader customer base from their historical business that we acquired. we should see future business and cash flows related to that division. And so while it's painful as we do that transition and the sales cycles have been somewhat longer than we had originally anticipated, we're encouraged by the opportunities that we have been working on with qualifications, and customer expansion. So I think hopefully I caught the question right and that gives an appropriate answer.

Nakano Miyo-san, did you understand and did he answer your question? Can you hear me?

Yes, understood well.

Thank you very much.

Next question is from Macquarie Capital Securities.

Damien Thompson, please go ahead.

Can you hear me?

Yes, we can hear you.

All right. Thank you very much. This is Damien Thompson of Macquarie. Just have a question on the profitability improvement that you're looking for in memory tested. You will see like what kind of actions you could take because it looks like given your expectation of strong. HBM and memory tester growth next year as well. Maybe it's stronger than SOC tester. It would seem that actually there is obviously risk that your margins could still be under pressure next year, but any hints you could have on on. what kind of actions you can take would be welcome. Thank you.

Yeah, thank you, Damien. Without getting into really deep dive details, I would probably put it into the three buckets that Mahashi-san mentioned in his answer, which is that we're looking to achieve better value for our customers by improving their yield and throughputs and as well as the technology transitions. So as everybody understands, in the industry knows that the yields of HBM are under lots of pressure. And this is a reason why test capacity is required. But there's also opportunities to work with our customers to add value to their operations. And if we do that correctly, we should be able to improve our product value and therefore our margins. The second thing I would say is that we are co-working with our supply chain. And so you can imagine the number of suppliers that go into the memory tester bill of materials and the extensive supply chain for productions that we have. So we're working with them closely. And then the last thing is just driving overall efficiency. I think when we look at the detailed plans that we have, we're fairly confident that we're going to have some margin expansion in the memory area. And so it's going to take, you know, a lot of work, but we've already seen some of the fruits of the labor from this past year already looking forward into our model.

Thank you very much. Thank you very much. A続きまして、岡山証券の島本さんです。 Please go ahead.

島本さんは聞こえますでしょうか。 島本さん、Can you hear us okay? Hello, hello, can you hear me? Yes, we can.

Please go ahead.

So from my side, about the SOC test, the projection has changed so much from three months back. So you have provided an explanation, but once again, which part has changed dramatically compared with three months ago? And if you provide a breakdown between the first half and the second half, are they much different from each other? For example, do you want to be strong in the second half or in the second half of the 24? Things that shouldn't be too strong yet? What is your projection?

Thank you very much. This is Nakahara of Stills speaking. First of all, as I mentioned earlier, in the market, utilization has been slow compared with our projection and expectation. And that is because of the smartphone market. And another point is that now automotive industry equipment, machinery, tester demand has slowed down somewhat.

And there is more clarity about it. So including such developments, protection has been revised downward. And as for first half and the second half, breakdown at some point in the future so in the second half of the year we expect more improvement improvement will be clearer in the second half of the year did i answer your question

Yes, thank you. Thank you very much.

By the way, AI out of SOC, is AI in line with your projection? Some companies are saying that AI demand is strong.

What about your outlook?

In FI24 and FI25, our tester business, this will be our core.

So both memory and logic, both of them will be the key for us.

So once we reach a peak utilization, then a system order will come in in relation to generate AI. Thank you. Thank you very much. Thank you.

Thank you very much, Yamamoto-san.

Next is from Mizuho Securities. Yamamoto-san, please. Yamamoto-san, can you hear us? Yamamoto-san?

This is Yamamoto of Miso Securities.

Can you hear me?

Good afternoon. Please go ahead.

At the same point, I would like to ask a question regarding the profitability. A product makes worsening as fully understood. However, would that be the single only reason of a deteriorating operating margin? Shure is gaining in steadfast manner an SOC tester and a memory tester. When you look at the breakdown further, and as an outcome of a competitive landscape compared to five years ago, aren't there any products having a lower margin? Is that simply that the product width of the world margin increased, or that simply the product mis-situ, or when you look at each line of the product's margin, isn't that accumulating? Could you comment on that, Miyaji-san?

Yes, Yamamoto-san, thank you.

Thank you very much for your question, Yamamoto-san. To be succinct, for FY24-23, the profitability was lesser. And businesses with a lesser profitability have expanded, and that is the main reason. When we go to the each and every single level of a product, we are quantitatively monitoring the margins. It's not an observed impression yet, basically. For example, wafer tester is mostly in the memory area and therefore is irritating. But for the other line of products, voting exchange rates and cost of goods and inflation as well as the wage increase, of course, We've been receiving certain pressure about margin deterioration, and yet we are able to secure a certain profitability. I'm sure that you're looking at Teradyne's number. Their business is slightly different. However, when you got to Tester, their profit deterioration for the Tester business is actually smaller than your company's. What is your take? Operation and the way of operation is quite different. What we are doing versus what we are doing isn't quite the same. Does that mean that memory testers, to begin with, are struggling with a lower margin? to begin with from the past as well is still the case. For the DLAM tester for wafer testers, that product itself doesn't have a high margin to begin with. However, on the other hand, the technology involvement further precedes the technology-based wafer test. is going to increase more, and HBM quality issue, as a result of that, a solid testing process has to be implemented on the fab side, and on top of that, HBM 440, so there are more advancement, and by offering a higher function tested, therefore, we can enjoy premium in price, and the higher margin that we can enjoy. That is all my question. Thank you very much.

Thank you very much.

Thank you very much, Mr. Yamamoto.

It is now 5 p.m. As mentioned previously, from here, I would like to take a question from the media.

First of all, from Reuters News, Sam, Mr. Sam, please go ahead.

ask about the business in China. Sales have risen to around half of total sales coming from China. Could you give us some insight into what's driving that increase recently in a bit more granular detail on that? Obviously, there's a big expansion of legacy chip making capacity in China. There's a lot of questions about to what extent that is going to continue. So is that something you're seeing as a secular trend or is there a risk there that the company might be becoming rather over-reliant on sales to China? Thank you.

Yeah, thank you, Sam. Yeah, for sure. Over the long term, our sales in China has expanded like most of the semiconductor equipment companies. We have a lot less exposure than maybe some of our peers, and this is a ship to data as well. So it includes certain companies that have factories there as well as the domestic headquartered Chinese companies. So that's important to point out that within that data, there's some lower data. And we've been very successful, particularly in the high-end SOC area, as well as obviously some memory customers there as well. As far as the legacy nodes go, no doubt that there is a lot of expansion in China at the expense probably of other countries. And most of the legacy nodes drive a lot of mid-range to lower-range nodes. test equipment, which we have participated in, but not as much as we depend upon the higher-end SOC and higher-end memory. So hopefully that gives you a little color at this point. Thanks very much.

Thank you, Samu-san. Next, we have from Nippon Keizai Shimbun, Omichi-san.

Excuse me, I'm Omichi from Nippon Keizai Shimbun.

My apologies, Omichi from Nippon Keizai Shimbun. Can you hear me okay? Yes, we can. Please go ahead. Thank you. So in this annual projection, compared with the market projection, it is much lower. Your projection is much lower. What is the background? So in the first half, you talked about smartphone and automotive slowing down because of the emerging deterioration and because of the product mix. Are there any geopolitical risks that are reflected in your conservative assessment?

And if so, to what extent?

For example,

There could be some regulations against China and so on, so I'll leave it to you.

Omitsu-san, nice to talk to you.

As always, thank you very much for your question. Regarding geopolitical tension or risks, we haven't incorporated that too much in our projection. Of course, there are some geopolitical regulations restrictions or control semiconductor manufacturing equipment, or we are part of a semiconductor manufacturing value chain, but in the end, we are providing systems to test the final products. So, even if our business is regulated, the production of actual semiconductors won't stop. So, control or regulations against us So regulations against us in regards to customers in the entity list, if a US IP is included and so on, such regulations will be applied to us. But if we follow the guideline, we can continue our business. That is the environment we find ourselves in. So this is not a big factor for us.

Thank you very much.

At the end of the day, it ultimately boils down to the market situation, such as weak demand and so on. Is that the case? Yes, in that sense.

The market situation is not fully visible.

We don't have all the input where we can make a definitive assessment, to be honest with you. But as I have said earlier, AI-related or HBM-related, especially our AI-related business in A524, throughout A524, should be.

And at some point in the future,

we will reach our threshold. There will be a growth above our threshold. That is our prediction.

Thank you very much. Thank you.

Maybe our view, we're a global company and we serve all markets. China is very important for Vantest. just like all of the different markets are important. And while there's a lot of geopolitical risk, there's also other risk out there with access to energy, access to human resources, and supply chains are moving. And I'm very happy to say that when you look at Advantis and our footprint, our ability and agility to move as the supply chains move around, as the technologies move around. We're very well positioned as a company, and we've worked hard for decades to position ourselves this way.

Thank you. Thank you very much.

Next is Nippon Kogyo Shimbun Kobayashi-san, please.

Can you hear me?

Kobayashi of Nippon Kogyo.

Related to memory for DRAM.

mentioned earlier, HBM, and related to AI.

Demand exists, but for NAND, inaudible, continuing from last year, it is very weak. How would that recover?

There's no projection to improve at this moment.

Is this the right understanding?

Your audio was breaking up. It seems that you have asked about the NAND market.

Is that right?

Correct.

And Nakahara of Sales will answer your question. Now, as we show on the slide, for FI24, our memory business, 95% is earned in the e-drum.

That is our projection now.

Having said that, the brand name...

In the current situation, the customer is gradually improving as far as I can recall and acknowledge. And also for ASB, that improvement is observed. Therefore, toward the second half of this year, situation must be improved gradually. But on the whole, once again, the run business is much stronger in our company.

Could I add also, Max, on Um, for, uh, man industry is, is clearly going through, you know, this period of consolidation. So, um, certain companies are moving all of their way for starts to. Um, some are exiting or merging and and so this is a natural market process that has to happen in order for those companies to raise up their and earn the margins and. Uh, we're part of that supply chain, um, as a tester company. Um, what I, what I can see is there's some, um, you know, light coming in the forum that I see, especially is in things like edge. So, for example. um smartphones with ai are now going to start going into some level of of training models locally on your handsets and that will drive a huge amount of local storage which you know will be in in the nand area same with notebooks and and tablets and so the consumer part of the AI at the edge will reveal itself somewhat in these other areas like NAND, which clearly have struggled for some period of time now. So maybe a little bit of extra commentary on NAND.

Thank you very much. Kobayashi-san, thank you very much. Next, Dr. Bloomberg.

Ms. Furukawa, please go ahead.

Can you hear me?

Yes, please go ahead.

Oh, good. I have a question related to foreign exchange rates. Recently, the yen is becoming weaker and weaker. And when this progresses more, I would like to know what kind of measures you have in terms of hedging it. Are you going to promote the dollar demand denominated transaction, or are you going to hedge more? I would like to know about that. Yes, I can hear you now. Well, for us, if the changes or the differences become larger, of course, we conduct activities of hedging and other necessary measures, but most recently, We were assuming ¥140 and now it's ¥150, ¥155. But instead of conducting an active activity of hedging, the foreign exchange is more towards the weaker yen. And as a result of that, we need to thoroughly control the impact to our company's business operation, internal operation, meaning procurement and others. In order to respond to this weakening, again, we are conducting activities. as the financial measures, we are not taking any major additional measures. So even with the recent level of the foreign exchange rate, you are not? Is there a certain threshold that you will take certain measures? This is Kobayashi from the IR. Basically, for the foreign currency denominated And so we look at the situation and reporting the differences that will occur, whether we'll be hedging or not. It depends on the volume. I believe that we're not at that timing – excuse me – taking any actions. We're not at that timing of taking any particular additional actions.

Thank you very much. Thank you very much.

It is almost time to end the session, but Tamehiro-san of Nikkei Shimbun newspaper, a final question, please. Tamehiro speaking, can you hear me okay? Yes, please.

So from my side, about the dividend projection for this year, at this point in time, this is not disclosed.

According to guidance, you are going to make an increase in the end, so as a shareholder return level, are you going to maintain the same level as last year, or are you going to expand the shareholder return level?

Thank you very much, Tamehiro-san, for your question.

Earlier in my presentation, a dividend per share slide was shown on page 7. It said 18 yen, 1.8 yen.

That is our plan.

Of course, this number... Did you talk about next year, Tamehiro-san? Are you talking about FI24? Yes, yes, I was talking about FI24.

Okay.

In that sense, this year and towards the next year, in regards to dividend, we're trying to base that on our actual performance, as you can see in the past years as well. dividend. Every year, it has been on the rise, and we have been strengthening the dividend for the past few years. So next year, the margin of profitability may suffer to some extent, but as for dividend, FY23 and FY24, We'll have a certain level of dividend and this will be approved by the board. An announcement has to be made officially after the board's approval.

We just concluded the second midterm management plan and our total shareholder return was a 69% ratio. Our policy for that plan was 50%, and so we achieved that even with the lower number this year. We're right now formulating the next 3 year plan and so in June, we will release what our policy will be for the shareholder return for the next 3 year tranche. So please wait until June for the forward looking aspect of our business shareholder returns. Thanks.

Did not answer your question? Thank you very much.

Thank you very much for your participation.