Q1 FY2020 Earnings Release Conference Q&A

In logic, investment for 5G will finally begin, and we expect investment to continue to be strong. As for management of memory customers, they are saying that new investment plans are likely to be clear sometime in the next three months. Note that we expect those Chinese memory investments in the next fiscal year, not this one.

In the next three months, memory inventories will fall even further, and we think that the new investment plans of our customers will become clearer along with this. We believe that memory investment is now nearing its bottom and expect that both orders and shipments will increase for the second half of CY2020.

Demand for data centers and smartphones and the spread of new technologies such as 5G and AI will promote adjustment of memory inventories.

Three months ago, we saw a 50:50 composition ratio of the WFE*1 market for memory and logic, but now the demand for logic is picking up and we believe that it is 40:60 at this point. Although three months ago we saw NAND as the first to recover in memory, we now believe that NAND and DRAM will recover at about the same time.

Although we expect investment in logic and logic foundries in CY2020 to increase in the second half, it is too early to forecast the full-year investment amount.

Although we believe that investment will recover in CY2020, it is too early to say anything about to what extent.

This is because as the technology node proceeds, the proportion of critical processes also increases, and the areas in which TEL participates will grow even faster than in the WFE Market.

TEL’s market share in etch systems is higher for logic than for NAND. However, if we look at TEL as a whole, there is not such a large difference in market share by application, and there will be no major impact on profitability even if the composition of sales by application changes.

Sales in FS for Q1 and Q3 tend to be lower than in Q2 and Q4, but in this Q1 sales declined slightly compared to the previous quarter, FY2019 Q4, and also compared to two quarters ago, FY2019 Q3. Sales are declining mainly in modifications, and parts sales have not fallen that far. In Q2, we estimate that progress will be as planned.
TEL ships about 4,000 units of equipment per year, so FS demand is certain to increase.

As you know, sales of parts improve as the installed base increases. We will continue to make the most of product reliability and support capabilities, which are TEL’s strengths. As technology becomes critical, improving equipment uptime and yields through tool-to-tool and chamber-to-chamber matching become important for customers. TEL is aiming to provide new services for the future such as remote services using AI and advanced field support.

TEL recognizes sales at the time of completion of set-up and testing, and records any payments received from customers prior to the recognition of sales as customer advances. In this Q1, there just happened to be many cases in which payment was received during shipment or installation.

One of the reasons for being able to maintain a high level of gross profit margin while sales fell sharply is that inventories that are to be sold during Q2 increased, and fixed costs were converted into these inventories. It was not because profits were generated by squeezing expenses.
Regarding selling, general and administrative expenses, among these are also development costs and related capital expenditures that TEL considers to be important over the medium term, and we will not be letting go of these investments this year even though investments of memory customers are slowing down. Even if we were to reduce other costs, we intend to maintain growth investments for the future.

An improvement in gross profit margin is also stated in the Medium-term Management Plan. We will proceed to make improvements by (i) supplying high value-added products, (ii) the increase in sales that accompanies market recovery, and in addition, (iii) the growth of FS sales (target of 380 billion yen after 5 years) which are more profitable than the company average, and (iv) achieving an operating margin of 30% in the FPD business.

We would like to refrain from commenting on the volume and timing of sales because this depends on the investment plans of customers. Still, we were able to acquire the high value-added ALD processes for DRAM and NAND. We are anticipating next year’s memory investment.

Technology performance of equipment is important, and our strategy does not change due to mergers of other companies. TEL already owns all of the deposition technologies for batch, semi-batch, and single wafer production, and we will ensure that we improve the performance of processes and equipment for the applications that can be expected in the future.

We do not rule out M&A if there are advantages for shareholders, if it will lead to raising corporate value, if there are also technological advantages for customers, and a return on investment can be expected. We would like to consider non-M&A measures such as joint development as well.