Advantest Corporation (6857.T), a leading provider of semiconductor testing equipment, shared its financial results for fiscal year 2023 during its recent earnings call. Despite a decrease in sales, operating income, and net income compared to the previous year, the company reported an increase in market share for both System on a Chip (SoC) and memory testers.
Advantest's market share is estimated at 58% in 2023, with specific dominance in the SoC tester market at 59% and memory tester market at 56%. The company also provided an outlook for 2024, anticipating a 5% year-over-year increase in the semiconductor tester market and a focus on profitability and strategic growth initiatives.
Key Takeaways
- Advantest's FY 2023 sales, operating income, and net income declined from the previous year.
- Market share rose in both SoC and memory testers, with overall market share around 58%.
- The company exceeded the targets of its second midterm management plan set in May 2021 but fell short of revised July 2022 targets.
- Forecast for 2024 includes a 5% growth in the semiconductor tester market.
- Strategic plans for growth include a focus on high-performance computing, AI, and sustainability initiatives.
- Dividend policy for FY 2023 will be based solely on dividends, with a plan of ¥18 per share.
Company Outlook
- Advantest aims to secure over 50% of the semiconductor test market share.
- The tester market is expected to reach consecutive record peaks in 2025 and 2026.
- In June, further details on mid-to-long-term management policy will be provided.
Bearish Highlights
- Financial results showed a decrease in sales for SoC testers and a slight increase for memory testers in the fourth quarter of FY 2023.
- The company's revised targets set in July 2022 were not met.
Bullish Highlights
- Strong demand is anticipated for advanced logic and high-end memory devices.
- Advantest is focusing on high value-added solutions and profitability improvement measures.
- Expansion in the high-end SoC and memory sectors in China has been noted.
Misses
- The company's financial results for FY 2023 did not meet the revised targets from July 2022.
Q&A Highlights
- Advantest addressed impairment related to overexposure to a large customer, stating no further write-downs are planned.
- Confidence in the high-end sockets business and potential for future business and cash flows was expressed.
- Geopolitical risks have not significantly influenced projections as the company focuses on testing systems for final products.
Additional Information
- Advantest plans to provide further details on their management policy and metrics in June.
- The company is taking measures to strengthen supply chains, manage costs, and improve production efficiency.
- They have not incorporated geopolitical risks into their projections, focusing instead on market demand.
- The weakening yen has not led to major additional financial measures, as the company controls the impact on operations through hedging activities.
- Dividend projections will be maintained or increased based on actual performance, with an official announcement after board approval.
InvestingPro Insights
In light of Advantest Corporation's recent earnings call and their strategic focus on high-performance computing, AI, and sustainability, InvestingPro provides several key insights that could be valuable for investors considering the company's stock.
InvestingPro Data metrics indicate that Advantest (ATEYY) has a market capitalization of $25.09 billion and is trading at a high earnings multiple with a P/E ratio of 64.03. The company's Price / Book ratio stands at 9.2, suggesting a premium valuation compared to book value. Despite a decline in revenue growth over the last twelve months, with a -13.15% change, the company has maintained a strong gross profit margin of 50.57%.
Two critical InvestingPro Tips for ATEYY include the company's history of raising its dividend for 3 consecutive years and maintaining dividend payments for 33 consecutive years, which reflects its commitment to shareholder returns. Additionally, despite recent stock performance challenges, with a 1-month price total return of -27.88%, ATEYY remains a prominent player in the Semiconductors & Semiconductor Equipment industry, which could be significant given the strategic initiatives outlined for the coming years.
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Full transcript - Advantest ADR (ATEYY) Q4 2023:
Operator: Today, I thank you very much for taking the time to attend Advantest 2023 Financial Briefing. Let me introduce today's speakers. Representative Director, Senior Executive Officer, Group CEO, Mr. Douglas LaFever. Representative Director, Senior Executive Officer and President, Group COO, Mr. Tsukui. Senior Executive Officer, CFO and CSO, Executive Vice President, Corporate Strategy Group, Mr. Mihashi. Senior Executive Officer, CCO, Executive Vice President, Sales Group, Mr. Nakahara. Serving as the moderator for today, I am Kobayashi. I am Department Manager, Corporate Management Group. Today, first Mr. Mihashi will present financial results for FY 2023, and then Mr. Lefever will present 2024 outlook. We will first take your questions from institutional as well as analysts, and then from 05:00 p.m. for 50 minutes we will take questions from the press. We will end the briefing at 5:15 p.m. quarter past five. By the way, today's briefing session will be conducted both in Japanese and English. If you wish to listen to Japanese, please click on the globe icon at the left bottom of the webex screen. Above all will open, so please choose a Japanese. Down below there is a balance menu, so please move the sidebar to the right which says in capita you can listen to Japanese translation while English is spoken. Wish to listen to the original audio? You don't have to change the default settings. Today's presentation materials are published on our website as well as on tdNet. If you're joining on the forum, please download them for your reference. Also, only Japanese materials will be displayed on the screen during today's briefing. Please download English materials if you need them. Before we start the proceedings, I would like to make some disclaimers in explanations. Today, we may make some forward-looking statements based on our current projection, but they are subject to risks and uncertainties. Please note that actual results could be different from our outlook. Thank you. First, shortly in January this year, Group CEO positioned by Mr. Lefever and then Mr Mihashi will present 2023 financial results. Over to you, Mr. Lefever.
Douglas Lefever: Okay, thank you Kobayashi San. First of all, I'm very honored to take on the responsibility of CEO. I want to first acknowledge Yoshida San and the leadership he has provided and the results he's delivered during his tenure. I also want to emphasize the importance of the role of Tsukui in the company. In his position as COO, he will oversee many critical operations of the company and provide critical support both globally and domestically in Japan. As Tsukui and I have worked many years together in Advantest. I also should mention that Mihashi San, our CFO and CSO, also grow up together with me in Advantest. Mahashi San today will go through our FY 23, fourth quarter and full year results. First, you'll also report on results of our second midterm management plan which covered our last fiscal three years. Then in the second part, as Kobayashi San mentioned, I will cover our outlook for the fiscal 2024 and share some assumptions and market share positions looking forward. With that, I'll hand it over to Mahashi San.
Yasuo Mihashi: Thank you very much. Let me go through the financial results for FY 23. At the offset, I'd like to give the overview about the results of FY 23 First-off there are uncertain economic environments that continues at this point. I would like to first appreciate and thank all of our suppliers, employees and all of our stakeholders for their continued support of our business. Compared to the record results of FY 22 sales, operating income and net income in FY 23 have all reduced. But we would like to highlight that we gained market share in both SoC and the memory testers market. Despite a significant increase in sales for high performance DRAM related to generative AI, SoC test sales declined due to the factors such as softer, soft smartphone market conditions and a slowdown in the server investment. Despite such softer market conditions, the degree of the decline in sales was within the range of our guidance announced in July 22 when we revised the second medium term plan, MTP2. However, in terms of profitability, the product mix changed significantly due to lower than expected sales of SoC testers for leading edge processes. FY 23 was the final year of MTP2. We will discuss the results of MTP2 later in today's presentation. Turning to the next page on Page 5. This is the FY 23 summary of results. Sales, operating income and net income decreased significantly year-over-year compared to the full year guidance. As of January 24, sales were slightly higher due to the higher than expected product deliveries to customers, in particular for memory testers, however, operating income fell short of the full year guidance due to an impairment loss. Poor portion of goodwill of approximately ¥9 billion posted in other expenses in the fourth quarter. However, core operating income, excluding one of items, was ¥87.1 billion and that the core operating income margin was 17.9%. Net income for the year was also below the full year guidance. Tax expenses for the year include approximately 3.8 billion of deferred tax assets in the fourth quarter, which are likely to be realized within certain period in the future, resulting in a slightly lower effective tax rate of approximately 20%. Combining our year-end dividend forecast of ¥18 and the interim dividend of ¥16.25 already paid out, our annual dividend forecast is ¥34.225. On Page 6, which says FY 23 sales actuals by segment or regional. Over the three consecutive years until then we've delivered many products and because of the higher demand we faced a decline in the demand for our products due to excess capacity and therefore we had the lower numbers now by this segment. Although sales for SoC testers for mature process devices such as automotive industrial, sales for advanced process devices, for major customer appliances such as smartphones and PCs, as well as for the data center related applications declined. Only tester sales exceeded the previous year due to strong tester demand for high performance DRAM and growth in sales to Chinese memory companies, by region on a shift to basis since Taiwan fell sharply, particularly for high end entities. Page 7 which is about the fourth quarter FY 23 summary of results. This slide is describing the results and the details of the performance will be explained in the subsequent slides. On the next page, page 8 this is the quarterly sales by segment. Semiconductor & Component Test Systems, the SoC testers sales were 58.7 billion, a decrease of ¥4.7 billion on quarter-on-quarter, and for application processors, sales declined partly due to small pull forward in the previous quarter. On the other hand, sales for advanced process devices was down only slightly on quarter-on-quarter owing to the sales growth for high performance computing and AI related semiconductors. On the other hand, sales for mature process devices such as automotive and industrial, which was solid in the first half however, it softened in the second half, resulting in a decline in sales for two consecutive quarters. Sales and memory testers were ¥32.8 billion, an increase of ¥7.9 billion quarter-on-quarter. In addition to strong demand for high performance DRAM related to generative AI, sales to Chinese DRAM companies also increased. Mechatronics systems sales increased due to a healthy number of shipments in SEM MRE products. Service support and others in the system level test businesses, which has high sales exposure to specific customers, sales decreased due to a high comparison base following high level of product deliveries in the previous year. On Page 9, this is the fourth quarter sales per region. As is expected in the previous page, there was the sales pull forward in the third quarter as explained and sales of SoC test was decreasing on quarter-on-quarter basis. Moreover, sales of system level test business decreased as well. For China, sales increased and SoC testers and memory testers respectively. In South Korea, proposed customer investment continued and memory tester sales increased. Page 10, this is the fourth quarter sales gross profit and operating income. Gross margin increased slightly quarter on quarter. SG&A increased by 9.5 billion quarter-on-quarter and this is due to the impairment of a portion of goodwill of about ¥9 billion in other expenses item as mentioned previously, the impairment is related to SI Inc. which we acquired in FY 2019 due to a lower than expected sales outlook of their test socket business to a major customer, the future cash flow projection was deteriorated. The core SG&A was almost flat quarter-on-quarter. On Page 11, FY 23, fourth quarter R&D expenses and others so because this is the end of the year, R&D Capital expenditure increased quarter-on-quarter. The fourth quarter FY 23 operating cash flow increased because of the absence of the income tax and bonus payments in the previous quarter, as well as a slight decrease in inventories. On Page 12. As for the balance sheet for the period ended in March 31, 2024, an asset side inventory decreased slightly compared to the previous quarter, and on the liability side, short term borrowing was refinanced into a long-term borrowing energy of the working capital. Throughout FY 23, we worked to strategically build up inventories for the medium to long-term view and to increase supply capacity in the areas where demand is strong and particularly for high performance DRAM. In addition, inventories increased significantly compared to the previous year, partly in response to push out requests from customers, especially SoC detectors. To address declining capital efficiency we will drive our efforts to upgrade supply chain management and seek to monetize inventory in a timely manner. Lastly, I would like to discuss the results of the second midterm plan MTP2. Regarding the results of the second midterm plan MPP2, as shown in the slide, we were able to meet all the regional targets set in May 2021. We did not meet the revised target set in July 2022 with the exception of sales. Looking back over the past three years, the business environment has changed significantly in a short period of time. In the first half of the period, the increasing digitalization of society showed advancement of semiconductors while simultaneously pushing for increased semiconductor supply capacity. In the second half, however, the semiconductor market for major consumer applications entered a correction phase, and the tester market, which had experienced rapid expansion previously, ended up slowing down, although there were areas of strength such as high performance semiconductors related to generative AI, even under such an environment, we have increased our market share for three consecutive years in the MTP2 period by successfully capturing the test demands of leading customers and new entrants working on advanced technology development in the area of high performance semiconductors of increasing complexity, such as HPCI and HBM. Regarding this part, Doug will thoroughly explain it in his presentation part. Despite the short term cyclicality of semiconductor supply and demand, we see a continuing trend of increasing complexity in the pursuit of higher performance semiconductors, including the emergence of new semiconductor market entrants. The semiconductor tester market is likely to continue to grow in the mid long-term, just as MTP2 results exceeded those of MTP1. We recognized that the key challenge for us going forward is how to ensure strong profitability, which can withstand changes in the product mix. With regards to returns after taking into account the company's minimum cash holding level of ¥100 billion, working capital requirements and growth investment opportunities, we decided to implement shareholder return based solely on dividends for FY 2023. Therefore, the total return ratio was below 50%. However, the total return ratio for the three year cumulative period of MTP2 exceeds 50%. That concludes the presentation from my side.
Douglas Lefever: Thank you Mihashi San. So let me begin by touching about some of the semiconductor market trends. From our first midterm plan to our second midterm management plan, the tester market size in terms of a three year average increased by 35%. The market size assumption for our third midterm plan is currently under formulation after hitting a bottom in the calendar 2023, tester demand will be driven by complexity growth of semiconductors triggered by AI from 2024 onwards, and we expect it to be cyclically up. With the solid high performance compute and AI demand starting to expand, this year's overall tester market size is expected to be slightly up year-on-year due to a slow recovery in end markets such as smartphones and PCs, and softness in automotive and industrial equipment markets it should only be slightly up. In calendar 2025, overall demand for semiconductors is expected to pick up and reach a new record peak, underpinned by a strong demand for advanced logic devices, including those used in high performance computer demand recovery for mature C nodes and further growth in demand for high end memory devices. Driven by solid HPC AI related demand semiconductor tester demand is expected to hit consecutive record peaks in calendar 2025 and possibly again in 2026. In both years. Further volume growth and performance improvement in advanced logic and high end memory will also drive demand for our system level test equipment and test peripherals, particularly for high end SoC. Now, let's look at our sales trend over the past two midterm management cycles. From the first midterm plan to the second midterm plan, our sales in terms of a three year average increased by 68%. Our sales growth outpaced the tester market due to market share gains and some partial foreign exchange impact. The overall market expansion is an opportunity for us as we leverage our historical strength and high end applications such as high performance compute as well as all around capability of our solutions portfolio. Our midterm baseline is to secure greater than 50% of the semiconductor test market share, but we'll aim for even greater heights as we have in the past. Now let me turn to our market share position. In calendar 2023, total semiconductor tester market is estimated to have finished around $4.4 billion. This is down approximately 15% year-over-year, with the SoC tester market accounting for about $3.3 billion and the memory tester market accounting for $1.1 billion. While technology advances in high performance semiconductors drove demand for testers, the market size shrank for the second consecutive year due to the digestion of excess capacity and so some prolonged effects of the decline in demand for semiconductors and key consumer electronics applications. We estimate our market share was 58%, an increase of about a single percent point year-over-year. We believe we have won the number one market share for the third year in a row, including a 59% share of the SoC tester market and 56% of the memory tester market. In calendar year 2023, despite the market contraction, we expanded our sales and gained market share in the tester market, especially for high performance semiconductors such as HBCAI and HBM, which are critical markets for our future. Looking forward now into 2024, let me provide some comments on the business environment and test market trend. In 2024 uncertainty remains over the timing of a recovery as demand from key consumer electronics applications such as smartphones and PCs have remained sluggish for a prolonged period, while expectations for an increase in demand remain intact for high performance semiconductors, including high performance compute and high performance DRAMS such as HBM. The SoC market tester size in calendar 2024 is estimated to be in the range of $2.9 billion to $3.2 billion, a downward revision of approximately $400 million from our estimate three months ago. In the automotive industrial equipment applications, given the high levels of CapEx spending until recently, we anticipated a slowdown in customer CapEx spending for mature semiconductors and weaker demand for new testers as existing test capacity gets digested. In calendar 2024, memory tester market is expected to be in the range of us $1.4 billion to $1.7 billion in upward revision of about $100 million. In the area of high performance DRAM, robust customer demand is expected to continue through 2025 in conjunction with increased customer production plans and higher quality assurance, leading to high growth rates. Demand for testers for non-volatile memory is expected to recover gradually in the second half of the year. Taking all these factors into account the semiconductor tester market is expected to increase by 5% year-over-year at the midpoint in 2024. Looking beyond 2024 into 2025, we can say with relatively high confidence that the market size will grow. Now moving to our fiscal 2024 forecast in light of the tester market recovery, our FY 24 forecast calls for an increase in sales and profits with sales of ¥525 billion, operating income of ¥90 billion and net income of ¥67 billion. In the first half of FY 24, sales are expected to decline on a half over half basis due to soft CapEx appetite of customers and the traditional automotive, industrial and consumer applications despite robust high performance DRAM demand such as HBM. However, from the second half, demand for high performance compute such as high performance compute AI is likely to absorb excess capacity in the market and drive new tester demand. Gross margin for the full year is expected to decline a bit year-over-year to around 48%, mainly due to changes in our product mix. Operating margin is expected to be 17.1%. With that, we will continue our R&D and investment efforts to enhance the added value of testing by evaluating new test solution offerings aimed at solving customer problems. We are targeting high growth semiconductor areas that are driven by complexity. This forecast assumes exchange rates of $1 to ¥140 and €1 to ¥155. Our latest forecast for the impact of exchange rate fluctuations in FY 24 is that operating income is affected positively ¥700 million depreciation versus the U.S. dollar and a negative ¥300 million per depreciation of Yen versus the Euro. For our semiconductor and component test outlook SoC tester sales are expected to be flat year-on-year. Within this segment for HPC AI, we are sensing robust demand on the back of increasing production volume and complexity growth for generative AI. Furthermore, demand from new customers is expected. As such, the product mix within SoC testers is likely to turn around. On the other hand, for smartphones, although we expect complexity growth such as three nanometer migration to increase test demand, recovery of the demand remains somewhat uncertain as the smartphone conditions remain slow. For traditional, industrial and consumer applications demand is expected to remain somewhat weak this fiscal year. With lead times for SoC testers running now normal back to normal to three to four months visibility on tester demand is also getting shorter compared for information to us from our customers. This makes it a bit more challenging to formulate the full year forecast accurately. We will continue to work more closely with customers and increase the certainty of our business pipeline. For a memory tester, sales growth is expected driven by high performance Dram related to generative AI. However, I should say the current profitability of the memory test business is not at a satisfactory level and I recognize that improving increasing its probability is one of the most important issues I need to address as CTO and confident we will do so. Now, turning to our Mechatronics service support and others segment. In our Mechatronics business, solid sales are expected for our device interfaces and handlers supported by tester sales growth. Our nanotechnology product sales are expected to increase slightly as well. For sales and service support and others they're expected to be similar to the previous year. Within our service segment in our traditional maintenance services, demand is likely to be firm due to the steady growth of our installed base. In the system level test sub segment, sales are expected to decrease a bit year-over-year. In FY 24 despite the growing customer base adoption of SLT, this business is affected by certain customer involved in consumer electronics applications, specifically mobility, leading to some soft demand growth in recent times. The system level test is still a nascent business area and I've been working to expand this business including through M&A. In FY 23, we gained several new customers and new applications such as automotive and compute. The system level test business is critical for our strengthening of quality assurance for complex semiconductors, which is an area of high growth and I remain confident about its future growth prospects. Next, I would like to address key measures for fiscal year 2024. The first key measure for 2024 is to deliver high value added solutions and expand our supply structure. We will further expand our supply for high growth devices such as HBM to meet rapidly growing tester demand. We aim to accelerate development of integrated test solutions to enable our leading edge customers to overcome challenges in developing cutting edge technology. We will create value through automation initiatives for end to end test processes which coverages ranging from complex semiconductor design all the way to system level test with the data analytics in between. The second key measure is to drive profitability improvement measures. We will maintain our advantage in our already well established position in the testing of high performance semiconductors such as high performance compute AI and leading edge memory. Lastly, we will also continue with our work on upgrading our supply chain management to keep up with future demand fluctuation and enhance our production structure. Through the management midterm plan number one and two, which covered the last six years for Advantest, we have reinforced foundations for growth including enhanced product portfolio, expanded business domain and rich engineering support. We are currently formulating our mid-to-long term management policy and growth paths that are underpinned by the aforementioned achievements. Some of the core strategies are outlined below. There are four strategies I would like to share with you today. Firstly, we aim to continue to outpace the future growth rate of our core market by providing greater efficiency through automation for increasingly complex semiconductor devices. Secondly, we will drive operational excellence to the organization to ensure earnings growth. Third, we will continue to explore adjacent new businesses and fourth, we will enhance sustainability initiatives with a focus on our net zero transition. We plan to hold a briefing in June to explain our mid long term management policy and provide details including targeted management metrics. Thank you very much. Thank you very much.
Operator: Thank you very much Doug. [Operator Instructions] If more time is allowed to end, we would like to send the questions for the next round and we are broadcasting using simultaneous translation and that will please be succinct and clear in raising questions, please refer to raising questions to a particular competitor. We will accept questions both in Japanese and English. Now we'd like to open for the question. Morgan Stanley (NYSE:MS), MUFG. Wadachi-san, please.
Tetsuya Wadaki: This is Wadaki of Morgan Stanley, MUFG Securities. Because only one question is allowed, and therefore SoC tester Mergat for the three consecutive years is making a negative growth. However, what we would like to expect is that perhaps there are replacement needs for the testers, and perhaps SMARF is now accommodated with the generative AI. And also, in the midst of U.S.-China economic conflict, and perhaps for the back-end process capacity, maybe poised to increase in the global market, and therefore tester investment may be increased. And I think about all these possibility. I wonder at some point in the near future, there might be some additions of the sales and performance on your end. What is your take if I may ask?
Unidentified Company Representative: [Interpreted] Now, in regard to SoCs, as Mr. Wadaki, you are fully aware that our major customers is, for example, Foundry and OSAT and such service providers are our customers. And to your question, what is key for us is the improvement of the operating rate and utilization rate. And in FY23, what we recall, there was an idle capacity and changing the users from smartphones to AI, HPC. And there were so many business for the purpose of upgrading. But in regard to the utilization rate, though it is improving, particularly for the type of needs of customer, some of the customers are approaching to their full capacity operation. And for the system orders, compared to six months ago, the order level is increasing, as we are aware of. Yet, we would like to carefully monitor the situation because there are some Foundries who are not on the full capacity yet. Because of this reason, TAM is now being estimated at this point, like you heard in the presentation. But the market condition changed drastically. We need to carefully monitor three months to six months. We need to have a full understanding of the decision, and we need to update our outlook. In regard to the smartphones, the sales of smartphones, it's not as robust as you would hope to be. However, in the second half of this year, our customers will once again migrate to the advanced process nodes. It is very likely that they will advance to the higher nodes. Therefore, TAM is now published in six-month basis. Probably in the second half of this year, there might be some new trends appearing in the market, as I expect. We will be very careful in monitoring the situation, and we'd like to make judgment on our own.
Tetsuya Wadaki: Thank you very much. In regard to the global decoupling, like I asked, the test house and OSAT in the United States and the capacity building, what is the impact on that?
Unidentified Company Representative: [Interpreted] Well, migration of supply chain is actually happening, and because of the decoupling, for instance, from China to Malaysia or from Taiwan to Malaysia, that there are some supply chain migration. And the tester demand for us is now becoming visible at this moment. Having said that, though, some of the factories are being built up, and we need to carefully monitor the situation at this moment.
Tetsuya Wadaki: Thank you very much. You have answered your question. Thank you very much.
Unidentified Company Representative: [Interpreted] Mr. Wadaki, thank you very much. Next, from CLSA Securities, Mr. Yoshida, please go ahead.
Yu Yoshida: Hi, this is Yoshida from CLSA. I'd like to ask Douglas on about your market share outlook in calendar year 2024, and if possible, in 2025 as well, at both memory and SoC testers. I think the market growth potentials are more favorable for your company, but Teradyne (NASDAQ:TER) also commented that they are going to take some market share at HBM and also AI ASIC. So do you think the recent increased market share can be maintained or further strengthened going forward? That's my question. Thank you.
Douglas Lefever: Yes, thank you very much, Yoshida-san. Yes, our outlook for calendar 24, I should say, as I mentioned, is slightly up. But as you mentioned, there's going to be a large focus on memory as part of that total tester market for this coming year and into 2025. For 2025, we do expect a higher growth rate than we've seen in the past for memory versus SoC. And into 2026, it's potential to continue. In June, we will be very more clear about the actual market sizes for 25 and 26 and how we're modeling those assumptions. Specifically on HBM, I can comment that we're very comfortable with our position that we have. We've been working with our customers closely for so long. In fact, HBM, I think we started more than 10 years ago. And so we have very deep relationships, but we also understand that we have to maintain competitive balance between ourselves and how we're supplying into the system and manage our marginal profits there. Our first objective right now, our first responsibility is to make sure that we have adequate supply at the performance and quality levels expected by our customers. And by the way, those customers happen to be our SoC customers as well. And so we have an obligation and responsibility for the entire industry to make sure that we have adequate supply. So as I mentioned in my prepared remarks, we are opening up our supply chains in order to grasp the opportunity of the HBM and the high-end DRAM side. So while I can't talk specifically about customers or exact market share levels for 2025 and 2026, I guess I'll leave the remark at, we're very comfortable with our position at this point. Thank you.
Yu Yoshida: Well, do you think that market share condition for SoC testers is also similar to this in all of our HBM memory testers?
Douglas Lefever: I think historically what we've seen over the decades is that when there's large waves that happen, if it's BC and mainframe, moving to mobility and now with this era of AI, we've seen a large expansion in the memory business as the computational architectures have changed. And we're seeing that now. And that's why there's such expansion of HBM and high-end DRAM. Normally after that, it follows with a large ramp up in SoC. And so what we're expecting to see now is continued growth in the data centers and the cloud. And then there's going to be some migration into the edge compute. And so you're going to start seeing more applications of AI at the edge, which then will support the volume growth of SoC in consumer and mobility. So our SoC business is still quite strong in our view, given the cycle because of the HPC. And as that migrates from cloud to edge, we'll see that layered on to our business model.
Yu Yoshida: Thank you very much.
Douglas Lefever: Thank you very much, Yoshida-san.
Operator: And next, Nakamura-san from Goldman Sachs (NYSE:GS), please. Go ahead.
Shuhei Nakamura: [Interpreted] Thank you. Thank you very much. I'd like to ask about the profitability and the outlook as well as trends. So earlier in the presentation, 48% is the gross margin you spoke of and compared with the previous year, it will be down slightly. So in the new fiscal year, the sales is going up and there will be a goodwill impairment. And also if you exclude that, operating profit is a flat. You know, is it just because of the product mix situation? And if that's the case, memory test profitability may be lower than we anticipate. And earlier, Adago-san talked about the improvement of profitability. That is one of the key responsibilities. And what sort of schedule timeline do you have and what sort of level do you think you can raise it to? Thank you.
Yasuo Mihashi: [Interpreted] Well, thank you very much, Nakamura-san, for your question. First, I, Mihashi, would like to respond to this question. Well, as you rightly pointed out, a fine 24 profit may look slow. The reason why this is the case is because of the product mix. I cannot just say it is all because of product mix. But as for this year, in FY24, memory tester sales ratio will be very high. That is our projection. Normally, 20% to 30% is the memory, historically speaking. But as for FY24, this will be much higher than that 20 or 30%. So the product mix will be the largest factor that can impact our performance as well as profitability. And as for profit and as to how we can improve the profitability, first and foremost, in relation to memory, especially HBM, the generation changes speed compared with the DDR, commodity DDR. Unlike the generation creation of business, we have to work with our customers with a very hands-on approach to deliver new devices without depending on the bank. So the cycle time will be faster. JTEC, so from the second half of the year, HBM3 will come in, so the generation change will happen. So at that timing, along with the evolution of devices, on our side, we'd like to deliver higher value-added system configuration and our technologies that will be used. And as a result, our profitability should improve. I believe we can expect that to happen. And earlier, Mr. Lefever, Group CEO, mentioned that to improve our profitability, we will strengthen our supply chains to a great deal, and then our procurement and cost will be managed very thoroughly, and also our production will be made more efficient. And by doing so, we'd like to push up our profitability. Such activities will be conducted this year.
Shuhei Nakamura: [Interpreted] Thank you. Thank you very much. In that sense, HBM sales will go up going forward, and as for FY25, do you believe that the profitability will go up in FY25?
Yasuo Mihashi: [Interpreted] Yes, that is our assumption.
Shuhei Nakamura: [Interpreted] Thank you, thank you very much.
Operator: Thank you. Nakamura-san, thank you very much for your question. From Jefferies Securities, Masahiro Nakanomyo, please.
Masahiro Nakanomyo: [Interpreter] Nakanomyo, one question. Impairment is my question. Is that coming from the large accounts where their sales forecast was changed, as I understand from your presentation? But was that significant enough to pose a large amount of impairment? And what is your forecast? Do you need to continue to incur such a loss of sales going forward? And also, if that particular customer is not the one to sell to, I believe that you still have some potential to expand the business, but yet you are posting the impairment. Would that be just a conservative approach, or why did you pose such a large impairment?
Douglas Lefever: Thank you for the question. This is Doug. I'll do my best to answer the question. I think I understand. The impairment that we took, yes, was related because of some overexposure to a certain large customer. We do not have plans to take any further write-downs. We do remain confident in this particular business which has to do with high-end sockets. And as we transition to a broader customer base from their historical business that we acquired, we should see future business and cash flows related to that division. And so, while it's painful as we do that transition, and the sales cycles have been somewhat longer than we had originally anticipated, we're encouraged by the opportunities that we have been working on with qualifications and customer expansion. So I think, hopefully, I caught the question right, and that gives a appropriate answer.
Masahiro Nakanomyo: [Interpreter] Yes, understood well. Thank you very much. Nakanomyo, thank you very much.
Operator: Then the next question is from Macquarie Capital Securities, Damian.
Damian Thong: Can you hear me?
Unidentified Company Representative: [Interpreted] Yes, we can.
Damian Thong: All right, thank you very much. Yes, this is Damian from Macquarie. Just have a question on the profitability improvement that you're looking for in memory testers. Are you able to say what kind of actions you could take? Because it looks like, given your expectation of strong HBM and memory tester growth next year as well, maybe stronger than SoC tester, it would seem that actually there is obviously risk that your margins would still be under pressure next year. But any hints you could have on what kind of actions you could take would be welcome. Thank you.
Douglas Lefever: Yes, thank you, Damian. Without getting into really deep dive details, I would probably put it into the three buckets that Mahashi-san mentioned in his answer, which is that we were looking to achieve better value for our customers by improving their yield and throughputs, as well as the technology transitions. So as everybody in the industry knows, the yields of HBM are under lots of pressure. And this is a reason why test capacity is required. But there's also opportunities to work with our customers to add value to their operations. And if we do that correctly, we should be able to improve our product value and therefore our margins. The second thing I would say is that we are working, co-working with our supply chain. And so you can imagine the number of suppliers that go into the memory tester bill of materials and the extensive supply chain for productions that we have. So we're working with them closely. And then the last thing is just driving overall efficiency. So I think when we look at the detailed plans that we have, we're fairly confident that we're going to have some margin expansion in the memory area. And so it's going to take a lot of work, but we've already seen some of the fruits of the labor from this past year already looking forward into our model. Thank you very much.
Operator: Next talker on security is Takashi Shimamoto. Please go ahead. Hello, hello. Can you hear me?
Takashi Shimamoto: [Interpreted] Yes, I can. So from my side about the SoC tester projection, it's changed so much from three months back. So you have provided an explanation, but once again, which part changed dramatically compared with three months ago? And if you provide a breakdown between the first half and second half, are they much different from each other? For example, are you going to be strong in the second half or in the second half of the 24? Things that shouldn't be too strong yet? What is your projection?
Makoto Nakahara: [Interpreted] Well, thank you very much. This is Nakahara of sales speaking. Well, first of all, as I mentioned earlier, in the market, utilization improvement has been slow compared with our projection and expectation. And that is because of a smartphone market. And another point is that now automotive industry, equipment, machinery, tester demand has slowed down somewhat. And there is more clarity about it. So including such developments, term projection has been revised downward. And as for first half and second half, breakdown at some point in the future, our SoC tester utilization will be full in the market. So in the second half of the year, we expect more improvement. Improvement will be clearer in the second half of the year. Did I answer your question?
Takashi Shimamoto: [Interpreted] Yes, thank you. Thank you very much. By the way, AI out of SoC, is AI in line with your projection? Some companies are saying that AI demand is strong. What about your outlook?
Makoto Nakahara: [Interpreted] Generative AI in FY24 and 25, our tester business, this will be our core. So both memory and logic, both of them will be the key for us. So once we reach a peak utilization, then a system order will come in in relation to generative AI. Thank you.
Takashi Shimamoto: [Interpreted] Thank you very much.
Yamamoto: [Interpreted] This is Yamamoto of Miso Securities. Can you hear me?
Yasuo Mihasi: Good afternoon. Please go ahead.
Yamamoto: [Interpreted] Now in the same point, Mihashi-san, I would like to ask a question regarding the profitability and product mix worsening is fully understood. However, would that be the single only reasons of a deteriorating operating margin? Share is gaining in steadfast manner and SoC tester and the memory tester, when you look at the breakdown further, as an outcome of a competitive landscape compared to five years ago, are there any products having a lower margin? Is that simply that product with a lower margin increased? Would that simply the product misuse? Or when you look at the each line of the products, margin isn't that deteriorating. Could you comment on that, Mihashi-san?
Yasuo Mihasi: [Interpreted] Thank you very much for your question, Yamamoto-san. To be succinct, for FY23, the profitability was lesser and business with a lesser profitability have expanded. And that is a main reason. In regard to the each and a single level of a products, we are quantitatively monitoring the margins and profitability worsening is not an observed impression, yet basically, for example, wafer tester is mostly in the memory area and therefore profitability is deteriorating.
Yamamoto: [Interpreted] But for the other line of products, foreign exchange rates and cost of goods and inflation as well as the wage increase, of course, we've been receiving a certain pressure of margin deterioration and yet we are able to secure a certain profitability. I'm sure that you are looking at the Teradyne's number. Though business is slightly different, however, when it got to a tester, their profit deterioration for the tester business is actually smaller than your company's. What is your take?
Yasuo Mihasi: [Interpreted] Well, operation and the way of operation is quite different. A Teradyne versus us, as what we are doing in versus what we are doing isn't quite the same.
Yamamoto: [Interpreted] Does that mean that memory testers to begin with is struggling with a lower margin to begin with from the past as well? Is that the case?
Yasuo Mihasi: [Interpreted] Wafer for the DLAM tester for wafer testers, that product itself doesn't have a high margin to begin with. However, on the other hand, the technology involvement further precedes it and technology-based wafer test is going to increase more. And Yamada-san, HBM quality issue as a result of that, a solid tester testing process has to be implemented on the fab side and on top of that, HBM for E, so there are more advancement and by offering a higher function tested, therefore we can enjoy premium in price and the higher margin that we can enjoy. We need to generate such trend going forward.
Yamamoto: [Interpreted] That is all my question. Thank you very much. Thank you very much.
Yasuo Mihasi: [Interpreted] Thank you very much, Mr. Yamamoto.
Operator: It is now 5 p.m. As mentioned previously, from here, we'd like to accept a question from the media. First of all, from Reuters News, Sam [ph]. Mr. Sam, please go ahead.
Unidentified Analyst: I would like to ask about the business in China. So, yes, sales have risen to around half of total sales coming from China. Could you give us some insight into what's driving that increase recently in a bit more granular detail on that? And obviously, there's a big expansion of legacy chip-making capacity in China. There's a lot of questions about to what extent that is going to continue. So, is that something you're seeing as a secular trend or is there a risk there that the company might be becoming rather over-reliant on sales to China? Thank you.
Douglas Lefever: Yes, thank you, Sam. Yes, for sure, over the long-term, our sales in China has expanded like most of the semiconductor equipment companies. We have a lot less exposure than maybe some of our peers and this is a ship-to data as well. So, it includes certain companies that have factories there as well as the domestic headquartered Chinese companies. So, that's important to point out that within that data, there's some lower data. And we've been very successful, particularly in the high-end SoC area, as well as obviously some memory customers there as well. As far as the legacy nodes go, no doubt that there is a lot of expansion in China at the expense probably of other countries. And most of the legacy nodes drive a lot of mid-range to lower range test equipment, which we have participated in, but not as much as we depend upon the higher-end SoC and higher-end memory. So, hopefully that gives you a little color at this point.
Unidentified Analyst: Thanks very much.
Operator: Thank you, Sam. Next, we have Omichi [ph] from the Japan Economic News. Please go ahead.
Unidentified Analyst: [Interpreter] My apologies, Omichi of Nikkei Shimbun newspaper. Can you hear me okay? Yes, we can. Please go ahead. Well, thank you. So, in this annual projection, compared with the market projection, it is much lower. Your projection is much lower. What is the background? So, in the first half, you talked about smartphone and automotive slowing down and because of the emerging deterioration and because of the product that mix. Are there any geopolitical risks that are reflected in your conservative assessment? And if so, to what extent? For example, there could be some regulations against China and so on. So, what is your view?
Yasuo Mihasi: [Interpreted] Omichi-san, nice to talk to you. Well, thank you as always. Thank you very much for your question. Regarding geopolitical tension or risks we haven't incorporated that too much in our projection. Of course, there are some geopolitical regulations, restrictions or control, semiconductor manufacturing equipment or we are part of a semiconductor manufacturing value chain but in the end, we are providing a system to test the final products. So, even if our business is regulated, the production of actual semiconductors won't stop. So, control or regulations against us. So, regulations against us in regards to customers in the entity list, if the US IP is included and so on, such regulations will be applied to us but if we follow the guideline, we can continue our business. That is the environment we find ourselves in. So, this is not a big factor for us.
Unidentified Analyst: [Interpreter] Thank you very much. At the end of the day, it ultimately boils down to the market situation such as a weak demand and so on. Is that the case?
Yasuo Mihasi: [Interpreted] Yes, in that sense, the market situation is not fully visible. We don't have all the input where we can make a definitive assessment to be honest with you but as I have said earlier, AI related or HBM related, especially our AI related business in FI24, throughout FI24 should pick up and at some point in the future, we will reach our threshold. There will be a growth above our threshold. That is our prediction.
Unidentified Analyst: [Interpreter] Thank you. Thank you very much. Thank you. h, Mitsu-san, Doug wants to make some comments.
Douglas Lefever: Hi. Maybe our view, we're a global company and we serve all the markets. China is very important for Advantest just like all of the different markets are important. And while there's a lot of geopolitical risk, there's also other risk out there with access to energy, access to human resources and supply chains are moving. And I'm very happy to say that when you look at Advantest and our footprint, our ability and agility to move as a supply chain move around, as a technologies move around, we're very well positioned as a company and we've worked hard for decades to position ourselves this way.
Operator: Next is Nick [ph] Kogyo-Shinbun. Kobayashi-san, please. Can you hear me? Go ahead.
Unidentified Analyst: [Interpreter] Kobayashi [ph] of Nick and Kogyo. Related to memory, for DRAM, mentioned earlier, HBM and related to AI, demand exists. But for NAND in Audible, continue from last year, it is very weak. How would that recover? There's no projection to improve at this moment is this the right understanding?
Yasuo Mihasi: [Interpreted] Your audio was breaking up. It seems that you have asked about the NAND market. Is that right?
Unidentified Analyst: [Interpreter] Correct.
Operator: And Nakahara of Sales will answer your question.
Makoto Nakahara: Now, as we show on this slide, for FY24, our memory business, 95% is earned in the DRAM. That is our projection now. Having said that though, for NAND inventory situation, the customer is gradually improving as far as I can acknowledge. And also for ASP, that improvement is observed. Therefore, toward the second half of this year, situation shall be improved gradually. But on the whole, once again, DRAM business is much stronger in our company.
Douglas Lefever: Could I add also, Max, on for NAND industry is clearly going through this period of consolidation. So certain companies are moving all of their wafer starts to DRAM. Some are exiting or merging. And so this is a natural market process that has to happen in order for those companies to raise up their ASPs and earn the margins. And we're part of that supply chain as a tester company. What I can see is there's some light coming in the forum that I see, especially is in things like edge AI. So for example, smartphones with AI are now going to start going into some level of training models locally on your handsets. And that will drive a huge amount of local storage, which will be in the NAND area. Same with notebooks and tablets. And so the consumer part of the AI at the edge will reveal itself somewhat in these other areas like NAND, which clearly has struggled for some period of time now. So maybe a little bit of extra commentary on NAND.
Operator: [Interpreter] Thank you very much, Kobayashi-san. Thank you very much. Next from Bloomberg, Ms. Furukawa [ph], please go ahead.
Unidentified Analyst: [Interpreter] Can you hear me? Yes, please go ahead. Oh, good. I have a question related to foreign exchange rate. Recently, the yen is becoming weaker and weaker. And when this progresses more, I would like to know what kind of measures you have in terms of hedging it. Are you going to promote the dollar denominated transaction or are you going to hedge more? We'd like to know about that.
Operator: [Interpreter] Furukawa-san, hello. Can you hear me?
Unidentified Analyst: [Interpreter] Yes, I can hear you now.
Unidentified Company Representative: [Interpreter] Well, for us, if the changes or the differences become larger, of course we conduct activities of hedging and other necessary measures. But most recently, we were assuming ¥140 and that's ¥150, ¥55, ¥155. But instead of conducting a proactive activity of hedging, but the foreign exchange is more towards the weaker yen. And as a result of that, we need to thoroughly control the impact to our company's business operation, internal operation, meaning procurement and others. In order to respond to this weakening yen, we are conducting activities. As the financial measures, we are not taking any major additional measures. So even with the recent level of this foreign exchange rate, you are not. Is there a certain threshold that you will take certain measures?
Yashitake Kobayashi: This is Kobayashi from the IR. Basically for the foreign currency denominated receivables we have. And so we look at the situation and regarding the differences that will occur, whether we'll be hedging or not. It depends on the volume. I believe that we're not at that timing, excuse me, taking any actions. We're not at that timing of taking any particular additional actions. Thank you very much.
Operator: [Interpreter] It is almost time to end the session, but Tamehiro-san [ph] of New Keshima newspaper. Now final question, please.
Unidentified Analyst: [Interpreter] Tamehiro speaking, can you hear me okay? So from my side about the dividend projection for this year, at this point in time, this is not disclosed. According to guidance, you are going to make a profit increase in the end. So as a shareholder return level, are you going to maintain the same level as last year or are you going to expand the shareholder return level?
Unidentified Company Representative: [Interpreter] Thank you very much, Tamehiro-san for your question. Earlier in my presentation, per share dividend, dividend per share slide was shown on page seven. It said ¥18, one eight yen. That is our plan. Of course, this number, did you talk about next year, Tamehiro-san? Are you talking about FY24?
Unidentified Analyst: [Interpreter] Yes, yes, I was talking about FY24.
Unidentified Company Representative: [Interpreter] Okay. In that sense, this year and towards the next year, in regards to dividend, we would like to base that on our actual performance, as you can see in the past years as for dividend, every year it has been on the rise. We have been strengthening the dividend over the past few years. So next year, the marginal profitability may suffer to some extent, but as for dividend, FY23 and FY24 will have certain level of dividend and this will be approved by the board and announcement has to be made officially after board's approval.
Douglas Lefever: The second midterm management plan and our total shareholder return was a 69% ratio. Our policy for that plan was 50%. And so we achieved that even with the lower number this year. We're right now formulating the next three year plan. And so in June, we will release, what our policy will be for the shareholder return for the next three year tranche. So please wait until June for the forward looking aspect of our business shareholder returns. Thanks.
Unidentified Company Representative: [Interpreter] Did that answer your question?
Unidentified Analyst: [Interpreter] Yes, yes, you did. Thank you.
Unidentified Company Representative: [Interpreter] Thank you very much. [Indiscernible] the financial reporting session today. Thank you very much for your participation.
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