Edited Transcript of 6857.T earnings conference call or presentation 24-Apr-20 10:59am GMT

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Tokyo May 3, 2020 (Thomson StreetEvents) — Edited Transcript of Advantest Corp earnings conference call or presentation Friday, April 24, 2020 at 10:59:00am GMT

Advantest Corporation – CFO, Executive VP of Corporate Administration Group, Managing Executive Officer & Director

Advantest Corporation – Executive VP of Corporate Relations Group & Managing Executive Officer

Nomura Securities Co. Ltd., Research Division – MD, Senior Research Officer & Analyst

Thank you very much, ladies and gentlemen, for attending the financial briefing conference call of Advantest Corporation for fiscal 2019 ended March 31, 2020. Attending this conference call are: Yoshiaki Yoshida, Representative Director, President and CEO; Atsushi Fujita, Managing Executive Officer, CFO; Kimiya Sakamoto, Managing Executive Officer, Executive Vice President of Sales Group; and Yasuo Mihashi, Managing Executive Officer and Executive Vice President of the Corporate Relations Group.

Today, CFO Fujita will first brief on the financial results for fiscal 2019 followed by the presentation by CEO Yoshida on fiscal 2020 outlook and the midterm business plan progress report. We will then take questions. The whole conference call is scheduled for 1 hour. The presentation material is available from TDNet and our company website.

Before we start, a cautionary statement. This presentation contains forward-looking statements that are based on Advantest’s current expectations, estimates and projections. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause Advantest’s actual results to be materially different from those expressed or implied.

I now give the floor to CFO Fujita.

Atsushi Fujita, Advantest Corporation – CFO, Executive VP of Corporate Administration Group, Managing Executive Officer & Director [2]

Good evening. This is Fujita speaking to go over the financial results for fiscal 2019.

Please turn to Page 4. Fiscal 2019 performance highlights. Strong tester demand for high-end SoCs, such as 5G devices, continued through fiscal 2019 in response to growing demand for higher performance semiconductors and enhanced reliability assurance. Memory tester demand also recovered from the second half. Advantest system-level test business, classified as a new business, saw steady order growth. Despite prolonged inventory adjustments in the memory and automotive-related sectors since the second half of calendar year 2018, Advantest achieved record high orders for the second year in a row.

Business activities have been restricted due to the spread of COVID-19, but internal and external efforts enabled the company to exceed the sales estimates announced in January. Fiscal 2019 was the second year of our midterm management plan, and we exceeded the targets set forth in the plan for a second consecutive year.

Next page, fiscal 2019 summary results. Orders were up 4.6% year-on-year at JPY 287.8 billion. Sales were down 2.3% at JPY 275.9 billion. Operating income was down 9.2% at JPY 58.7 billion, and net income was down 6.1% at JPY 53.5 billion. Backlog increased by JPY 16.1 billion to JPY 91 billion due to growth in orders. The year-end dividend is JPY 41 per share, the same amount as the interim dividend, an increase of JPY 7 from the forecast announced in January. The annual dividend is JPY 82. ROE, not shown in the graph, was 24.9%.

Next page, fiscal 2019 orders by segment and region. Annual orders by business and region were as shown here. Tester orders decreased year-on-year, mainly due to a decline in display-related orders, but stayed at a healthy level. In addition, due to growth in system level test, orders overall increased.

Next page, annual sales results by segment and region. Our regional mix, as shown on the right, changed slightly. Sales in Taiwan shrank due to softening demand in the display and memory markets. On the other hand, sales continue to grow in China, where the semiconductor industry is ramping up.

Next page, fiscal 2019 fourth quarter summary of results. Three months ago, we expected the fourth quarter orders to be about the same as the end of third quarter. But due to memory-related and system-level test growth and the addition of Essai, Inc., which Advantest acquired at the end of January to consolidated results, we achieved record high quarterly orders. As a result of recording deferred tax assets in anticipation of tax reduction effect on future tax expenses, net income is higher than income before tax.

Next page, fiscal 2019 fourth quarter orders by segment. In the semiconductor and component test systems, sales were JPY 52.2 billion, up 10.1% quarter-on-quarter. As for breakdown, please refer to the graph on the right. SoC test orders in yellow were JPY 32.9 billion, flat quarter-on-quarter. Orders for mobile and HPC or high-performance computing devices were strong. Regarding memory testers in green, in addition to solid DRAM-related orders, flash memory investment grew further, resulting in orders of JPY 19.3 billion. In Mechatronics Systems, orders grew by 31.6% quarter-on-quarter to JPY 12.6 billion. This result correlated with memory tester orders in excess of estimates. In Services, Support and Others, orders increased by 63.3% quarter-on-quarter to JPY 26 billion. In addition to strong system-level test-related orders, maintenance contract orders also grew.

Next page is about fiscal year 2019 Q4 sales by segment. Semiconductor and Component Test Systems was down 8.8% quarter-on-quarter to JPY 45 billion. In the breakdown, SoC tester sales in yellow came in on plan. Memory tester sales in green exceeded expectations set 3 months ago due to stronger customer inquiries for servers. Mechatronic Systems was flat quarter-on-quarter to be JPY 10.2 billion. As for Services, Support and Others, Essai’s business results began to be added to consolidated results in Q4 in this segment. Essai’s business of high-end IC socket was strong in HPC-related applications.

Next is about FY 2019 Q4 orders and sales by region. China, in yellow, became the largest source of both orders and sales. Regarding orders by region, in China, in addition to continued robust orders from memory customers, mobile-related orders also increased. In Americas and others, high-end SoC orders increased in the U.S. and Southeast Asia. In Japan, orders for flash memory testers increased. As for sales by region, mobile-related sales decreased in Taiwan, but increased in China.

Next page shows 4Q sales, gross profit and operating income. Gross margin was 53.8%, while the sales of Essai, which we acquired in January, are progressing. We recognized amortization of intangible assets related to orders inherited from the company’s prior ownership. Excluding this impact, we were able to maintain gross margin above the 55% mark. SG&A was JPY 25.1 billion. Operating income was JPY 11.6 billion. Operating margin was 17%. Full year operating income in FY 2019 was JPY 58.7 billion, down 9.2% year-on-year. SG&A expenses increased due to securing additional human resources for R&D and support as a foundation for future growth. Please note that operating income in FY ’18 included a onetime profit of approximately JPY 3.5 billion due to the sale of fixed assets and the transition of a part of our pension system to a defined contribution pension plan on a so-called core operating margin basis, which exclude onetime profits and losses, operating margin would be 21.3% in FY 2019, which is about the same level as 21.6% in FY 2018.

Next page explains R&D expenses, CapEx and depreciation and amortization in Q4. R&D expenses were JPY 9.9 billion and R&D-to-sales ratio was 14.5%. CapEx was JPY 4.6 billion. Capital investment aimed at improving R&D and production efficiency was concentrated at the end of the fiscal year. Depreciation and amortization was JPY 4.2 billion. This is due to applying the new IFRS lease accounting standard from FY ’19 as well as temporary increase of amortization of intangible assets due to recent M&A. As for cash flow, free cash flow in Q4 was minus JPY 20.7 billion. Due to the acquisition of Essai, investment cash flow expenditures increased in Q4 and free cash flow became negative.

Next slide shows balance sheet as of the end of March 2020. Total assets were JPY 355.8 billion. Cash and cash equivalents were JPY 127.7 billion, up JPY 7.8 billion from the end of the previous fiscal year. Equity attributable to owners of the parent was JPY 231.5 billion. The ratio of equity attributable to owners of the parent was 65.1%, down 0.1 point from the end of the previous fiscal year. The business environment is entering a period of increased uncertainty, but as this balance sheet demonstrates, Advantest continues to maintain financial stability.

That is all for the explanation of financial results. Thank you.

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Yoshiaki Yoshida, Advantest Corporation – CEO, President & Representative Director [3]

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This is Yoshida speaking. I will go over the fiscal 2020 outlook and report on the progress of the midterm business plan.

Please turn to Page 16. First, a look at our situation from the mid- to long-term perspective. Two years ago, in April 2018, the company formulated a 10-year mid- to long-term management policy and a 3-year midterm management plan, both starting in fiscal 2018, which lay out where we want to be in the mid- to long-term and how we should get there. The company is driving as one to achieve the goals of the plan. Fiscal 2020 marks the third and the final year of this midterm management plan.

Please turn to Page 17, progress report of year 2 in the midterm management plan. Let me summarize the progress of our midterm management plan to date. Over the past 2 years, due to the expansion of the tester market and the company’s market share gains, results have exceeded the target values of all KPIs under our base scenario. On the right, you can see the average for the 2-year period. Given that these targets were set as high hurdles at the time of formulating the plan, this indicates that we have made good progress in the last 2 years. We would have liked to raise our goals even higher for fiscal year 2020, but because the scale and the duration of the effect of the COVID-19 pandemic on the global economy are extremely unclear, we are keeping the initial target values of our midterm management plan unchanged and we’ll aim to meet or exceed this target.

Please turn to Page 18. Our grand design and midterm management plan set forth the aim of increasing our market share by 1% each year. The target aims at increasing our market share from 36% in calendar year 2017 to 46% in 10 years. In calendar year 2019, we were able to increase our share by 1 point over calendar year 2018 when our share had expanded significantly. Amidst growing investment in semiconductor development and volume production for 5G, we have effectively met customer needs for SoC testers to further increase our market share. As a general rule, our market share fluctuates markedly in step with the investment trends of major customers, but we have made notable gains in the last 2 years. The memory tester market has slowed down, and our customer mix led to deterioration year-on-year. As a result, our market share in this sector has fallen in fiscal 2019, but still commanded a majority share. Although the outlook for calendar year 2020 and beyond is uncertain, we expect the high-performance semiconductor tester market for 5G and high-performance computing to continue to grow based on mid- to long-term technology road maps.

Please turn to Page 19, initiatives for mid- to long-term growth. In fiscal year 2019, the second year of our midterm plan, we also made efforts targeted at mid- to long-term growth. We continue to actively add human resources to strengthen the foundation of our high-end SoC test business, which stands out among our core businesses for high-growth expectations. We also worked to further deepen engagement with customers and maintain and expand our market share. As part of our mid- to long-term growth strategy, we expanded our SoC system-level test business and reinforced our test peripherals business. A review of The Advantest Way clearly defined our core values and clarified the factors for the company’s growth. We believe that The Advantest Way gives our global operations the strength needed to minimize the adverse impact on product installation and customer support from COVID-19-related restrictions on movement.

As for fiscal year 2020, although the outlook is certain at present, feedback from customers supports our confidence in the unchanged market trends, driving our limit to long-term growth such as semiconductor performance gains and an increased emphasis on the importance of testing. Not only COVID-19, but other risk factors such as trade friction and natural disasters are increasing. In fiscal year 2020, we will, of course, respond flexibly to these environmental changes, but also continue to invest in long-term growth. We will promote measures to strengthen engagement with important customers and increase market share in sectors such as 5G-millimeter wave range semiconductors and high-end memory which hold great future premise — promise.

Please turn to Page 20. I would like to report on the current status of our system-level test business, which has been referred to several times during this briefing. Advantest has combined resources gained through M&As in the recent years, with basic technologies accumulated organically to provide efficient functional test solutions for modules and systems that incorporate all kinds of memory and SoC semiconductors. The concept of system-level test is now attracting attention from semiconductor manufacturers due to improvements in the performance of high-end semiconductors, greater circuit integration and an increased emphasis on reliability assurance. Similar solutions already exist in-house at customers and are available from measurement device — measurement instrument manufacturers, but our portfolio is differentiated by our wide-ranging know-how and superior performance.

Please turn to Page 21. Usually, this is where we will be describing the outlook for the tester market for the new calendar year. Let me describe our current view for calendar year 2020. Although the calendar year 2019 tester market declined year-on-year, 5G-related test demand was strong and test demand for DRAM and NAND flash for data centers regained its growth trajectory. We believe that the structural market factors, such as higher semiconductor performance and greater device complexity, which are driving increased demand for testers, remain unchanged.

Tester demand related to 5G smartphones and data centers, which require high-end semiconductors is firm, and we expect it will continue at a certain level through the first half of this year, CY ’20. However, the COVID-19 pandemic has increased uncertainty about future demand and a wide range of industries such as automotive, industrial, display and mobile-related tester demand, and we are currently reviewing our market forecast for CY ’20.

Next page summarizes managing the impact of COVID-19 at Advantest. This is an organized view of the risks COVID-19 poses to our business. First and foremost, there is a risk that Advantest business may suffer from infections among employees, suppliers and all customers. Although different restrictions have been imposed in each country, a production system is severely restricted at the moment due to travel bans and lockdowns. Our support capabilities have also declined due to the inability of our engineers to move freely. Supply chains around the world are also fragmented, and we have begun to encounter procurement problems. Problems on the supply side are leading indicators for us, but it is clear that the rapid deterioration of the global economy will eventually affect the semiconductor market and the semiconductor manufacturing equipment market. That said, it is still hard to predict how much impact it will have on demand.

Regarding Advantest’s response to these issues, first, from the perspective of business continuity and employee health, we have implemented bans on business trips since January and have now switched to remote work globally. We need to continue this policy for the time being to protect the health of our stakeholders. Regarding the impact of restrictions on movement, some countries are constrained in terms of production, but we do not anticipate it will be a major obstacle because other countries are compensating for these declines. We understand each country supports operations of semiconductor business and plants, which are considered as essential business. Regarding customer support, we do not see major problems occurring as we have enhanced our local support capabilities. Thus, immediate largest risk is material procurement. Until the previous quarter, we were able to avoid major problems. But in the current quarter, we have started to face problems in procuring some parts. We are working hard to address these problems now. Regarding the impact on the demand side, there is no telling how deep and long the impact of the pandemic will be, leaving us no choice but to monitor the situation carefully and respond flexibly.

We are attentively exchanging detailed information with our customers on the situation. In the post-coronavirus period, we believe global supply chains will be reviewed and rebuilt. We are aware that this may pose both opportunities and threats to the development of our business. Advantest will closely watch the signs of change in parallel with a careful review of our BCP. How coronavirus would change the world can be threats as well as opportunities for us.

Please turn to Page 23 for the forecast of FY ’20. Today, let me explain the forecast for Q1 only. So far, no major changes have been seen in semiconductor capital investment trend from the previous quarter, but it is not possible to predict at present how the semiconductor and the semiconductor manufacturing equipment markets will change in line with future changes in the global economy. Therefore, it is difficult to forecast our business results for the full year FY ’20. Under these circumstances, we are presenting only Q1 earnings forecast this time.

In Q1, we expect orders of JPY 62 billion, sales of JPY 70 billion, operating income of JPY 13 billion, income before tax of JPY 13 billion, and net income of JPY 10.5 billion. The forecast uses exchange rate assumptions of JPY 105 to the dollar and JPY 120 to the euro. Although the impact of the COVID-19 pandemic is factored in as much as possible, we expect the situation will change drastically during the period. So this forecast for Q1 should be considered for reference only. I mean actual result of Q1 could be above or below the forecast.

By segment, sales of SoC and Mechatronics are expected to decrease slightly quarter-on-quarter, while Memory and Services, Support and Others are on a growth trajectory. At the January briefing, we wanted to aim for a record sales year. But given the uncertainty in the global economy at present, we consider that flexible response to changes in the external environment must be our top priority in FY ’20.

Please turn to the last page, Page 24, for summary. The COVID-19 pandemic has raised many concerns. But as Q4 orders show, our major customers, like semiconductor manufacturers, have not changed their stance on continuing investment. Our customers’ financial condition is relatively strong. And it seems they continue their investment to secure their competitive advantage for the post-pandemic period. However, it is clear that the deterioration of the global economy will cause changes in semiconductor-related markets. In this fiscal year, we’ll set the priority on carefully monitoring and responding flexibly to changes in our business environment. Despite these circumstances, we believe that mid- to long-term semiconductor evolution trends remain unchanged. And we will continue to implement our mid- to long-term management policy by combining internal organic efforts with resources acquired through M&A. Test demand for high-end devices and sectors such as 5G, HPC and memory will continue to grow. We will secure our leading position in these arenas and maintain and improve our current market share.

That is all for my presentation. Thank you.

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Questions and Answers

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Operator [1]

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

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division – MD, Senior Research Officer & Analyst [2]

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My first question, DISCO Corporation, it is briefing earlier today mentioned peaking out of customer inquiries and attracting attention. Are you sensing signs of orders and inquiries peaking out as well? Of course, as Mr. Yoshida said, there are various uncertainties for the future outlook, but are you currently sensing a peaking out? That’s my first question.

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Unidentified Company Representative, [3]

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So is your question about possible peaking out?

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division – MD, Senior Research Officer & Analyst [4]

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Yes, in terms of orders and inquiries.

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Unidentified Company Representative, [5]

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In the fourth quarter, the amount of orders for system-level test was very large. So it may seem rather large overall. But in the SLT business, the amount per order tends to fluctuate significantly. So in the first quarter, we expect a certain level of moderation. But in terms of semiconductor tester ATE itself, we do not anticipate a major downturn. So in that sense, we do not expect a peaking out during the first quarter. That is not our view.

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division – MD, Senior Research Officer & Analyst [6]

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I see. My next question is on new products for SLT, you have been promoting this for some time. And I personally had expected that JPY 10 billion would be reached quickly, but now it seems we are way off. So what is your view on the scale of this particular business? And there are other aspects, as mentioned in previous briefings, such as market share increase coming from upgrading of burn-in testers, CMOS imaging sensors testers. And perhaps with work at home, LCD monitors are selling well and so display driver IC testers must be doing well as well. So could you comment on the current situation?

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Yasuo Mihashi, Advantest Corporation – Executive VP of Corporate Relations Group & Managing Executive Officer [7]

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Thank you for your question. This is Mihashi from the Corporate Relations Group. You asked about the scale of the SLT business. As was mentioned earlier briefly, it started from the module testing using the motherboard related to PCs in the past. And as has been mentioned for some time recently, with the increased complexity of semiconductors from the viewpoint of reliability assurance of the system, it is growing strongly. For this term, we saw a strong increase in orders for SLT. In that sense, we believe that customers with similar processes and similar products will expand the use horizontally, and there is a great growth potential. It is against this backdrop that we executed acquisitions in the SLT business. As for the scale of the business, SLT is typically application-based system testing, so there is seasonality. So it is a bit difficult to talk about the scale while keeping in mind the seasonality factor. But we are expecting on a full year basis, maybe 20% to 30% growth going forward, with successful progress on the part of the customers.

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division – MD, Senior Research Officer & Analyst [8]

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I see. Can you also comment on CMOS and burn-in testers and display driver IC testers?

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Yasuo Mihashi, Advantest Corporation – Executive VP of Corporate Relations Group & Managing Executive Officer [9]

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As for CMOS testers, given growth related to multi-lens smartphones and increasing number of pixel counts and the expansion of applications in automotive and other areas, the combination of reliability assurance requirements and the pixel count growth and the number of units produced is driving the market growth. Amid such development, Advantest is steadily and solidly growing the CMOS tester business. And going forward, the smartphones and automotive-related market warrants a close attention and caution. But basically, we believe that with the advancement and growth of technology, the CIS business will grow.

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Kimiya Sakamoto, Advantest Corporation – Executive VP of Sales Group & Managing Executive Officer [10]

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This is Sakamoto speaking. First, regarding the burn-in, the market that we target is the high-end memory burn-in segment. The market size in 2017 and 2018 grew to USD 100 million to USD 200 million, then dropped to below USD 100 million in 2019. But we are promoting the DRAM burn-in and core test solutions to expand the support. So should the NAND market recovery prove solid, then we believe 2020 will be better than 2019. Regarding the LCD driver, in 2018, back by shift to TDDIs and COF, we saw a threefold increase in orders related to LCD drivers. Partly due to the reaction to that, in 2019, orders declined. We were expecting a recovery in 2020. But currently, due to the COVID-19 pandemic, customers are all reviewing and revisiting their respective investment plans. So we are closely watching how things evolve going forward regarding COVID-19 impact.

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Operator [11]

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The next questioner is Mr. Yoshida of CLSA Securities Japan.

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [12]

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Yoshida from CLSA. My first question is on orders, the actual orders for SoC tester for the fourth quarter. I think your previous outlook expected SoC tester orders to decline quarter-on-quarter. But in reality, it grew slightly. Can you give us the background? And why is it that some orders shifted from the first quarter and came in early? Can you also comment on the first quarter orders, product by product, in particular, for testers?

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Kimiya Sakamoto, Advantest Corporation – Executive VP of Sales Group & Managing Executive Officer [13]

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Sakamoto from Sales speaking. Your first question on SoC tester orders. True, compared to the forecast, for the fourth quarter, the actual was JPY 1 billion lower. This was particularly due to the impact of COVID-19 and some customers decided to postpone investment to the first quarter. And as was mentioned earlier, especially related to LCD drivers, that was one factor for the results that we saw. And your second question is about the first quarter [product-by-product], correct?

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [14]

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Sorry, before that, did you say SoC tester actual was lower in the fourth quarter? Were you talking about sales?

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Kimiya Sakamoto, Advantest Corporation – Executive VP of Sales Group & Managing Executive Officer [15]

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No, I was talking about orders.

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [16]

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I see. How much did you say?

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Kimiya Sakamoto, Advantest Corporation – Executive VP of Sales Group & Managing Executive Officer [17]

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Sales were JPY 1 billion higher than the forecast.

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [18]

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So sales were JPY 1 billion higher, but orders were JPY 1 billion lower. Is that what you said?

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Kimiya Sakamoto, Advantest Corporation – Executive VP of Sales Group & Managing Executive Officer [19]

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Yes.

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [20]

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I see. What about orders for the first quarter?

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Kimiya Sakamoto, Advantest Corporation – Executive VP of Sales Group & Managing Executive Officer [21]

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First quarter orders. Quarter-on-quarter, we expect SoC testers and memory testers to both decline. And as for Mechatronics, with a decline in memory tester-related orders, we expect a decline in the DI or the device interface products.

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [22]

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I see. My next question is on Essai. Large amount of orders were recorded in the fourth quarter, and you also mentioned seasonality. So going forward, order-wise, should we expect a concentration in the fourth quarter? Is that the type of seasonality we should expect? And how would the sales be recorded? How would the fourth quarter orders be booked as sales?

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Unidentified Company Representative, [23]

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Thank you for your question. Let me check if I got your question right. Are you asking about Essai or the system-level testing business?

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [24]

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Sorry, I meant system-level testing business.

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Unidentified Company Representative, [25]

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I see. Regarding seasonality, there definitely is seasonal factors. As mentioned earlier, it is related to the delivery of the final applications. That type of seasonality is felt in the SLT business. As you are aware, the timing of smartphone launches is slightly different for different vendors, be it U.S., European or Korean vendors. And accordingly, the demand for the testing business goes up. And that is the seasonality.

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [26]

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So when is the peak season?

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Unidentified Company Representative, [27]

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Actually, it is governed by the launch for — the launch of the final products. So you can’t say specifically when. It’s not fixed, but the seasonality is definitely there. As for the orders received in the last fourth quarter, sales will be booked during the first half of this fiscal year.

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Yu Yoshida, CLSA Limited, Research Division – Research Analyst [28]

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I see sales booked in the first half of this fiscal year.

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Operator [29]

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The next questioner is Mr. Hirakawa from Merrill Lynch Japan Securities.

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Mikio Hirakawa, BofA Merrill Lynch, Research Division – Research Analyst [30]

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Hirakawa from Merrill Lynch Japan. I have a couple of questions related to system-level testing. Can you elaborate on the scale and breakdown? In the fourth quarter, orders for Services, Support and Others totaled JPY 26 billion. How much of that came from system-level testing? And for fiscal year ended March 2020, on a full year basis, what was the total amount of sales and orders? And in terms of areas, you mentioned storage versus automotive versus HPC. In what areas do you see emerging needs? Can you elaborate on those factors?

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Unidentified Company Representative, [31]

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Thank you for your question. First, the scale. About 60% of the orders for our Services, Support and Others came from SLT in the fourth quarter. And on a full year basis, approximately 30%.

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Mikio Hirakawa, BofA Merrill Lynch, Research Division – Research Analyst [32]

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I understand you started with SSD testers. I’d like to know which areas were strong in FY 2019? And which areas are you going to focus on in this FY 2020, if you have anything you can share with us?

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Unidentified Company Representative, [33]

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At this moment, we are seeing strong performance of SLT for SoC high-end application as well as SLT for SSD.

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Mikio Hirakawa, BofA Merrill Lynch, Research Division – Research Analyst [34]

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My second question is about the same slide, and it says, Essai contributed through system-level test. I assume IC sockets are not used for system-level test only. Still, you described it as a differentiator. Can you elaborate more on this?

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Unidentified Company Representative, [35]

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Thank you for your question. It says SLT on the slide. But as high-end sockets for high-end applications are Essai’s strength, we consider they are applicable not only to SLT, but also to ATE. Having said that, the volume of SLT-related application business is large as of now. This is why we specifically mentioned SLT in the presentation.

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Mikio Hirakawa, BofA Merrill Lynch, Research Division – Research Analyst [36]

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Okay. I understood. Let me clarify one more point. Am I correct in understanding Essai accounts for about $100 million in sales?

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Unidentified Company Representative, [37]

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Yes, the sales of Essai for fiscal year 2018 were $100 million. And going forward, we’ll grow its sales further by expanding its customer base or applications after the acquisition.

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Operator [38]

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Next, Mr. Nakanomyo from Jefferies.

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Masahiro Nakanomyo, Jefferies LLC, Research Division – Equity Analyst [39]

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This is Nakanomyo from Jefferies. Can you hear me?

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Unidentified Company Representative, [40]

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Yes, we can hear you.

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Masahiro Nakanomyo, Jefferies LLC, Research Division – Equity Analyst [41]

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My first question is also about system-level test. I’m asking a little detailed question, but does this JPY 26 billion for the orders of Services, Support and Others, include backlog of Essai as a result of its consolidation? I mean isn’t this a case that includes not only orders you received in the 3 months of Q4, but also includes Essai’s backlog for alignment of backlog account, and this increased the orders in Q4?

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Unidentified Company Representative, [42]

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Its backlog we inherited is, of course, included in the item of backlog, but that is not recognized as new orders. So JPY 26 billion is actual orders received. Only orders Essai received in February and March after the acquisition were posted as new orders received.

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Masahiro Nakanomyo, Jefferies LLC, Research Division – Equity Analyst [43]

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Then you said 60% of these orders is for SLT. I know all of them did not come from Essai, but anyway, you saw strong orders in January, March quarter in real terms.

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Unidentified Company Representative, [44]

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Earlier, Essai sales was explained as about $100 million. But according to the current business flow, we assume much higher sales and orders are achieved by them.

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Masahiro Nakanomyo, Jefferies LLC, Research Division – Equity Analyst [45]

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Okay. Assume it would be difficult to predict this now due to the impact by coronavirus and other issues. But without these issues, what do you expect for the level of gross profit with acquisition of Essai and once system-level test business is ramped up? I know it is difficult to make an accurate forecast now, but do you have any idea about it?

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Unidentified Company Representative, [46]

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We assume gross margin is fairly good for both SLT business of Astronics, we acquired last year, and SLT business of Essai, we acquired this year, which are comparable to the average gross margin of our tester business. For Q4, although profit of Essai was not included at all, but from Q1 of FY 2020, it will start contributing in profit. And we do not expect profit margin will decline by this inclusion.

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Masahiro Nakanomyo, Jefferies LLC, Research Division – Equity Analyst [47]

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I understood. My second question is about your supply chain. In Malaysia, movement restriction still continues. Can you explain the current status of operations in Malaysia? Are you able to operate with priority under such a circumstance?

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Unidentified Company Representative, [48]

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In Malaysia, there is a company producing V93000 SoC main platform under consignment contract. Also, we have our own production subsidiary in Penang, which is not so large, but engaged in production of device interface units. And its operation had been suspended temporarily due to the restriction placed by Malaysian government. But semiconductor-related businesses are basically considered as essential in Malaysia, and they were permitted to resume operations, if not 100% of ordinary operations. Therefore, supply or shipment of V93000 did not suffer the impact at all until Q4.

For Q1, we have already prepared back-up production system in Germany to compensate the production decline in Malaysia, which would be around 50% to 70% of ordinary production level. As long as we can secure materials, we do not think the production will be strained in Q1. We assume the risk factor is that we cannot secure perfect procurement for materials yet. The operations and the plant have not become a major issue so far.

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Operator [49]

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Next is Mr. Yoshikawa, Morgan Stanley MUFG.

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Kazuo Yoshikawa, Morgan Stanley, Research Division – Analyst [50]

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I’m Yoshikawa from Morgan Stanley. My first question is about segment income. Services, Support and Others were in the red in Q4, and I assume this is due to the amortization of intangible assets related to acquisition of Essai. Can you tell me how much the segment income was affected by the amortization? Related to this point, depreciation and amortization increased in Q4, and what is your outlook for this item in Q1?

Another related question. In the balance sheet, goodwill and intangible assets were recorded as JPY 51 billion as of the end of March. Can you provide a breakdown of this number between goodwill and intangible assets? I’d like to know if the accounting for the acquisition has completed.

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Atsushi Fujita, Advantest Corporation – CFO, Executive VP of Corporate Administration Group, Managing Executive Officer & Director [51]

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This is Fujita. Your first question was about the amortization cost related to Essai’s business included in the segment Services, Support and Others. I cannot disclose specific figures here. But to help your guess, I can say that the amortization we posted in Q4 was more than the amount, which could have turned this deficit of the Services, Support and Others to the black.

I’m sorry, I couldn’t hear your second question well. Can you repeat it?

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Kazuo Yoshikawa, Morgan Stanley, Research Division – Analyst [52]

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Depreciation and amortization in Q4 were slightly more than JPY 4 billion. What is your outlook for it from Q1 onwards?

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Atsushi Fujita, Advantest Corporation – CFO, Executive VP of Corporate Administration Group, Managing Executive Officer & Director [53]

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I suppose that would be at a normal level.

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Kazuo Yoshikawa, Morgan Stanley, Research Division – Analyst [54]

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Do you mean it will be back to the level of a little over JPY 2 billion or so?

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Yoshiaki Yoshida, Advantest Corporation – CEO, President & Representative Director [55]

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This is Yoshida. I think this topic substantially overlaps with the first question, but the reason of large depreciation and amortization in Q4 is as you guess. It is considered as a temporary factor. So you can assume it will go back much to the previous level. But please understand, it will not exactly be the same as in the past, considering some increase in capital investment.

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Kazuo Yoshikawa, Morgan Stanley, Research Division – Analyst [56]

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I understood. Here’s my second question. Last year, you explained testing time got longer due to introduction of 5G devices. Can you explain about how testing time is changing now for the advanced devices? If you have any idea you can share with us.

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Yasuo Mihashi, Advantest Corporation – Executive VP of Corporate Relations Group & Managing Executive Officer [57]

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I am Mihashi. That is a little difficult question to answer because we cannot disclose the test time data of our customers. For your reference, our high-end products for HPC, CPU, processors, et cetera, account for 70% of total SoC sales. SoC sales grew year-on-year in this fiscal year under review. And this growth is from those high-end products. And sales of the high-end products grew 25% year-on-year, and I hope this indicates something for you. I know I am not answering your question directly. Do you think this can be a help?

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Kazuo Yoshikawa, Morgan Stanley, Research Division – Analyst [58]

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Okay, I understood.

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Yasuo Mihashi, Advantest Corporation – Executive VP of Corporate Relations Group & Managing Executive Officer [59]

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Thank you for your questions. We have received some more questions, but we have run out of scheduled time. So I’d like to call an end to Q&A. This is the end of the conference call. Thank you for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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