Q3 FY2021 Earnings Release Conference Q&A

In your FY2021 Q2 earnings conference, you explained that CY2021 and CY2022 will show continuous growth in the WFE*1 market, and will be Big Years. Has there been any change to this view?

There has been no change in our view that CY2021 and CY2022 will both be Big Years that exceed even CY2020, the biggest year on record. Regarding the growth rates for each year, we will need to conduct more careful examinations.

Your views for the WFE market in CY2021 appear to be stronger than they were six month ago; why is that?

As we transition into a more data-driven society, the WFE market is moving into the next phase of its growth. Data center investments are expected to recover thanks to the release of high speed CPU, in addition to increased 5G mobile and PC demand, and we believe that is why customer investments are growing more active.

Regarding the CY2021 WFE market, please share with us your thoughts on any imbalances between the first half of the year and the second, and your views regarding investment growth rates by application.

At present, we are seeing comparatively balanced inquiries for both halves of the year. However, this could change based on the timing of strategic investments by customers, and we are currently looking into the matter closely. Now, as for growth rates of investments by application, rates are highest in logic/foundry, followed by DRAM, and then NAND. We anticipate that 60% of total investments will be for logic/foundry, while another 40% will be for memory.

How much investment can we expect to see from local Chinese customers in CY2021?

In the last few years, investments from local Chinese customers in the WFE market overall have trended between 15 and 20% of the total. This trend will not change in CY2021.

There is a deficiency in automotive and industrial semiconductors. In the future, if WFE investments into mature generations increase in order to increase production of these semiconductors, could this represent a business opportunity for TEL?

In addition to an increase in demand for our equipment for mature generations, we can also expect an increase in field solutions sales as this would mean greater demand for our services such as any relocations and modifications necessary to allow customers to reuse existing equipment.
As for automotive semiconductors, since the market is expected to expand as EVs become more widespread, we will further deepen our collaboration with our customers, and expand our business opportunities by providing new added value.

If the annual net sales for FY2022 grow in line with the growth rate of the WFE market, this will take you into the scope of the 1.5 trillion yen and 1.7 trillion yen in net sales scenarios described in the financial model of your Medium-term Management Plan. What will happen to your operating margin in this case?

We are currently examining our forecasts for FY2022, so we cannot comment at the moment. The increase rate of our net sales will not necessarily match the growth rate of the WFE market.
We plan to achieve our Medium-term Management Plan by FY2024, the last fiscal year of the plan. Even if the WFE market grows faster than our previous expectations, it does not mean that we can move forward our schedule for achieving our goals. Our plans are proceeding steadily.

Can you tell us why the SPE sales for FY2021 Q3 were so low?

This is because some of the sales in Q3 were pulled forward to Q2.
Shipments in Q3 for the sales of Q4 were proceeding smoothly, and business activities have been proceeding as planned in our forecast for FY2021 H2.

Your gross profit margin still falls short for the target set in your Medium-term Management Plan. What measures do you have planned to meet your target?

We are making proactive growth investments in our future, and record a portion of the expenses associated with evaluations with customers as a cost of sales. As a result, our gross profit margin is somewhat lower than some of our US competitors. Our plan is to improve our gross profit margin by providing products with high added value in order to achieve our Medium-term Management Plan.

Why were the net sales for field solutions in FY2021 Q3 so high? Further, can you share with us your outlook for the future?

Modification sales grew significantly in Q3. However, increases and decreases in modifications sales tend to be transitory, and these sales do not necessarily grow in a stable manner. On the other hand, parts and services sales see stable growth due to increases in installed base and customers’ high fab utilization rates.
As demand for relocations and modifications of equipment for mature generations is expected to expand in the future, we anticipate further growth in the field solutions business.

How significant are the sales for modifications?

We do not disclose sales for modifications specifically. Approximately 60% of field solutions sales are in parts and services, while the remaining 40% is in used equipment and modifications. Recently, due to customers’ high fab utilization rate, there have even been instances where the proportion of sales for parts and services exceed 60%.

Can you please describe the profitability for field solutions?

Field solutions have higher profitability as less research and development expense is required compared to new equipment sales. We plan to achieve even greater profitability by leveraging AI and virtual metrology to provide services with even higher added value.

What are your forecasts for EUV adoption by semiconductor device manufacturers?

EUV adoption has increased in foundries starting from the 5nm generation, and will increase even more in the 3nm generation. EUV will enable further scaling of semiconductor devices, thereby increasing the technological difficulty involved in etch and deposition, resulting in continued demands for semiconductor production equipment with high added value. Besides, we hold a 100% market share in mass production EUV coaters/developers. Therefore, further spread of EUV adoption is a positive for our business.

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

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