Advantest Corporation
Q4 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Thank you for attending the earnings conference call of Advantest Corporation for fiscal 2020 ended March 31, 2021. The participants from Advantest are Yoshiaki Yoshida, President and CEO; Atsushi Fujita, CFO; Kimiya Sakamoto, Executive Vice President of Sales Group; and Yasuo Mihashi, Executive Vice President of Corporate Planning and Stakeholder Relations. First, CFO, Fujita, will go over the financial results for fiscal 2020, followed by a presentation on the midterm business plan results and fiscal 2021 outlook by CEO, Yoshida. We will then take questions. The entire conference call is scheduled for an hour.

[Atsushi Fujita:]

Good afternoon. This is Fujita speaking. I will go over the fiscal 2020 results. Please turn to Page 4, highlights of the fiscal 2020 results. We would like to express our deepest gratitude to all of our business partners, related parties and employees who continue to support our business in this unprecedented business environment. The COVID-19 pandemic created difficulties in all of our lives this past year. In the first half of the fiscal year, conflict between the U.S. and China had a major impact on our tester business. On the other hand, from the second half of fiscal 2020, demand related to work from home continued amidst the mainstreaming of remote work and demand for test equipment grew due to competition among 5G smartphone manufacturers. As a result, Advantest was able to achieve record high orders, sales and net income in fiscal 2020. And in addition, in fiscal 2020, we achieved sales of over JPY 300 billion for the first time in Advantest's history. Therefore, we have revised our dividend forecast to a year-end dividend of JPY 80, including a commemorative dividend of JPY 10. We were also able to achieve the management metrics of our 3-year midterm management plan. Please turn to Page 5. Summary of results for fiscal 2020. Orders were up 14.9% year-on-year at JPY 330.6 billion. Sales were up 13.4% at JPY 312.8 billion. Operating income was up 20.5% at JPY 70.7 billion, and net income was up 30.4% at JPY 69.8 billion. Due to higher orders in fiscal 2020, our Balog increased by JPY 17.8 billion from the previous fiscal year at JPY 108.8 billion. Tax expenses include the effect of posting deferred tax assets likely to be realized during a certain fixed period in the future of approximately JPY 10 billion. Thus, net income was greater than income before taxes. Our year-end dividend forecast is JPY 80, including a commemorative dividend of JPY 10 with interim dividend of JPY 38, our annual dividend forecast is JPY 118. Total shareholder return ratio consisting of total share repurchases and total dividends divided by net income is 52%. ROE was 27.3%.

[Yoshiaki Yoshida:]

This is Yoshida speaking. I will report on the results of the midterm business plan as well as present the fiscal 2021 outlook. Please turn to Page 16. Review of the mid- long-term management policy. In April 2018, we set out our goals and principles fourth, medium to long-term in our grand design, a 10-year medium to long-term management policy starting from fiscal 2018. We also formulated a midterm management plan for the first 3 years of this period. And the whole group has been working to achieve its targets. On Page 17, you can see the results of the midterm management plan. As shown on the right-hand side of the slide, we achieved results greatly in excess of the management metrics set forth as our base scenario 3 years ago. Two main factors contributed to this accomplishment. Firstly, Advantest gained market share faster than originally expected. Amidst the semiconductor and semiconductor tester market expansion, spurred by the digital transformation.

[Operator:]

We will now take questions. First, Mr. Wadaki from Nomura Securities.

[Tetsuya Wadaki:]

Wadaki from Nomura Securities. Thank you for the strong encouraging earnings report. I have 2 questions. First, currently, you are doing amazingly well, bright outlook feels like a Deja Vu. So can you show us an evidence that gives us confirmation that this time it's going to be different than this business will remain strong. In front-end semiconductor equipment market, there are such factors as announcements by some of the major players for investments, what about in the tester business, tester market?

[Kimiya Sakamoto:]

This is Sakamoto speaking. You asked for some evidence that this strong momentum is sustainable. Well, overall, demand from 5G smartphone-related and HCP, we believe, will continue to grow throughout the year. Furthermore, in the second half of the fiscal year, our major customers are expected to start the production of semiconductor devices at the most advanced nodes and therefore, we expect big demand for testers. So during the first half, 5G smartphone-related demand and in the second half, high-performance computing, HPC and other would further boost demand. That's our current projection. Therefore, we believe that the SoC tester market will continue to see strong demand. As for memory testers, as was mentioned in the presentation, no shrinkage and production capacity expansion on the part of the customers should continue. So there is capacity by. And there are industry trends such as speed and density gains driven by DRAM node shrinkage and the multi-layering in NAND flash memories and the start of full-scale mass production in DDR five, LD DDR5 DRAM. There's capacity by and technology buying. The combination of the 2 should continue throughout the fiscal year. So the tester demand for both SoC and memory testers, we believe, will remain strong.

[Tetsuya Wadaki:]

I have a follow-up question. How far into the future, are your production slots booked?

[Kimiya Sakamoto:]

You're asking about our production system?

[Tetsuya Wadaki:]

Yes, your production slots. How far into the future are they booked?

[Kimiya Sakamoto:]

Well, our lead time is 3 months, 3 months between an orders paced and production. So our production slots are fully booked for the next 3 months. Our production floors are kept very busy.

[Tetsuya Wadaki:]

I see. My second question, for the last several years, you have enjoyed some unique growth drivers. Last year, system level test and before that, DRAM tester replacement demand. Anything similar for this fiscal year? For example, high-speed flash memory, image sensor tester, new burn-in tester, any such topics, for example, comparable to last year's system-level test system that will be drastically impacting the business outlook?

[Kimiya Sakamoto:]

In terms of new products like system level test, new items that would greatly contribute to our operating results and not being planned over a short term. However, with the advancements and progress of technology, devices become more complex and testing time increases and test items will increase. So as devices become more complicated, there will be more test requirements. And we believe that momentum would continue.

[Tetsuya Wadaki:]

Well, maybe not necessarily new products, any other factors that will boost the demand this year.?

[Yoshiaki Yoshida:]

This is Yoshida speaking. In response to advanced node of 5 nanometers or smaller press processes. Last year, we unveiled a new tester exascale test system, and we expect the demand for that to grow significantly this year. And also for CMOS image sensors, display driver ICS, for which we have received orders to be delivered to our customers. Lots of shipments have yet to be made. So we have so many things to sell. Orders are strong, and the lead time is getting longer. That is what is happening today. And with longer lead time, maybe some orders are being placed earlier. There is a bit of that concern. But looking at the current situation, that doesn't seem to be necessarily the case. We believe that the orders are being placed on more solid real demand. Currently, the demand is strong, but the lead time is about 3 months, 4 months to 5 months. So if you ask whether we have a clear visibility into the next year, well, that's hard to say.

[Operator:]

The next question is from CLSA Securities, Yoshida from CLSA.

[Yu Yoshida:]

This is Yoshida from CLSA. My first question is on the tester market outlook. Page '18. You raised both the actual for 2020 and estimate for 2021. So what part of SoC tester and memory Custer markets did you raise from the previous estimate. I would appreciate it if you could comment on both the actual and the estimate. And as for SoC tester market, you commented that there is a possibility of further growth. In what application areas do you see upside potential?

[Kimiya Sakamoto:]

This is Sakamoto speaking. First, for calendar year 2021, SoC tester market estimated at $3.4 billion and memory tester market, $1.3 billion. Regarding SoC tester market, we expect growth in relation to an increase in devices adopting the leading edge processes, computing and communication-related devices, as mentioned earlier. And we expect growth in analog semiconductor business, including automotive applications as well. And with performance gains and functionality gains as smartphones, higher performance, DDI, display driver IC, is expected to grow. So those 3 factors combined should bring about the growth of the market, $3.4 billion. As for memory tester market, the growth of $100 million is expected. Not much difference in terms of direction from what we estimated back in January. But both for DRAM and nonvolatile memory. As mentioned earlier, we expect demand to grow due to development of technologies in such areas as advanced nodes, greater density and higher speeds and bandwidths.

[Yu Yoshida:]

Do I understand correctly that your comment is compared to last year's actual, correct? So how about compared to the previous estimate or forecast made in January? Would the storyline be the same?

[Kimiya Sakamoto:]

Yes. In terms of SoC tester market, we said $3 billion in January, and we raised that estimate by about $400 million for the reasons that I just mentioned.

[Yu Yoshida:]

So you're expecting growth in all of those 3 areas, correct?

[Kimiya Sakamoto:]

Yes.

[Yu Yoshida:]

And you said that there is a further upside potential for the SoC tester market, and what applications specifically? I believe there will be investments in HPC in the second half of the fiscal year. So this would be the upside factor. Am I correct?

[Kimiya Sakamoto:]

Yes, that is correct. I see.

[Yu Yoshida:]

My second question the system level test, what percentage of orders and sales of services, support and others came from the system-level test in fiscal 2020. And what about the forecast for fiscal 2021?

[Yasuo Mihashi:]

Thank you. This is Mihashi speaking. For fiscal 2020, system-level test accounted for 50% of orders and sales, 50% of orders and 50% of sales. For fiscal 2021, the current projection is, again, both 50% of orders and sales.

[Yu Yoshida:]

For orders, you are not disclosing by segments. But if you focus only on system level test, what will be the overall direction?

[Yasuo Mihashi:]

What do you mean?

[Yu Yoshida:]

Orders for system-level test for this fiscal year, what will be the general direction?

[Yasuo Mihashi:]

With the evolution of the semiconductors in terms of need for quality assurance, the industry has grown even more deeply involved in SLT in terms of applications, from application processors to HPC to automotives. The application areas covered are becoming broader. And with that, we believe the orders and sales numbers will increase year-on-year.

[Operator:]

Next, Mr. Nakamura from Goldman Sachs.

[Shuhei Nakamura:]

I have 2 questions. First, on order trends in the April-June quarter onward, full year forecast guidance of JPY 350 billion for both orders and sales. So on a quarterly basis, that translates into JPY 80 billion or higher range, I think. Orders were strong for the October, December and January, March quarter. So what is the current direction of order situation? That's my first question.

[Kimiya Sakamoto:]

Yes. This is Sakamoto. In regard to the orders, as I mentioned this earlier, I would say our lead time now is 3 months. Our customers are also to make a short forecast as short as 3 months. That said, yes, we have both visible portion and not so visible portion, particularly in the second half. Comparing the first half and the second half, orders in the first half is somewhat stronger than the second half. The second half seems to go down a little bit. The same goes to SoC testers. As for memory side, it will be even between the first and second half. As for Mechatronics, the second half would go higher than the first half. As on the services and support and others, we believe it will grow big in the second half according to our current plan. Hope this answers your question. Instead of looking at each quarter, I shared my thoughts by comparing the first half and second half at a high level.

[Shuhei Nakamura:]

Thank you. I understood it well. You told us that SoC business will decline a little bit in the second half. Why you believe so? Is it because right now, you do not have a good visibility. So you came up with somewhat small number? Or do you have something visible to you as of now?

[Kimiya Sakamoto:]

Well, as we discussed this earlier, we do not necessarily have a good visibility for the second half. Here, may I remind you again that for the current fiscal year, we had a good growth in the second half when it comes to the SoC. What I mean to say is that it is still rather difficult to say for sure, unless we get closer to the actual point in time. That said, with good factors, we can expect to have in the second half. It may well grow in the second half, as we have discussed at this point earlier. If I may now like to add some. Yes, we had a very strong performance in the fourth quarter. Generally speaking, in normal years, when we had a good quarter, usually, the following quarter is going to fall. But looking at the latest situation, there seems to be no sign that the number may fall. So the first quarter may turn out to be quite strong. The question here is how long this will continue. And as for our full year forecast of JPY 350 billion. Since the first half is rather strong so far, we plan to have a slightly bigger number for the first half. And as we move into the second half and when we can get to see our customers more clearly, it could be -- we may have more growth in the second half.

[Shuhei Nakamura:]

Well, understood. My second question is about an upward possibility. I appreciate if you could expand on your thought on the second half guest for SoC business. You indicate SoC on order will come down in the second half. But if we could -- SoC may go up in the second half, do you believe you have no problem on the quarterly basis in terms of production to meet with the orders and sales to be realized? You told us, and currently, you do not have a print and the shortage of materials you need to have. So appreciate if you could expand on those factors.

[Kimiya Sakamoto:]

Yes, I'm talking about our production systems. We do have our own plants as well as, what we call, EMS, both at home and abroad. So we have both in-house as well as outsourcing capabilities. As for JPY 90 billion in sales, we are producing our products without and having a much tight situation. In other words, we are not having an apparent problem of materials of sourcing. What should I say, we are making our best efforts so that we will not have such a problem. Well, our testers are actually a collection of semiconductors. So if the semiconductor world is having a shortage program, it may affect our production capacity. But since we are proactively responding to this kind of issue, we have not been faced with a big problem as of now. Just purely talking about our production capacity, we still have enough outsourcing EMS capacity, both at home and abroad. We should be able to further grow. We achieved JPY 400 billion in our grand design or JPY 100 billion on a quarterly basis. As for that kind of level, we are not much worried about.

[Operator:]

Next, would like to have Mikio Hirakawa, BofA Securities.

[Mikio Hirakawa:]

Thank you. This is Hirakawa from BofA Securities. If I may now have 2 questions. The first question is just a confirmation, if I heard you correctly. You told us your backlog is growing. And with this point in mind, do you believe you may be getting double booking orders from your customers? What would you say that in the current orders and real orders based upon actual demand? This is my first question.

[Kimiya Sakamoto:]

I do understand your question. What you said is right. There is a concern that we may be getting double orders when the real demand is one, but we may be getting 2 orders. Yes, I do understand your point very well. But in this regard, here, may I remind you that our customers are also becoming more sophisticated. I do not believe they are becoming so wild and reckless in placing orders when they do not have good business opportunities. Advantest is not getting any cancellation so far. I do believe the orders we are getting from our customers are coming from rather sound and healthy demand.

[Mikio Hirakawa:]

And thank you, indeed, for that clarification. My second question here is about your market share. I do understand there is a gap between calendar year and fiscal year basis. But in light of the baseline of JPY 3.4 billion For SoC. Your SoC revenue is JPY 169 billion. With a simple math, your share is going to be 47%, less than 50%. And well, that said, in FY '19 your SoC tester share was more than 50%, if I'm not wrong. This year, now you seem to have a competitive edge because they are on a strong demand for advanced technology, thanks to the smartphone processors and HPC applications. With this point in mind, won't you say your forecast here is too conservative? I just would like to know, you just wanted to be conservative or you may have some concerns you have not shared with us and that your share will not go back to the same level you once had?

[Yasuo Mihashi:]

Thank you, Mr. Hirakawa. This is Mihashi. Thank you for your question. You are right. I would say the calendar year and the fiscal year are having a great gap, and it is having an impact on the numbers.

[Operator:]

Next, I would like to have Mr. Yasui from UBS Securities.

[Kenji Yasui:]

Thank you, indeed. This is Yasui from UBS Securities. Can you hear me?

[Kimiya Sakamoto:]

Yes.

[Kenji Yasui:]

I have 2 questions. You mentioned that in the second half of this year, HPC customers will make investments in advanced production. I am assuming here you are talking about a triplet, if I'm not wrong. Several customers will invest into advance solutions. Thus, you can expect to have a high-end package orders. One more thing. I would like to inquire and ask for your gut feeling, whether or not you could expect to receive orders from this major U.S. company. They now have a new management. You have not received orders from this company for some time. How do you feel about it? This is my first question.

[Kimiya Sakamoto:]

First, your question about HPC. It is not the chip that we are talking about the latest 5 nano devices and its mass production.

[Kenji Yasui:]

I see. So you are indicating 5 nano will go up in the second half when you are talking about the HPC growth in the second half?

[Kimiya Sakamoto:]

Yes, you are right.

[Kenji Yasui:]

Then my second question is about geopolitical risk. You are talking about this geopolitical factors for the end of last year. For example, China is now making investment into advanced fields such as artificial intelligence. With this geopolitical situations going on, now in Europe and the U.S. and China. And for this matter, even Japan may be further prompted into this semiconductor nationalism. India to Japan, of course, we have to see how the Japanese government reaction to the situation. With this geopolitical risk becoming more apparent, I would like to inquire here, how it is going to affect your orders? What kind of risk or opportunities are you seeing here?

[Kimiya Sakamoto:]

Yes. Nowadays, we simply have to be sensitive enough to geopolitical risk factors. Last year, U.S. applied restrictions against the mainland Chinese cellphone company, we found ourselves a bit confused and kind of freaking out in the summertime. Yes, it is true. So in order to avoid such a situation, it is very important on our side to make more efforts to gather information. But if the U.S. and China or China and the West are to be divided, then definitely, our business will be affected a lot. But it is not just us, but other U.S. and SP manufacturers and device manufacturers are going to be affected greatly. Then it is going to be a true tragedy. Of course, we have to be compliant with the laws and regulations. We need to be able to deliver our products wherever they are wanting on products. It could be in China or it could be outside of China. For example, Taiwan or other Asian regions, or it could be the United States. Wherever our customers are located, we should be able to deliver our products based upon our most advanced technology development when our customers are needing them. I think that's all I can say. I don't think it is worthwhile for us to dwell upon what may happen in our assumptions. Again, information gathering is going to be quite critical, and it is very important. Well, as of now, China is not saying that, oh, it is the Japanese device. And so we do not need them or it is the American thing. So we do not need them. In light of the fact our orders and the sales person to China are growing. So what I said seems to be right. I think we are needed. Well, in case, if the nation has come to edition to ban our sales into China, of course, we have to honor and obey this national role. That's all I can say. I'd rather not to have an in-depth discussion here with you how we are going to react under those circumstances. Hope you understand this.

[Kenji Yasui:]

Well, understood, and I appreciate your comments. If you look at the demand side, since China is now trying to make its own sand conductors. This may not help you to push up your business opportunities. The same could be applicable to the U.S. and European regions. How do you feel about it?

[Kimiya Sakamoto:]

For that matter, Mr. Fujita showed a slide of orders and sales on the quarterly basis in his presentation today. Yes. As a matter of fact, it is rising. Moving to the right-hand side. I think it clearly indicates China and is making its advanced product, and they need to test them. That's for sure. It means that China needs our product for this matter, and I believe there is a strong demand for our products currently. And if I may say, China does not have a full capability to make what it needs to have without depending upon other countries. Thank you, indeed.

[Operator:]

With this, I would like to close today's conference call. Thank you, indeed, for your time and attention.