Q3 FY2018 Earnings Release Conference Q&A

Are Q3 sales figures and your expectations for Q4 sales to be significantly higher than Q3 both as planned? If so, do you have any concerns in terms of engineer resources and materials supply?

Q3 results were in line with expectations, with no surprises. Sales estimates for Q4 is quite high, and if sales proceed according to plan, it should be a record quarter for sales. As we only book sales at the time of the completion of set-up and testing, scheduled Q4 sales mainly comprise equipment already shipped during Q3. Provided that there are no major issues with acceptance by client fabs, we think we should be able to achieve our Q4 sales plan.

Your suppliers are saying that they will increase production volumes substantially, so is your expectation for 10% YoY growth in the WFE*1 market in CY2018 not too cautious? If not, then do you expect your earnings in FY2019 to significantly outperform growth in the WFE market?

We provide products with a focus on areas where we anticipate technological innovation as well as market growth. Etch and deposition are areas where we see both the equipment market size and our own market share growing significantly, not just in the short term but also over the longer term. Regarding FY2019 earnings, you can reasonably expect us to significantly outperform the level of market growth.

Could you talk about the risk factors in relation to the CY2018 WFE market forecasts by application, shown on page 17 of the presentation materials? For example, if NAND prices fall, will this have an impact on capital spending?

Provided that customers are generating profits and cash flow, we have no serious concerns. Our customers are in an oligopolistic market, and as they monitor memory prices with the benefit of past experience, we do not expect an excess level of investment that would cause the market to crash. With regard to NAND, it is actually more beneficial for us if prices fall, because the market will widen. As mentioned in the presentation, we see DRAM growing by 30% YoY in CY2018, even after factoring in the recent slowdown in mobile shipment volumes.
The risks for logic foundries should also be limited. The capex forecast mentioned recently by a leading Taiwan foundry manufacturer is also in line with our view. Of course there are also geopolitical risks, but these are not within our control.

You are expecting WFE capital spending for logic and foundries in CY2018 to be in line with the previous year. By equipment, investment in EUV (Extreme Ultra Violet) exposure tools will rise, so will investment in other equipment fall? Could you talk about the impact on your mainstay coater/developers and etch systems?

Once EUV is introduced, the number of patterning process steps will decrease, to a limited extent. However, some process steps will increase along with miniaturization. Thinking about the sum of these two factors, the etch systems market will expand. Additional functionality is required of coater/developers in order to enhance EUV productivity, so the coater/developers market should also widen.

How do you view CY2018 growth rates in the WFE market by equipment, particularly etch systems? And what was your share of etch systems in CY2017?

The etch systems market is growing the most. Regarding our share of etch systems, since last year our share of DRAM has risen, and in NAND we captured POR*2two customers for the word line isolation (slit) etch process. One of these has already started mass production, and the other will contribute to our FY2019 sales. We believe our market share in CY2017 rose by a few percentage points compared with the previous year.

What is your view of the WFE market in CY2019?

We have not yet looked closely at the outlook for the WFE market in CY2019, but the scale of investment among Chinese customers will increase, and capital spending associated with the introduction of 5G will also get underway. There will be some fluctuations based on customers' investment plans, but we think growth in the WFE market will trend upward toward CY2020.

Extrapolating bit growth from the outlook for 3D NAND production capacity shown on page 17 of the presentation materials, WFE capital spending for NAND in CY2018 looks set to grow considerably more strongly than your forecast. If that happens, could investment undergo a correction in CY2019?

From late-CY2018, infrastructure investment will take shape ahead of the introduction of 5G, and we envisage huge server demand along with the increase in data traffic. As of CY2017, only 9% of server data storage consists of SSDs, so as the adoption of SSDs in server data storage proceeds in the future, we believe that we can expect stable NAND growth.

Compared with October when your Q2 results were released, how has your view of Chinese semiconductor investment changed?

Our view is unchanged. Chinese WFE capital spending is likely to be $9B in CY2018 and $12B in CY2019. Within this, investment by new local Chinese semiconductor manufacturers is estimated at $2B in CY2018 and $3B in CY2019, and in terms of the scheduled supply of equipment, there is also no significant change at present. However, there could well be some upside to this.

Do you have any concerns about wafer supply in relation to the growth scenario you envisage for the semiconductor market?

At present, the supply of wafers is not keeping up with demand, but technological innovation will not stop as a result of this wafer shortage, and customers' investment plans are also unlikely to change significantly.

Cash on hand is above your target level. Could you talk about your approach to M&A? Also, with regard to "flexibly" considering share buybacks, could you describe in more detail the conditions for this, such as the level of cash on hand and your view of the market conditions?

About two years ago, we set out a ¥250B target level for required cash on hand, and this remains unchanged. Our approach to the use of cash on hand is also unchanged, and we regard M&A as one option for investing in growth, focused on semiconductor production equipment and FPD (flat panel display) production equipment. In terms of the use of surplus funds after investing for growth, we are considering share buybacks flexibly, as before. If we speak about the conditions for this, it will no longer be "flexible," so we would prefer not to comment.

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

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.