2Q FY2016 Earnings Release Conference Q&A

Did orders in the July to September quarter end up in line with estimates?

Orders for all applications were in line with estimates.

What is the direction of orders in the January to March quarter of 2016?

They should be roughly equivalent to orders in the October to December quarter but are likely to increase slightly. We expect logic orders to increase.

What lies behind the upward revision in financial estimates and what is the market outlook for next year?

The market outlook for the current year has not changed, but logic and foundry order inquiries are increasing. As for the wafer fab equipment (WFE) market in CY2016, we expect it to be equivalent to CY2015 or slightly higher. The investment outlook of logic and foundry customers has improved, and investment in 3D NAND and new memory devices can also be expected.

The company has revised up its sales estimate for the second half of the fiscal year, but what is the reason for the weaker expected operating income versus the amount of increase in sales?

As part of measures aimed at achieving the Medium term Management Plan, we have increased R&D expenses and sales promotion-related expenses for priority areas.

Estimated operating income for FY2016 has increased by roughly 17 billion yen year-on-year, but in view of the decrease in business combination-related costs and the improvement in earnings in the PVE business, isn't the operating income estimate for FY2016 conservative?

With the aim of bolstering our product competitiveness, we have increased R&D expenses and sales promotion-related expenses.

Efforts are being focused on etch systems for 3D NAND. When will the outcome become apparent?

It is important to carry out multilayer etching at high speed and with high precision, and we are focusing on HARC (deep hole) processing, which is our strong point. Good evaluation results have begun to emerge in the development of 3D NAND for the generation after next, when the number of layers will increase, and we expect results to appear from around 2017. The more the number of layers increases, the more we can make use of our strengths, so we believe we will be able to achieve our medium term targets.

Regarding the improvement in profit margins in the semiconductor production equipment business, when and in what way do you expect the results of the reallocation of R&D expenses to emerge?

We are preparing an operational structure to enable margins to increase uniformly from next year. We cannot disclose the details yet, but we are considering six new projects.

In regard to the expansion of sales in field solutions businesses in the Medium term Management Plan, which of the businesses of used equipment/modification and comprehensive parts and service contracts will grow?

We expect both businesses to show a similar degree of growth. Regarding used equipment/modification, demand for 200mm wafer-related equipment will increase because of the Internet of Things (IoT), and as there is a shortage of inventory only in the case of used equipment, there is also a trend toward addressing issues with new equipment. As for comprehensive parts and service contracts, there will also be requirements for high-value-added service that contributes to the improvement of customers' yields and a rise in their productivity.

As you expect to increase comprehensive parts and service contracts, are there targets for the number of agreements and the contract ratio? Also, what is the status of the introduction of TELeMetrics?

As there are various forms of service agreements depending on the customer, such as agreements per equipment or factory, it is difficult to calculate matters such as the contract ratio in general. However, we will show customers the benefits of comprehensive contracts, which will lead to our sales growth. TELeMetrics is a service that we have begun to newly provide, and at present there are about 40 customer plants worldwide that have been remotely connected with Tokyo Electron. From here on, we will grow this business aggressively.

What is your view of the news that Lam Research will combine with KLA-Tencor?

We do not think this will have an immediate impact on our company. As the combination of the two companies will take place in the future, we cannot comment on this at present.

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