Renesas Electronics Corp

Thank you very much for taking your time despite your busy schedule to attend UNESCO Select Times 2025 Second Quarter Earnings Call.

We thank you very much indeed. For today, simultaneous interpretation service is provided.

Please click the interpretation icon at the bottom of the screen and select the language of your choice. Speakers, please turn your video on. For today's session, we have our President and CEO, Hidetoshi Shibata, and Senior Vice President and CFO, Shuhei Shinkai, and some other staff members from the company. After opening remarks from Mr. Shibata, Mr. Shinkai was playing the second quarter results. After that, we would like to take questions. We expect to finish the entire session in about 60 minutes. Please be advised that the material to be used for today's session is already posted on the IR site of our homepage. Now, Mr. Shibata, please turn the microphone and the floor is yours. Good morning, everyone.

This is Shibata. First of all, Recently, we have seen a certain conclusion with respect to the tariff issue, which I think is wonderful. The government has arrived at the best possible solution out of the options available.

So from here onwards, the private companies in the current environment will have to consider how to respond and deliver results. I think that is the phase that we are currently moving into. Having said that, however, the uncertainty still remains.

The numbers that we have provided to you, including the third quarter numbers, where we have not factored in any numbers that could be affected by this tariff rate of 15%.

Instead, the second quarter, a 5% or so risk had been factored in in the second quarter numbers, which is something that we had already announced, but this did not materialize, fortunately. Still, uncertainty continues, so around 3%. the haircut numbers outlook is provided this time around.

So that is the overall picture.

Now, in particular about the second quarter, no big surprises, the tariff impact did not materialize. So no big surprises for the second quarter numbers. Wall speed impairment, as we have been informed you before, we've been able to land the numbers in the line with the projections that we had given to you earlier. And that is reflected in the difference between gap and non-gap numbers. As for the third quarter, the conventional servers and other data centers, and because we've been able to acquire market share slightly and because of seasonality, mobile is expected to grow quite healthily and in the area of IIoT. solid growth is therefore expected. On the other hand, when it comes to automotives, the second quarter, in particular in China, the performance was stronger than expected. This subsidy is now coming to an end and there are some reactions about that, so therefore In the third quarter, China is expected to slow down slightly, so that is factored in the number, so automotive, therefore, is expected to remain flattish. So overall, the tariff impact still is uncertain, therefore, Although not as significantly as the second quarter, we have made a little haircut in order to include some risks. That is the overview of the guidance for the third quarter. So that is the overall picture. So from here, as always, we would like to go through the presentation and have more details explained by Mr. Shinkai. Mr. Shinkai, please begin.

Thank you very much. This is Shinkai CFO.

I would like to explain the results for the second quarter of the year ending December 2025 using the material. If you can go to the fourth page.

This is the second quarter results.

As for the actuals of the third quarter, second quarter, please look at the columns in dark blue on the middle. Revenue 334.6 billion. Gross margin 56.8%. Operating party profit 91.9 billion yen. And the OP margin 28.3%. Profit about the beautiful to a parent 77.8 billion yen. EBITDA 110.2 billion yen. Foreign exchange rate 146 yen to the dollar and 162 yen to the euro. Compared to the difference with the forecast, if you look at the three columns to the right, And for the first quarter, first half is at the far right, the dark blue part. And what is written on this slide is the non-gap-based results. The gap-based results are in the appendix. There, the deposit to Wolfspeed has been recorded as valuation losses, 235 billion yen for this fiscal year. It was originally anticipated to be 250 billion yen, but it came in at 235 billion yen at the end of the day. That's the final number. Those are recorded under financial expenses and have impacted a profit attributable to the owner of the parent.

Next page, please.

This is the second quarter revenue growth margin and operating margin. I would like to explain them here. Compared to the forecast on the upper right, if you look at the upper right box, revenue was up 7.5% compared to the forecast median number. Less than half of that was due to the weaker yen. and remaining slightly over half was due to the fact that, as Mr. Shibata mentioned, when we developed our second quarter forecast due to the uncertainties over the reciprocal tariff impact, we factored in some risk, but those risks did not really materialize. To give you some more details, automotive achieved an increase compared to the forecast that accounted for 80% and the remaining coming from the IIoT area. As for the gross margin, 56.8% and compared to the median value, 180 basis points higher.

So that was an improvement.

And due mainly to the weaker yen increased utilization and improved production costs. Those were the factors behind this increase. As for the utilization, the input, the utilization increased slightly, and also for the manufacturing cost, the manufacturing-related projects, footprint optimization and those projects' expenses were pushed out, and those are going to be delayed into the third quarter. As for the OP margin, operating margin, 28.3%. So compared to the median value, up by 3.3% point improvement. This was due to the size increase of the gross margin, gross profit. So the size improvement and the cost improvement and push out of the expenses. Due to these factors, we arrived at these numbers. The cost itself, OPEX itself, excluding the foreign exchange impact, came in as projected. And if you look at the bottom right on the Q and Q, um operating revenues revenues was a increase of 5.1 percent excluding the impact of foreign exchange up nine percent both automotive and iot achieved an increase operating margin gross margin was on nearly flat the foreign exchange and the deterioration due to the manufacturing expenses was offset by utilization improvement. For OP, probing profit because of the foreign exchange and the expense increases these were offset by utilization so up 2.1 percentage points on q and q basis 1.2 percentage points we on a q and q basis by segment if i look at the um the middle part here i would like to give some commentary here um the p and l for the uh by segment the one of um This is excluded from the non-gap adjustment for the entire company, but for segment-specific P&L, it's already adjusted for in each segment. So therefore, the segment total does not really match up with the company total. So those are, I would like to just add some comments here. For the automotive sector, in the second quarter, we have added back the losses, such as impairment losses from SIC business, those are recorded here. So therefore, the OP margin on a Q&Q basis was down 6.3%. And because of this irregular factor, if they were not for this impact, the automotive Q&Q was almost flat. When it comes to IIoT, in the first quarter, there were one-off factors factored in in the first quarter, such as the legal expenses allowances. mainly. And because of this reaction on a Q&Q basis, in the second quarter, the operating profit improved more than the growth of the revenue.

And the next page, please. This is the quarterly revenue trends.

You can see the second quarter results on the far right. Year on year, overall, we had minus 9.5% in revenue, Q&Q plus 5.1%, excluding the FX impact. As you can see on page four, year on year, revenue was down 9.6% and increased 9.0% on Q. And as you can see, this by segment results as follows. And these are the financial numbers and their trends at this time. There's nothing in particular that I would like to highlight, so this is just for your reference. Please go on to the next page. This is showing in-house inventory and channel inventory changes and forecast. First, please take a look at the top right, in-house inventory and DOI. In the second quarter, both inventory, the actual amount, and DOI decreased queue on queue. As for DOI, from 118 to 106 days at the end of second quarter, there was a decrease. The main reason comes from a decrease in line with the revenue increase. Particular reasons include the April power outages in Naka factory, disposals and recovery efforts in relying with that. Other than that, Due to production and shipment, the raw materials and working process decreased as a result. As for the three third quarter forecast, we expect an increase Q on Q. Dai Bank is to be increased. according to our plan and this is for the VINEO 5 and others and as for the finished goods we expect there may be some upturn in the demand so we would like to build up the inventory to some extent and the lower half this is for the channel inventory in the second quarter Although inventory increased queue-on-queue, sell-through also increased. As a result, WOI decreased queue-on-queue. At the end of the first quarter end, it was 9.2 weeks. It decreased to 9.0 weeks at the end of the quarter. As for the automotive, sell-through was mostly in line with our expectation. We have increased sell-in to the channel inventory with the expectation that demand increase in the third quarter. As for the IIoT, sell-through increased slightly above our expectation. And as a result, the sell-in also increased. And as a result, the channel inventory decreased in line with our expectation. For the third quarter, we expect a slight increase, a Q1Q.

For automotive,

will follow shipment in line with sell-through, but we would like to accommodate a potential upside in the sell-through with sufficient buffer. As Shibata said at the outset, in the third quarter, of course, there remains uncertainties with regards to tariff issues, and we expect some impact of that in case risks materialize. And if there is going to be an upside, we would like to be in a position to accommodate with sufficient buffer. Therefore, for WOI, we expect a slight increase. But if there is a upturn in the end demand, of course, the amount as well as WOI would decrease as a result. As for the IIoT, the plan is to further expand a channel inventory, and this is to accommodate seasonality coming from the mobile, among others, and as a result, WOI is expected to increase. Please go on to the next page. This is on the utilization rates on the left-hand side. This is the front-end utilization rate based on wafer input. From the initial expectation in the second quarter, utilization rate increased. It was mid 40% as originally expected, but the result was slightly below 50%. Partly, this is due to in relation to the power outages at the Nanaka factory and the recovery efforts in production. There was a temporary increase, but mostly this increase in utilization rate came from other factors. As for the third quarter, we expect a flat Q1Q. So from mid 40% to upper 40% is our expectation. As for the capital expenditures, the recent trend is that the capital expenditures are mostly for non-production related. But the second quarter, in addition to R&D for increasing efficiency in the production equipment, there were some investments made. In the third quarter, mostly capital expenditures will increase, mostly around R&D. Please go on to the next page. This is the third quarter forecast. Please refer to the dark blue column in the middle of the slide. The midpoint revenue forecast, 330 billion yen, growth margin 56.5%, operating margin 27.0%, FX, assumes that 145 yen to the dollar and 169 yen to the euro. As for revenue forecast, I would like to give additional comments here. We expect year on year minus 4.4% plus 1.7% queue on queue for revenue. If you look at two rows below, device sales excluding FX impact, we expect plus 2.0% Q1Q.

Furthermore, gross margin, our forecast is 56.5%.

This is 0.3% decrease Q1Q.

Overall, because of the weaker euro,

This will have an upturn, but due to the mix with mobile increasing and also the cost increased in the second quarter, as a result, the gross margin is expected to slightly decrease. OP margin 27.0%. We expect 130 basis points decrease Q on Q. This is mainly due to OPEX increases. On Q on Q basis, we expect 3.1 billion yen or so increase. 70% comes from R&D, 30% from SG&A.

This year, in the first half, OPEX had a slow start. We maintained low levels.

In the second half, we will gradually increase OPEX spending. And for the appendix, I will also give some additional comments. Page 16, please. This is a bridge from non-GAAP to GAAP on operating margin basis. Second from the right, non-recurring items in the second quarter. there was a 16.3 billion yen substantive amount. This includes restructuring related one-off costs and suspension of SIC business. This is also a one-time cost and a provision for litigation costs as well as loss as a result of the power outages at a factory are all included here. In the next page, page 17, this is what I referred to at the beginning of my explanation. The results in a gap The impairment loss related to wolf speed is included here. As a result, a profit attributable to owners of parent was minus 201.3 billion yen. This concludes my explanation. Thank you.

Thank you very much.

Now we'd like to move on to the Q&A session. First of all, I would like to explain how to raise your question. If you have any question, please press the raise hand button on the screen. From the order of the hands, we would like to call out the name of the company and your name. If you are nominated by the MC, you are able to speak, so please unmute your microphone and begin your question. In the interest of time, we would like to limit the number of questions to two questions per one questioner.

Now, the first question.

Goldman Sachs Takayama-san, please begin your question. Please unmute yourself and begin.

Takayama-san, you cannot hear your voice.

Can you confirm your audio status? Takayama-san, we cannot confirm that we have your audio feed, so please check your audio environment, and we would like to give you an opportunity for your question later. Now we would like to move on to the next question. BOA Securities, Hirakawa-san, please begin your statement after unmuting yourself.

I have two questions.

First, as Mr. Shibata said, Delta said that the tariff was now set to be 15%, so we have better visibility in that regard compared to before. In the realm of what you can see right now, after the fourth quarter into the second to 2026, automotive and IIoT, what are the scenarios that you are foreseeing in that timeframe? so that's my first question well it's very difficult for me to foresee 2026 at this point of chunk at this point of time even the fourth quarter still at this point it's very difficult for us to foresee what is going to happen then but as an overall trend we are expecting flattish or slight increase well that is a modest forecast as we have right now the vectors of the growth remains unchanged from the third quarter. I think nearly unchanged data center AI related will be driving the growth, I believe. As far as automotive is concerned, although the size is still very limited, but still in the fourth quarter, the fourth generation ADAS related SOC for automotive will start to pick up. So I think that would be a positive development for us and for the MCU in 2028. Those 28 nano, those were driven by China, but these will be expanded into Japan and Europe. So that is going to sustain the growth, I believe. But on the other hand, when it comes to the overall demand for automotive, we still have no clue as to how that will unfold. So there will be both positives and negatives. And therefore, on a net basis, we believe we will be happy if it's a slight increase compared to now. A follow-up question. Other companies, compared to three years ago, they believe that they have a more cautious view on the market environment forecast. That was a comment by your competitor. But have you changed your focus as for the market outlook compared to before? Well, as we have always been pointed out and criticized in many cases, but we always have a modest view or it doesn't mean that we have moderated our focus compared to before. This is something that we have factored in from before. Okay, my second question. At the Capital Market Day event in the end of June, you talked about the initiatives for our competitiveness improvement, and you're going to run the R&D projects in order to raise your competitiveness. And therefore, the OP margin target was changed compared to before. But also, the company message also came after that. You also talked about the time horizon. So what is your financial model that you're currently contemplating, it's getting us difficulty to see what is your current model. So as of this point, compared to the message that you have given at the capital market day, are there any changes or anything that you would like to add as a comment to what you said at the capital market day? And so the OP margin, the target range was changed, and also the two percentage point increase of OP margin. You're going to work on cost reduction this fiscal year. So then what is the net results out of that? Can you comment on those points? That would be appreciated. The latter half will be explained by Shinkai-san later after me. But for the former part of the question, there are no changes. These are things that are not going to change so suddenly.

What are the issues for us? Although this was pointed out by some of the investors, but we...

cannot compare the performance of the company unless we use a constant foreign exchange. So 110 yen to the dollar and 120 yen to the euro. We have been comparing our performance based on the current constant currency basis and the numbers that we show on a quarterly basis is based on the actual foreign exchange rate and therefore the baseline is different. So that kind of explanation was insufficient. So that was pointed out by some of the investors and therefore If that is the case, then I want you to deepen your understanding. So that's one point. So in the recent years, 100 yen to the dollar and 120 yen to the dollar. If that is the case, this is lower than 28%. So we would like to put it to somewhere in the range of 25 to 30% range. So that remains unchanged as a message that we have given you at the Capital Market Day. And this is something that we have to Mr. Shinkai mentioned back then regarding the R&D intensity. There was a simple miscalculation, so we would like to make that correction. Those are the two points that I would like to convey here. The total message remains unchanged, 25 to 30% range. This range of margin, this is what we like to adhere to in our operations because in Japan we often do this, but the emergency and the priority, we look at things at those quadrants then previously important but not the urgent those items had been postponed in many cases and we're not really able to tackle them so much so so important but not injured we have decided to steadily tackle these issues so that is the main focus here so especially when it comes to R&D we have decided to focus more on the R side of R&D and that is the reason why we have decided to take on this initiative so having said that it's not going to be that we are going to recklessly make investments and we don't want to dilute the operating margin as a result of that. So if you look at the second quarter numbers and if you look at the guidance of the third quarter, you should be able to confirm I think that it is best for you to confirm those numbers with the second and third quarter numbers. And Shinkai-san will follow up. As we've been talking about from the beginning of the year, the four-year run rate, two percentage point of improvement of operating margin, that worth of cost reduction is currently in progress, and we are making progress on track with our plan. And this two percentage point COGS and OPEX related initiatives, 1.5 percentage point is related to the OPEX run rate verification. So on a four year basis, this is currently in progress. And also for the run rate impact on the operating profit margin, there was a change due to the accounting and also the change of depreciation period. Because of these impacts, three percentage point worth of cost reduction is currently in progress, but this is only at the run rate basis. And for example, if you compare with last fiscal year, the year-on-year revenue reduction impact is also kicking in here. And also, there is also a one-time cost reduction. So that caused a little bit of inflation. So in reaction to that, there is an increase. So if you compare this year versus last year, the current margin, it doesn't really seem to be visible. But again, on a run rate basis, the reduction is making good progress as planned. So that's all for myself. Thank you. Thank you.

Thank you very much.

Next, from UBS Securities, Yasui-san, please unmute and go ahead. Thank you. This is Yasui of UBS Securities. I have two questions. First, from April-June term, you talked about one time uh cost sca sga i think um seems to be bigger by 8 billion and also the power outages related across should they be considered one time in my calculation on non-gap basis op margin i think was above 31 according to my calculation so how should we consider this that's my first question and my second question also that relates to Hirakawa-san's question. At the capital market day, the way you communicated was what I would like to talk about. What was the message? Was the message that OP margin would decrease? I think that was how we understood your message. So once again, we would like to clarify what the message is. The actual OP margin or the OP profitability compared to the target since it is low should we expect the increase and by how many percentage points should we expect an increase in the profitability going forward i would like to to get specific numbers sorry for asking this in a roundabout way but what are the assumptions and how many percentage point increases should we expect in terms of profitability first regarding automotive the one-time costs seem more concentrated for the automotive segment, and they are a one-time cost. Since these involve counterparties, I would not go into details, but for a prolonged period, this has been going on, going back certain periods, the so-called patent trolls.

initiated lawsuits.

And then, regarding these litigations, we would like to settle them. Finally, in order to do so, we allocated certain costs for bringing those lawsuits to an end. And also, as Shinkai said, mostly around SIC, we made capital expenditures and investments without setting any timeline, we have made a decision to suspend this business. So this portion would be impaired, and that is why we refer to these as one-time costs. As for the capital day market, I did not understand the intention behind your questions, but we introduced a lower end for the range, and that's precisely what we did. So it is not that we will unilaterally lower the profitability, but rather than trying to increase, we would like to ensure there is flexibility in our management, nothing more, nothing less. As for what the numbers would look like based on constant currencies, I would like to refer to Shinkaisan. for this part of the question.

On a constant currency basis, our currency sensitivity for this year is as follows.

Well, going forward, so I will first talk about the third quarter for revenue with one yen change against the dollar, 1.7 billion. on an operating margin basis 700 million in terms of euro 200 million yen against one yen op margin 100 million yen sensitivity against one yen difference so using these if you calculate you can see what the numbers would look like today on a constant currency basis or the exchange rates of 100 yen to the dollar, 120 yen to the euro. As Shibata said, the 25% to 30% range, as we've been saying, currently we are below the 25% level. Thank you very much. So when excluding those one-time factors, what would be the amount for the operating profit is it going to be 100 billion yen on the dot when you say 100 billion yen this is a company-wide impact i believe now i'm talking about the second quarter 991.9 billion so would that be 100 billion with constant currency or excluding one-time factors I would like to go back to the presentation materials, page five. If you look at the numbers on page five, company-wide, there are litigation-related costs, as was mentioned, and also SIC impairment loss costs. So these have been excluded from the company-wide numbers. They have been excluded. But for segment-specific factors, they have been added to the segment-specific numbers. So for automotive segments, if you look at this segment, operating margin is 23.4%, and Q1Q, it's a 6.3% decrease. This minus 6.3%, mostly, almost all of it comes from one-time factors. So excluding one-time factors, Q1Q automotive would have been flat around 30%. So company-wide impact will be neutral, I see. Sorry, I did not understand that point. Thank you. It's clear now. Thank you very much.

Thank you.

Now moving on to the next question. The previous questioner who didn't have a good audio condition. Goldman Sachs, Takayama-san, please begin. Please unmute yourself and begin your question. So sorry about that. Can you hear me now? Yes, we hear you. Two questions, if I may. The first question, the third quarter revenue guidance, I just wanted you to give us some more breakdown about IIoT. There are three segments and the growth rate that you have in your current guidance. There's 3% haircut you talked about. Is this going to be applied across the board, including automotive? So can you give us some more color to that? And also you mentioned that the automotive business is expected to be flattish. But I think with Japanese customers, I think the numbers are going to... Are you expecting a number increase, a volume increase among the Japanese customers? So what is your view, Mr. Shibata, on that?

So that's my first question.

At this point of time, there are both ups and downs. The situation is mixed. Even if it's the Japanese customer, the same Japanese customer, Some customers are increasing, other customers are not increasing, so it's quite divided. On a net-net basis, then a slight increase, I would say. So the big variance comes from China. On a Q&Q basis, if I talk about the Q&Q changes, China, second quarter, reactionary decrease in the third quarter will be noteworthy or most conspicuous. europe from our viewpoint remains weak we don't really see any uh strong signs out of europe uh japan is mixed uh some companies increasing others decreasing china not really weak trend but there is a reactionary decrease that is going to be quite a remarkable in the third quarter and then in europe will continue to be weak That is the color that we see at the moment. And for all the guidance, how we develop the guidance, the approach to developing guidance for the third quarter, if I give you some breakdowns of the elements, the data center, if I talk about the data center first, we believe this is going to be firm, as I mentioned earlier. um percentage increase is what we project here for the data centers in the third quarter consumer mobile when we blend them all together only high single digit level growth but if you just talk about mobile in particular high teen level of growth is what we are projecting right now. But then after the mobile segments, those growth are muted when it comes to consumer segments. So that's how we look at things. As for industrial, the core industrial automation related, As far as those demands are concerned, I think double-digit growth can be expected as we see things right now. But again, this is just like the Chinese automotive, but in China, the white appliances, home appliances in China, from the second quarter to the third quarter, we are expecting a reactionary decrease in the third quarter. So industrial overall, If you look at the entire industrial, we're not really sure. There are some growth in some other areas, but decrease in other areas. And therefore, we are expecting generally a flattish growth for industrial growth. So a haircut of around 3 percentage points, 3%.

I said, so we are seeing some solid growth in applications data center mobile.

We have not applied a universal haircut there. Just a rounding level haircut was applied there. But other than that, when it comes to particular circuits where there is a solid decrease or insufficiency in supply, Otherwise, other than those elements, we have applied a universal haircut in general. Okay, my second question. I'm not really sure if you can ask this in an easy-to-understand way, but the other day during the capital market day, you talked about reinforcing your capabilities for the mid to longer term, and I do understand that you are taking all these initiatives in order to afford that direction for that purpose. But investors are not really looking at things on a three-year horizon, but I think they have to live with the reality that they have to improve their capital gains in like six months range. And I think it's difficult to achieve both. So in that environment, I think software strategies will take time for you to materialize and deliver results. Given that in the one year, two year timeframe, what do you want us to evaluate on you from an outsider's perspective? What is going to be the driver for you to raise your stock price? I'm sure you're thinking about that. So if you can, in terms of your communication with the stock market how are you going to harmonize your views vis-a-vis the investors or the stock market if you have any plans for the company in the next six months one year period what are the elements for us to evaluate the company or in your view what will drive the growth of your stock price in the next six months time one year time frame exactly capital market day We have been setting this at a cadence of once a year. So at the next capital market day, we'll try to provide information that could specifically address your question. I will try to comment that and provide you communication in a very easy to understand way as much as possible, especially when it comes to software and digital. How should I put it? We are looking at things quite aggressively. we would like to translate them into matrix so that you can precisely understand what that means. But before that, like in a six-month, 12-month time frame, within that time frame, this is not really about software additional. This is rather more about the conventional semiconductor-centered topics, which I think will be key, and that's more suitable for the growth So we would like to continue to provide information on the extensions of what we have done so far. And right now, 15% tariff, I think, is a wonderful conclusion. But still, uncertainty remains. That is true. So therefore, we have to move in line with the visibility enhancing in the total market and give you more visibility as to the semiconductor market. We'll try to respond to your request based on that approach.

Thank you.

Correct me if I'm wrong, but in the next six months, 12 months, you'll talk more about the conventional things like a semiconductor. And for IIoT, you'll try to raise revenues based on different product level. But for automotive, the 15% tariff, given that this conclusion, if this turns positive, Now we are seeing slight signs of that then therefore the expectations are beginning to increase and I think that is going to you're expecting those hopefully to be the driver of your stock price. Is that correct as your as my interpretation? Yes, that's true. But also as I said the 28 nano MCU at last in other geographies than China, this is going to take off. It's expected to take off although the number is not going to increase significantly, but then for SOC also We would like to also give you some more color on that product as well. Okay, thank you very much for that.

Thank you very much.

Next, from Nikkan Kogyo Shinbun, Kobayashi-san, please unmute and ask your questions.

Can you hear me?

Yes.

Thank you.

I'm Kobayashi from Nikkan Kogyo. My first question is this regarding utilization of your factories.

In total, in 2025, you had a slight increase, I believe, for 12 inches, 8 inches, but for 6 inches, it's below 40%.

I think that's the level you're continuing to see with regards to the utilization rate. So I would like to know more about the outlook, particularly for the six inches. Is it going to increase? That's a difficult question. It's not that we have a plan to launch new products for six inches, but so our approach is to maintain the utilization rate.

Thank you. And my second question is this.

I apologize for asking this every time, but for Kofu Factory, are there any updates? In the previous capital market day, you talked about 300 milli GAN and also power MOSFET. A future vision was presented to be used for these products for GAN. What is your timeline for the mass production to start? I think it's going to be a longer range. What is the current utilization outlook? How are you going to use this plant for the time being? Well, I don't have any new information to share since last time. It's only been one month. No big situational change has taken place in over a month. We've made a decision for the CAPEX. So for MOSFET process, we will make sure that the process will be launched And I would say in a low single digit number of years, we hope that this will be fully launched. So currently we are making preparations in a very steady manner. That's all for me. I see. Thank you very much.

Thank you.

Moving on to the next question. Oh, Kawasan from Daiwa Securities. Please unmute and begin your statement.

Thank you very much for this opportunity.

This is Oka from Daiwa Securities. My first question regarding your growth margin, your approach thereof. In the third quarter, automotive and IOT, when you separate between the two, what is the growth margin you project? The reason why I'm asking is because, of course, mobile is going to increase and the mix may deteriorate, but industrial and data center applications increasing in ADAS, in automotive, if those increasing, I thought that the gross margin would improve, but we can give a comment on that. And also the longer term, during the IR day, you said that you're going to increase your gross margin and also The SG&A ratio would also increase, but so long as the gross margin is going to increase, I think you said that the profit margin would stay flat, but then the gross margin has not been revised upwards. So if you can comment on the reason behind that. And that can be explained by Shinkai-san, all right? Yes, of the medium term, the model for the medium term, if you can comment on that, the gross margin is 55%, remains unchanged from the last presentation.

So the reason for that is because the mix improvement,

will be there but we are not expecting a significant change in the mix and therefore depending on how things unfold in the future such as pricing and also the cost base there are there could be variations there are changes there so we'll try to offset them properly so that we can manage a good way so with that that's the reason why we are expecting flattish growth for the gross margin the details pertaining to automotive and the changes between the mix between automotive and the industrial there might be some short-term changes but if you even them out over a longer time horizon the gross margin is not going to increase sharply given the current situation. So we are not foreseeing a significant increase in the gross margin at this point of time, but we are not expecting a decrease either.

Well, this fiscal year,

For example, if you look at the second quarter, third quarter gross margin trends, in the second quarter, if you look at the slide, there's a gross margin by segment. On a Q&Q, the changes are not that significant. Automotive on zero, 0.2% for IAOT, 0.8% point. So that is the changes.

that we have been seeing.

So we are not expecting a dynamic change from that level of changes. Thank you. My second question is about now that the autonomous driving increasing, you're expecting SLC to increase in this fiscal year, but even the mid to long term, are you having tangible progress in terms of the order receipt for autonomous driving? Do you rather believe there's something needed such as R&D and reinforcement? So if you can talk about the autonomous driving related SLC or microprocessor units, order acquisition status over the mid to longer term well this is not going to change significantly from what we had commented before in this segment in this area we are not a dedicated automotive

portfolio, graphics, all these things.

We are not bringing automotive, these things developed for mobile and graphics are bringing them to automotive because we are a dedicated automotive player in that regard.

So, looking at the entire customer as a target,

and building of things, that is not our direction because that does not make sense in terms of our strategic rationale. So since last year, we have made announcements that we are going to collaborate with a major Japanese OEM. I'm sure you have read that press release. So we are going to meticulously build up those kind of projects going forward. That is the approach that is fit to our strategy. So that's what we are doing. So therefore, it's only six months since we made this comment or announcement so uh we are not seeing a significant increase of these orders so these things can increase only one to three or maybe one to two cases per one year if that that kind of increase is going to be very um matching with our strategy so that is what we are looking at right now that is the level we are looking at so if the next opportunity arrives maybe sometime around the end of this year or maybe early next year if those materializes that will makes us believe make us believe that we are in a favorable trend and a steady progress gen 4 Those are going to take off from here onwards. So for those products, fortunately, we have so far not been able to enter the Korean market in a significant way. But fortunately, we were able to make a foray into that market. So for the next several years, not five, seven years, but in a shorter timeframe, in a chopper, we believe this is a very exciting opportunity for us. So we have high expectations there. So what I'm trying to say here is that we are doing okay, so-so okay, I believe. So we cannot be too proud. with this current level performance but we are not facing dire situation either so I think we really believe we are progressing so so well that's about the SOC when it comes to R&D SOC consumes money that's exactly correct but not only that as I mentioned earlier important but not urgent those kind of initiatives will have to be executed so the design methodology, drastically modernized implementing AI, or as far as the research part, as you may be aware, SIC, we have been a laggard. We tried to enter that space as a laggard, and the situation is what you have seen. So those things, those research that will lead us to a future, we have to tackle them earlier on. So based on that awareness, we have decided to reinforce our research activities. So that is currently being contemplated. So with respect to SOC, it is true that SOC requires a lot of money, but not only that, we are a technology company, so we would like to brush up our technology and we would like to spend the necessary investments for that. Again, at the risk of repeating myself, important but not emergent, not urgent, pushing out to next year or the next half, we tend to fall into that trap. But instead of that, we'll try to prioritize things and tackle them one by one. Our operating cadence is about once a year, we develop an annual operating plan. And we decide on the theme of the year and make investments according to the theme. So on an annual basis, we run this cycle of planning. And the model that we talked about the other day, all the themes that I'm talking about right now will be factored in in the plan for next fiscal year. That's already factored in the plan for next fiscal year. So if you ask me what we are doing right now, we are doing only the things on the extensions of what I mentioned the last time. For next fiscal year, we are developing the multi-year plan that will continue from next fiscal year.

Thank you. Thank you.

It is almost time to start wrapping up, so the next person will be the last person to ask questions. Yoshikawa-san from Morgan Stanley Securities.

Please unmute.

Hi, this is Yoshikawa from Morgan Stanley. Thank you for this opportunity. I have two questions. First, regarding automotive, Based on what you've said so far, the idiosyncratic automotive driver will be 28 nano microcontroller unit. And although scale is small, you have ADAS SOC based on what you said. But with regards to 28 nano MCU, for Japanese OEMs, certain models will have significant volume and they will be making a shift to the new architecture. And as a result, the overall MCU market, for example, content growth is expected for the next one to two years or two to three years. Do you think such improvement will be made? Will this have certain impact to result in such improvement or the MCU growth will remain just as before. And as a result of that, your company for the next one to three years, the automotive revenue will grow at a higher pace than TAM. There are many uncertainties, I understand, and therefore difficult to make a prediction, but whether you will be able to outperform the market or not, I would like to get your views on this. And the second question is this, it's more on the short term. after the acquisition of Altium, it's almost one year since the acquisition. So looking back the past one year, what would you say were the good things? What are some areas where you were lacking to some extent? And also compared to before the acquisition, have you seen accelerated revenue growth or has it remained the same in the mid 10% range? With respect to Altium over the past one year, I would say not much has changed. This will be something we will cover again in next year's Capital Market Day. Of course, we target aggressive growth And that's where we are shifting our focus. We are pivoting and hopefully next year we will be able to share the progress of that. So I think we hope to go in the direction of accelerating growth from now on. As for automotive, what will happen in one year or one to three years? All I can say is that we will do our best. For 28nano, this will be launched, this will take off, but in reality, customers other than in China, how should I put it? Should I say migration, changing platforms, the speed with which they are changing platforms, China is overwhelmingly fast. Other geographies, we have not seen much change, the same for Europe or the Americas. So I think five years is the reality with which we are working with. We will have the ramp up, the launch, and this will have a positive impact in an incremental manner. Of course, we would like to further accelerate. We are working hard in China as well. So our views remain the same. Sam, we will outpace the SAM growth and we will make efforts to achieve that but what will happen one year from now or three years out it's difficult to say unless we reach that time horizon to share more details with you and this topic in my mind is basically the same as the my MCU share discussion as we've said before for 28 nano in the initial phase

We were quite rushed. We were overzealous.

And I think that shows in the real share status. Going forward, we will launch products to be aligned with the marketplace. That's something we've already shared with you. And for these to fully take off, how much longer do we need, I believe is going to be the answer. to your question. I wouldn't say one year, but we are looking more in the period of two to three years. So that's when we will start to see these fully take off. So I don't know all these things combined. If you allow us a three year time, then you will be able to see what I'm talking about today.

I see.

Thank you very much.

Thank you very much.

Would this be like to finish the Q&A session? Finally, we would like to close the meeting with the closing remarks from Mr. Shibata. So there's nothing new in particular as of today. So in many different regards, we are in a very difficult situation, but the Japanese government have made a lot of efforts and achieved this great result. So we would like to pay respect to that. And also, although we are a very small private company, only a single private company, but now it's the hearts that the private sector to exert efforts. So we would like to give out our best and lead it to our growth. So we continue to seek your support and collaboration. Thank you very much for your participation today.