Earnings Release

Q2 FY2022 Earnings Release Conference Q&A

  • With respect to the WFE*1 market forecast for CY2021, you raised YoY growth rate for logic/foundry investments from 45% to 60%. Is most of the increased portion from mature generations? Also, what will be the ratio of logic/foundry investments between leading-edge generations and mature generations for CY2022?

    Roughly half of the increased portion comes from leading-edge generations, while the remaining half comes from mature generations. As to the ratio for CY2022, we would like to refrain from giving a quantitative answer.

  • What is your forecast for the WFE market in CY2022?

    We are expecting YoY positive growth. While we would like to refrain from giving a quantitative answer, we are expecting YoY increases for all applications. We believe that the widespread adoption of DDR5 in DRAM and the migration to the 170-layer generation in NAND will drive investment. We also expect to see acceleration of investment in logic/foundry, driven by new CPU releases and increased demand in data centers and mobile devices.

  • We are seeing a high level of investment in DRAM in CY2021. Do you have any concerns that those investments will contribute to high-volume production and worsen the supply/demand balance in the DRAM market in CY2022?

    We expect the DRAM market to remain strong in CY2022. Currently, DRAM demand seems partly suppressed due to constraint in end-product production caused by the shortage of logic semiconductor chips. We expect the shortage to be resolved eventually after CY2022 and DRAM demand to increase as a result. Furthermore, full-scale mass production of DDR5 will begin in CY2022, and chip size will increase with DDR5 due to the introduction of on-chip ECCs*2. The amount of DRAM investments required to keep up with bit demand growth is increasing.

  • What is your medium- to long-term forecast for the WFE market?

    It is expected that the semiconductor market will more than double in size compared to CY2020 by CY2030. We believe that the WFE market, which supports the semiconductor market, will also expand in the medium to long term without major adjustments. Our customers have very large investment plans, and so we expect strong inquiries to continue.

  • Some semiconductor manufacturers are receiving government subsidies. Are you concerned that they might make capital investments that exceed actual demand utilizing the subsidies, and thereby worsen the semiconductor supply/demand balance in the short-term?

    Semiconductor manufacturers make disciplined investments that emphasize profits and cash flow while forecasting the semiconductor market. We believe they are making healthy investments in anticipation of medium- to long-term demand.
    Furthermore, many semiconductor technological innovations are expected over the next five or six years. For logic, these include Gate All Around (GAA) and backside PDN (Power Distribution Network); for DRAM, 3D DRAM; and for NAND, further layering. We expect semiconductor manufacturers to continue investing in order to realize these technological innovations while assessing the market demand.

  • Looking back, the WFE market entered an adjustment phase in 1998 after several years of expansion, which resulted in a large number of order cancellations. Do you have any such concerns now?

    We see no signs of that happening now. In the past, semiconductor demand was linked to PC or mobile demand and so the semiconductor market went through repeated cycles of growth and adjustment. Currently, in conjunction with the transition to a data-driven society, semiconductor demand is being driven by data traffic. Going forward, further advancements of ICT and DX will cause an explosive increase in data traffic, which will lead to even greater increases in semiconductor demand. We believe that the WFE market will also grow going forward without major adjustments.
    Furthermore, as I mentioned earlier, our customers are making more disciplined investments than before while forecasting the semiconductor market. This is different than in the past, and we believe it is one of the factors for continuous growth of the WFE market.

  • What do you think is the cause of the semiconductor shortage, which has been such a major problem up to this point? Also, when do you expect it will be resolved?

    Even as semiconductor demand was rising with the transition to a data-driven society, it increased even more with the lifestyle changes brought on by the spread of COVID-19. And although large semiconductor capital investments were required in order to address rising demand in CY2020, capital investment actually slowed across industries due to the impact of various elements such as travel bans and behavioral restrictions, which lead to the semiconductor shortage. Driven by the increase in data traffic due to the spread of IoT, AI and 5G, we are seeing greater increases in semiconductor demand. We believe the semiconductor shortage will last a bit longer. We are working very hard to play a part in resolving the shortage.

  • This marks the third upward-revision in your CY2021 WFE market outlook. I think this is the first time your outlook has changed in this way in one year, what is the background behind this?

    The changes were made because equipment demand is rising in order to normalize the semiconductor supply/demand balance. We are seeing acceleration of WFE investments in all applications, which has led to a net increase in investment over time from the beginning of this year.

  • What caused FY2022 H1 SPE sales to exceed your financial estimates by about 30 billion yen?

    Both new equipment and field solutions contributed to the upturn. Sales of new equipment, mainly for DRAM, and sales of field solutions, mainly for modifications, exceeded our plans.

  • What is the background behind the QoQ decline in FY2022 Q2 gross profit margin and why it exceeded your financial estimates? Also, why have you raised your financial estimates for the FY2022 H2 gross profit margin?

    Our FY2022 Q1 gross profit margin was high due to the impacts of our customer and application mixes. Although FY2022 Q2 gross profit margin fell QoQ accordingly, the negative factor of the mixes was not as bad as we expected, so the margin landed above our financial estimates in FY2022 Q2.
    We plan to further raise our gross profit margin toward achievement of our Medium-term Management Plan, and are definitely moving toward higher profitability. We plan to sustain a gross profit margin in FY2022 H2 as well, and so we have raised our estimates for H2.

  • Have you considered the component procurement risk when revising your FY2022 financial estimates upward?

    We did take component procurement risk into consideration. We are working hard to achieve our estimates with the cooperation of our partner companies. We will continue to work on strengthening our supply chain to realize reliable component procurement so we can respond to increasing equipment demand.

  • My impression is that TEL does component procurement better than other companies. What sort of efforts do you take to achieve this?

    Although we also have some degree of difficulty in component procurement, each of our four plants in Japan holds a Production Update Briefing every six months to ensure good communication with our partner companies so that we can meet demand. Additionally, we recognize that most of our partner companies being domestic companies based near our plants works in our favor compared to our overseas competitors when it comes to component procurement.

  • As the WFE market grows, I believe that component procurement may become even more difficult over the medium to long term. Are you making any efforts to strengthen your supply chain with a view three to five years out?

    We established our Corporate Production Division under the leadership of Corporate Director Sasaki Sadao to strengthen our procurement capability. We have begun looking into how to build a strong supply chain even under future business environments where procurement amounts exceed 1 trillion yen.

  • How long is your visibility of TEL's financial performance?

    As equipment demand increases, the timing of receiving orders from our customers is coming forward. For some equipment, we have already received LOIs (letters of intent) for the equipment to be delivered in the fall of CY2022. We also know our customers’ fab investment plans, and are forecasting demand up to two years out.

  • What is the upper limit of sales you can handle with your current production capacity?

    We have steadily increased our production capacity over the past three to four years. We built a logistics building and strengthened production lines at our Miyagi plant. We also built production buildings at our Yamanashi and Tohoku plants, expanding their capacities by 50% and 100%, respectively. With our current production capacity, we can handle annual net sales of over 2 trillion yen.

  • Are your equipment manufacturing lead times getting longer?

    Although component procurement lead times are getting longer, we are working to maintain manufacturing lead times by acquiring orders from customers early.

  • Are your modification sales of field solutions being suppressed by the strong demand for new equipment? Also, do you expect increased new equipment shipments will lead to further growth in field solutions going forward?

    In Q2 of FY2022, modifications contributed significantly to the increase in field solutions sales. With inquiries for new equipment staying strong, modifications are utilized in some cases as an alternative when new equipment will not be ready in time. Accordingly, we are also seeing strong inquiries for modifications.
    Our current installed base is about 78,000, and that number is increasing at a pace of about 4,000 systems per year. Field solutions, where delivered equipment generate new revenue, such as from parts and system upgrades, relocations, modifications, remote services, etc., will continue to grow steadily going forward.

*1 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.
*2 ECC (Error correction code): Function that detects and corrects data corruption

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