Q1 FY2022 Earnings Release Conference Q&A

With respect to the WFE*1 market outlook for CY2021, the YoY growth rate forecast was raised from 30% to 40%. How much of the investment pulled forward from CY2022 is included in this 10% increase? Also, please provide details for that increase amount.

It is our understanding that the increase amount does not come from the investment pulled forward from CY2022, but that it is an increase in investment amid heightened semiconductor demand. The breakdown is roughly 50% for leading-edge logic/foundry, roughly 15 to 20% for DRAM and the remainder for other investments.

With respect to the WFE market outlook for CY2021, the YoY growth rate forecast was increased twice from the beginning of the year, from 20% to 30%, and then from 30% to 40%. Is it possible that this growth rate will increase even further going forward?

We expect to see high levels of WFE investment in CY2022 as well. In such an environment, if customers request some investments to be pulled forward from CY2022, it is possible that the YoY growth rate for CY2021 will exceed 40%.

SPE sales to China have increased significantly in Q1 FY2022. Is it possible that local Chinese customers are pulling investments forward out of concerns that export restrictions may tighten in the future?

We believe that the investments being made are in-line with semiconductor demand, and it is unlikely that these are pulled-forward investments being made out of concerns that restrictions will tighten. The amount of WFE investments being made in China constitute approximately 25% of total WFE investments, and we anticipate this trend will continue going forward.

What is your outlook for the WFE market in CY2022?

We would like to refrain from providing a quantitative answer regarding the WFE market in CY2022, but we anticipate positive growth.
The reason we raised the WFE market outlook in CY2021 is primarily due to increases in investments in leading-edge logic and DRAM driven by the acceleration of the shift to digitalization. With respect to DRAM, DDR5 will begin mass production, and since chip sizes will increase with DDR5 due to the introduction of on-chip ECCs*2, this will result in increase in DRAM investments.
This trend will continue into CY2022, and we can expect ongoing leading-edge logic and DRAM investments. In addition, we expect investments in mature generation logic/foundry of 28nm or larger.

Two major logic/foundry customers have announced new fab investments. Does your forecast for the WFE market in CY2022 also include these investments?

The forecast for the WFE market in CY2022 was made based on current inquiries from our customers.

DRAM spot prices are currently dropping. Are there concerns that DRAM investments may decelerate?

At present, there have been no changes in inquiries from customers. As we can anticipate increased DRAM demand in tandem with the release of new server CPUs, and increases in DRAM investments in tandem with the mass production of DDR5, we don't think that the recent fluctuation in spot prices will have much impact on customer investment plans.

What impact will changes in revenue recognition standard have on the financial estimates for FY2022? According to your financial review, by comparing the FY2022 Q1 results under the new standard and the old standard, we see large differences amounting to 139.6 billion yen in net sales, and 82.9 billion yen in operating income. When looking at the numbers on a half-year or full-year basis, what impact do you anticipate the change in standard will have on financial results?

If you compare the new standard against the old standard, the timing for revenue recognition will be off by about one quarter. As such, the high net sales for Q1 FY2022 based on the new standard will be reflected in the net sales for Q2 FY2022 based on the old standard. There was a large gap in net sales for Q1 FY2022 between the new and old standards, but for the full year of FY2022, the revenue recognition timing will simply be off by around one quarter, and we do not believe this gap will continue getting bigger.
Further, when making comparisons based on our product shipment volumes (monetary basis), Q1 FY2022 saw increases compared to the previous quarter, and have increased significantly YoY.

Based on the new revenue recognition standard, is it correct to say that the systems you shipped in Q4 FY2021 were not recorded in the sales for Q1 FY2022?

Generally speaking, under the new revenue recognition standard, sales for systems are recorded at the time the systems have been shipped, and sales for any services related to system startup are recorded at the time customer acceptance inspections have been completed. Therefore, the systems shipped in Q4 FY2021 were not recorded as system sales in Q1 FY2022. On the other hand, if the acceptance inspections for those systems are completed in Q1 FY2022, the sales for the services associated with those systems should be recorded in Q1 FY2022.
Note that the sales for systems that are not recorded were reflected in retained earnings on the balance sheet without going through the income statement.

Gross profit margin for Q1 FY2022 was extremely high at 46.7%, but your financial estimates for the full year of FY2022 shows a gross profit margin of 44.5%, indicating that the margin for the full year sees a decrease compared to Q1 FY2022. Why is this?

In Q1 FY2022, multiple positive factors such as the sales contributions of newly acquired PORs*3 , as well as device mix and customer mix stacked up to boost gross profit margin. However, as those positive factors will level out over the full year of FY2022, the gross profit margin forecast is closer to our current capabilities.
Product strategies for leading-edge processes are progressing smoothly, and resulting in increased market shares and profit margins realized through the provision of products with high added value. Although profit margins can vary from quarter to quarter, our business strategy is progressing steadily toward the achievement of our Medium-term Management Plan.

SPE sales by region for Q1 FY2022 saw increases in sales to China, and decreases in sales to Taiwan and South Korea compared to the previous quarter. What is the relationship between the increase in gross profit margin and the changes in sales by region in Q1 FY2022?

The major factor behind the increase in gross profit margin for Q1 FY2022 was the sales contributions from the newly acquired PORs. As there are many new customers in China, the proportion of new POR-based sales among sales to China was comparatively high. Note that, although sales to Taiwan and South Korea have decreased compared to the previous quarter, they remain at high levels.

What progress has there been in POR acquisition, and how will it contribute toward financial results?

The PORs acquired in the last two years, specifically etch systems for 3D NAND slit processes and cleaning systems with supercritical drying technology, have been contributing to business performance as customers have begun investments for mass production. Furthermore, POR acquisition is progressing for deposition systems as well, resulting in sales contributions.
We are also advancing POR acquisition activities in etching processes other than 3D NAND slit as well, in order to realize further growth. Furthermore, as new technologies are being introduced in the lithography, etching, depositing and cleaning processes necessary for patterning, we are seeing more expansive business opportunities.

Has TEL manufacturing lead time gotten longer as demand continues to rise? Furthermore, do you have any concerns pertaining to component procurement?

Manufacturing lead time has not changed significantly.
As for component procurement, we have not experienced delays thanks to the efforts we have made to share our production plans for FY2022 with our suppliers. However, as demand has been increasing rapidly, we will need to pay close attention to this matter.

According to your financial estimates, gross profit margin for FY2022 is expected to reach high levels, but is it possible that your profitability may worsen in the short-term due to the emergence of new, anticipatory investments in the future?

Due to various factors such as customer mix and device mix, profitability may fluctuate in the short term. However, thanks to the proactive R&D investments we have made thus far, we have been able to introduce products with higher added value and high profitability. By increasing the proportion of products like these, we believe profitability will grow going forward.

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.

ECC (Error correction code): Function that detects and corrects data corruption

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

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