Q2 FY2020 Earnings Release Conference Q&A

What is behind the forecast of a recovery in memory investment in CY2020?

While logic investment is robust at present, memory inventory adjustment is proceeding. Investment in high-speed data centers and mobile communication will recover with the new release of CPUs aimed at 5G in the near future, and this is expected to be followed by a recovery in investment in memory. In addition, there is also demand particularly for NAND due to the replacement of HDDs with SSDs, and the possibility of a shortfall in supply in CY2020 has come into view. For DRAM, demand for semiconductor production equipment will likely increase due to new demand and technological requirements aimed at 5G.

Securities analysts expect major South Korean customers and Chinese customers to invest in memory next year. What is your view on the likelihood of a recovery in memory investment?

We mentioned that “the specifics of new investment plans of memory customers will become visible in the next three months” in the July earnings release conference, and accordingly, inquiries from customers are increasing. Logic will make a large contribution to sales in FY2020, but the investment plans of customers will gradually be finalized for memory as well beginning with 3D NAND followed by DRAM in the near future. Production at our factories has been restrained to match market adjustments until now, but we are preparing to return production to normal levels.

I would like to ask about the outlook for the WFE*1 market in CY2020 by application.

It is still too early to say how much growth there will be compared to CY2019. However, we are preparing to return production in our factories to normal levels as I mentioned earlier, and it is our view that much of the capacity will be filled in January–March of CY2020.

What is TEL’s view of the continuity of investment by logic customers?

The semiconductor device market is currently valued at USD 468.8 billion, but one forecast is that it will grow to USD 1 trillion by 2030. In addition, it has been said that the number of smartphones will reach 1.534 billion units in 2023 and that 745 million units of these will support 5G, so there will be demand for a variety of devices aimed at 5G moving forward. It is our view that we can expect continued investment.

What is the outlook for WFE investment by local Chinese semiconductor manufacturers in CY2019 and CY2020? Have there been any changes to the outlook compared to three months ago? A TEL competitor has commented that USD 6 billion is forecast in CY2019.

We have not disclosed our outlook for CY2020. We estimate investment by local Chinese memory manufacturers was a total of USD 2 billion by three companies in CY2018, and is expected to be a total of USD 2 to 3 billion by two companies with one company unable to continue investment in CY2019. We have not changed our view for this year since three months ago.
However, I think the outlook by the other company may include investment by customers in areas other than memory such as logic, logic foundry and power devices.

What is the outlook for the FPD market in CY2020?

In CY2020, we can expect investment in mobile Gen 6 OLED for 5G and investment in Gen 10.5. There are business opportunities for TEL in PICP™*2 etch systems and large panels.

I would like to ask in which regions, applications and equipment there has been a pull-forward of sales with regard to net sales in the first half of this fiscal year.

There was a pull-forward of sales in non-volatile memory and logic foundry. Sales also exceeded our forecast in the Field Solutions (FS) business.

What was behind the decline in the FPD segment profit margin in Q2 compared to Q1? Also, what is the outlook for the profit margin in the second half of the fiscal year?

The fixed costs of inventory yet to complete set-up in Q1 were recognized in Q2 due to the recognition of sales, which led to a decline in the profit margin. Another factor is the product mix. We have not disclosed our outlook for the segment profit margin in the second half of the year.

What is the reason for low sales for non-volatile memory in the second half of FY2020? I had expected TEL’s sales in the second half of the year to increase due to the large amount of capital investment anticipated in October to December announced by a South Korean customer.

Memory is currently in the phase of inquiries increasing. We expect sales to gradually increase from the first half of FY2021 for non-volatile memory and from the second half for DRAM.

What is the reason for not projecting an improvement in profit margin in the second half of FY2020 compared to the first half? In the April earnings release conference, it was explained that expenses for strategic investment would squeeze the profit margin this fiscal year. Will many of these expenses be in the second half of the year? Also, will these expenses increase in FY2021?

This is affected by the customer mix, the product mix and also active investment. Depreciation costs related to new buildings will increase in the second half. Research and development expenses have also been increased by 3 billion yen in this revised financial estimates, and more of those are in the second half of the year.
We intend to spend 123 billion yen on research and development expenses this fiscal year, and expect to spend 400 billion yen over three years including this fiscal year.

Have you made an upward revision to sales in the FS business along with the upward revision of the full-year forecast?

There is no change to the sales forecast (278 billion yen for the full year) for the FS business.

Will TEL be able to export to China without any problems arising?

We will maintain compliance concerning our exports. Also, we do not intend to target business simply because our competitors are unable to export to China as a result of the trade friction between the United States and China, and would like to compete fairly. We will expand business by providing the cutting-edge technology and presenting the value of our company.

What business opportunities does TEL have in the 1Z generation of DRAM? Do you think EUV will be used in the 1Z generation?

Patterning is the key in DRAM. We have a 90% market share in the overall coater/developer market, and have a 100% market share in the coater/developer market for EUV high volume manufacturing. In addition to this, there are great business opportunities because we have equipment for the sequence of all key processes repeated in patterning, namely coat/develop, clean, deposition and etch. Furthermore, there is demand for technology using new materials such as high-k metal gates in order to increase speed of DRAM, and we believe this will also lead to business opportunities.
We are not yet at the stage where we can make a clear statement on the adoption of EUV. Our customers are considering methods from all perspectives such as productivity and differentiation.

I would like to hear about obtaining POR*3 in the process of single wafer deposition being replaced by batch deposition for logic mentioned in the presentation. What is the advantage of batch deposition over single wafer deposition? In what kind of processes has the replacement been made?

We are unable to publicly announce the details at this time due to our relationships with the customer, but one of the silicon deposition processes has been replaced by batch deposition. We have been able to confirm through evaluation that our batch furnaces can be applied to that process as customers place emphasis on footprint and throughput. We expect the number of processes to increase in the future.

WFE (Wafer fab equipment): The semiconductor production process is divided into front-end production, in which circuits are formed on wafers and inspected, and back-end production, in which wafers are cut into chips, assembled and inspected again. Wafer fab equipment refers to the production equipment used in front-end production and in wafer-level packaging production

PICP™: Plasma source for producing extremely uniform high density plasma on substrate

POR (Process of record): Certification of the adoption of equipment in customers' semiconductor production processes

The above content is a summary of question and answers session.