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Edited Transcript of 6857.T earnings conference call or presentation 24-Jul-19 7:00am GMT

Q1 2020 Advantest Corp Earnings Presentation

Tokyo Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Advantest Corp earnings conference call or presentation Wednesday, July 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Atsushi Fujita

Advantest Corporation - CFO, Executive VP of Corporate Administration Group, Managing Executive Officer & Director

* Kimiya Sakamoto

Advantest Corporation - Executive VP of Sales Group & Managing Executive Officer

* Yasuo Mihashi

Advantest Corporation - Executive VP of Corporate Relations Group & Managing Executive Officer

* Yoshiaki Yoshida

Advantest Corporation - CEO, President & Representative Director

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Conference Call Participants

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* Hideyuki Maekawa

Crédit Suisse AG, Research Division - Research Analyst

* Mikio Hirakawa

BofA Merrill Lynch, Research Division - Research Analyst

* Takeo Miyamoto

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst

* Takeru Hanaya

SMBC Nikko Securities Inc., Research Division - Research Analyst

* Tetsuya Wadaki

Nomura Securities Co. Ltd., Research Division - MD, Senior Research Officer and Analyst

* Toru Sugiura

Daiwa Securities Co. Ltd., Research Division - Research Analyst

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Presentation

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Yasuo Mihashi, Advantest Corporation - Executive VP of Corporate Relations Group & Managing Executive Officer [1]

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Good afternoon. Thank you very much for your patience, and thank you for participating in Advantest Corporation's FY 2019 First Quarter Information Meeting Conference Call. There are 4 attendees today: President and CEO, Yoshida; CFO, Fujita; Sakamoto, Sales Group EVP; and myself, from the Corporate Relations Group, Mihashi. For today, Fujita will report to you our financial results for FY 2019 first quarter, followed by Yoshida explaining the outlook for FY 2019. Then we would like to answer questions from the participants. We are scheduled to conclude at around 5:00 p.m.

Presentation materials for today have been uploaded to the TDNet as of 3:00 PM. We have also uploaded these materials on our homepage. However, I believe that due to some network glitches, some of you may not have been able to access. If you enter our homepage and access the IR Library tab, you should be able to see these materials. We appreciate your understanding.

Prior to this conference call, we would like to state that this presentation contains forward-looking statements based on our current projections. These statements are all subject to risks and uncertainties, and therefore, actual results may differ. Let us now begin the presentation.

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Atsushi Fujita, Advantest Corporation - CFO, Executive VP of Corporate Administration Group, Managing Executive Officer & Director [2]

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This is Fujita. I would like to outline to you our FY 2019 first quarter results summary. Please turn to the next page. I am on Page 4, and this is the summary of our first quarter results. Three months ago, we anticipated that orders, sales and profits would all decline. However, thanks to steady demand for SoC testers in 1Q, we were able to achieve higher orders, sales and income than in Q4 of the previous year. Year-on-year, all figures other than gross profit decreased due to the downturn in the memory market compared to 1 year earlier, when the market was more robust.

Backlog was JPY 74.6 billion. Despite uncertainty regarding the semiconductor market and the future of the global economy, this was a positive start towards achievement of our full year forecast. There were no major changes in the foreign exchange environment during 1Q. On the following pages, 5 to 7, I will explain the details of our order and sales results.

Please turn to the next page. This depicts orders by segment. As for Semiconductor and Component Test Systems, an 8.3% increase quarter-on-quarter, standing at JPY 49.9 billion. Demand of testers for application processors and other semiconductors used in smartphones grew, lifting SoC tester orders to JPY 43.6 billion, a record quarterly high. One of the drivers for this new record was growth in demand for 5G-related devices. We had originally anticipated some 5G investment in the first half, but in fact, several semiconductor manufacturers accelerated their development or preparation for mass production of 5G devices.

Orders for memory testers was JPY 6.3 billion.

For Mechatronics Systems, there was a 22.1% decline quarter-on-quarter, resulting at JPY 7.2 billion. This decline was due to the sluggish growth in memory-related investments and a rebound decrease in nanotechnology product orders following a robust 4Q.

In Services, Support and Others, JPY 8.8 billion, a 15.1% decline quarter-on-quarter. Orders for annual maintenance contracts increased last quarter, leading to a rebound decline in 1Q. Let us now proceed to the following page.

Page 6 shows sales by segment. Sales in Semiconductor and Component Test Systems increased 2.1% quarter-on-quarter to JPY 50.9 billion. As with orders, sales of smartphone-related IC Testers grew leading SoC tester sales to a quarterly record high of JPY 44.8 billion. Sales of memory testers were at JPY 6.1 billion. Sales of Mechatronic Systems were at JPY 6.6 billion. Sales of Services, Support and Others grew 18.5% quarter-on-quarter to JPY 8.6 billion. Sales of this segment increased from the previous quarter due to the full consolidation of the system-level test business for 3 months, which was acquired from Astronics Corporation in February.

Please turn to the next page. As for orders by region. In Taiwan, test demand for 4G and 5G smartphone SoCs implemented on the latest process nodes increased, and orders from Taiwan increased overall as a result. On the other hand, there was a stronger sense of wait and see among Taiwanese display-related customers and orders for display driver IC testers decreased compared to the previous quarter.

In China, in the previous quarter, we saw the increased demand with the launch of Chinese domestic semiconductor supply chain. But in this first quarter, orders were not very substantial.

As for FY 2019 first quarter sales by region, in South Korea, although memory tester demand was sluggish, smartphone-related SoC tester business in the nation has been robust for the past few quarters. First quarter saw a steady sales of testers for high-end SoCs using advanced process nodes in addition to testers for smartphone-related devices, such as image sensors and power management ICs.

Please turn to the next page. This slide shows operating income and profitability in the first quarter. Gross margin was 59.5%. It grew to almost 60% due to a positive change in our product mix. The ratio of sales for high-end devices using advanced process nodes increased. SG&A expenses were JPY 24.2 billion, staying flat from the previous quarter. Operating income was JPY 15.2 billion, and operating margin improved 7.0 points from the previous quarter to 22.9%.

Please turn to next page. This slide shows R&D expenses, CapEx and cash flow. R&D expenses were JPY 9.8 billion, flat quarter-on-quarter. Depreciation and amortization was JPY 2.4 billion, up JPY 1.1 billion quarter-on-quarter, as Advantest began to apply the new IFRS lease accounting standards in the first quarter. In addition, from the first quarter, we began posting amortization of intangible assets included in the acquisition price of the SLT business we acquired from Astronics in February.

As for cash flow, in the first quarter, there were seasonal demands for funds following the end of the corporate financial year, holding free cash flow to only JPY 1.8 billion.

Please turn to next page. This is the balance sheet as of June 30, 2019. Total assets were JPY 310.8 billion, and the cash and the cash equivalents were down JPY 8.6 billion from the end of the previous fiscal year to JPY 111.4 billion. Property, plant and equipment was up JPY 9.5 billion from the end of the previous fiscal year to JPY 40.3 billion. In accordance with the new IFRS standard on leases, JPY 9.9 billion in right-of-use assets is classified under property, plant and equipment from the first quarter.

Goodwill and intangible assets were at JPY 25.1 billion. The allocation of the acquisition price of the SLT business acquired from Astronics in February is not yet complete. It is expected to be incorporated at the end of September.

Equity attributable to owners of the parent was JPY 199.4 billion, and this ratio went down 1.0 point from the end of the previous fiscal year to 64.2%.

This concludes my presentation. Thank you.

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Unidentified Company Representative, [3]

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Next, President and CEO Yoshida will illustrate our FY 2019 outlook.

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Yoshiaki Yoshida, Advantest Corporation - CEO, President & Representative Director [4]

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Thank you. This is Yoshida. Allow me to explain the outlook for FY 2019. Please refer to Page 12. In April, we explained that we expect the company's performance to decline in FY 2019 compared to FY 2018 due to the sense of uncertainty in the global economy as a result of the trade dispute between the United States and China and a slowdown in demand for end products and demand for semiconductors. The deterioration of the semiconductor market is, in fact, proving to be severe, especially in memory testers. However, although semiconductor test volumes may not increase, demand for testers will increase due to the higher performance of semiconductors. This factor emerged again in the first quarter.

Thanks to the technological enhancement of smartphone SoCs, which boosted SoC tester demand, our results in 1Q exceeded initial expectations. However, it is difficult to predict demand with regard to whether this positive performance will continue since the future environment is still uncertain. Therefore, we feel that there'll be some risk in reflecting this positive performance of 1Q in our full year forecast. Therefore, the full year forecast announced in April will remain unchanged at this time. We will carefully review our forecast once there is greater certainty around the outlook for orders in 2Q and 3Q.

As described at the beginning of the fiscal year, we plan to increase investment in SEs and other personnel and increase development and capital investment, aiming to retain and expand our share gains in the previous fiscal year.

Next, I would like to explain our outlook by segment. Please move on to the next page.

Page 13 depicts our full year SoC tester business outlook. The general trend of advances in performance of the semiconductors, underpinning the level of demand for SoC testers will continue unchanged in FY '19. Sales in FY '19 will continue to depend mainly on testers for semiconductors, facilitating the increased performance of smartphones, such as application processors. The demand for end products is by no means strong, and our outlook is that business for display driver ICs may be less than expected at the start of the fiscal year. However, growth in demand for testers for advanced process nodes are exceeding our initial plans. We have increased our revenue forecast for SoC tester business this fiscal year by JPY 17 billion, and it is now JPY 130 billion.

While 5G-related test business made a gradual start last year, more orders than anticipated were received from several major semiconductor manufacturers during the first quarter. This is only a foretaste of the expansion of 5G-related demand expected to ramp up in calendar year 2020, and we expect a larger positive impact from the growth of commercial 5G services and the ramp-up of 5G semiconductor mass volume production projected to occur in the future.

This slide describes memory testers. Due to adjustments of memory inventory, demand for memory testers has declined. As demand is expected to stay weak for longer than initially anticipated, we have lowered our sales forecast for memory testers this fiscal year. From the initial sales forecast of JPY 40 billion, we reduced the forecast to JPY 30 billion, down by JPY 10 billion. We had originally expected a recovery in the second half, and this remains unchanged. But at present, we expect the recovery in demand for testers to come in FY '19 fourth quarter from January to March. However, regarding DRAM, there are clear technological drivers not easily affected by memory market conditions, such as a shift to DDR5 and an increase in demand for high-speed products for HPC. We believe that high-speed DRAM tester demand will continue to support tester orders for the foreseeable future.

Page 15 shows remaining 2 businesses. With the prolonged slowdown of tester investment by memory customers, we have lowered our forecast for the Mechatronics Systems segment to JPY 32 billion, down by JPY 4 billion.

With regard to Services, Support and Others, we expect solid sales in field services. Unfortunately, however, due to the slow recovery of data center investment, we have revised our sales forecast for the existing SSD system-level test products. And our forecast for this segment was lowered to JPY 38 billion, down JPY 3 billion from the initial forecast. However, we expect sales in this segment to increase year-on-year due to increase in -- of the SLT business acquired from the Astronics in February.

Astronics' system-level test products are expected to reinforce our SLT business by targeting SoCs. We have already received inquiries from many companies, including global leading telecommunications and automotive application companies and we are looking forward to the development of this business.

This slide is for summary. Trade disputes stemming from protectionist policies are escalating, and there is an increasing sense of uncertainty in the semiconductor market and the semiconductor production equipment market. Supported by the increasing SoC tester investment, the first quarter results exceeded initial expectations, despite the memory market slowdown. Increased activity in the semiconductor industry toward volume production of 5G semiconductors also made this a positive quarter in terms of medium- to long-term trends in the tester market.

Although we have expectations for a recovery in the market in the second half of the year, we are keeping our earnings forecast unchanged at this time, pending confirmation of the order trends for the second and the third quarter. The tester market is leveling off but Advantest's customers are moving ahead with development of a wide range of advanced devices, and technology is evolving. We will strive to achieve the goals set forth in the mid- to long-term management policy defined under our Grand Design by increasing our market share. This concludes my presentation.

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Unidentified Company Representative, [5]

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This will conclude our explanation of financial results for FY 2019 first quarter and FY 2019 outlook. From here onwards, let us move on to the Q&A session.

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Questions and Answers

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Unidentified Company Representative, [1]

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First, from Nomura Securities, Mr. Wadaki. Please.

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division - MD, Senior Research Officer and Analyst [2]

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I believe I can ask 2 questions. So my first question pertains to the memory tester outlook. The anticipated major investments into memory by Korea and Japan have been postponed, which has more or less dampened expectations, I believe. So can you elaborate on this outlook. And also, in China, I also believe that you have plans to make large investments into local players, but regardless of these conditions are things tight. So the first question is considering these factors, what is the outlook for memory testers?

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Kimiya Sakamoto, Advantest Corporation - Executive VP of Sales Group & Managing Executive Officer [3]

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This is Sakamoto from Sales, and let me respond to this question. As for the memory market, as Yoshida explained, it has declined based on our initial expectations. Front-end memory tester demand has declined quite dramatically. So I would like to highlight this first point. And as you have just pointed out, this trend is observed both in Korea and China. As for back-end investments, this is ongoing and especially for high-speed products, DDR4, LPDDR4, and investments in these areas are continuing. Our strengths are in high-speed products and this business is on an ongoing trajectory.

Now for FY 2019 memory tester outlook, I believe, is the question. So may I first respond by saying that for calendar year 2019, as of April, TAM was disclosed to be $550 million to $650 million. And this number remains unchanged. But depending on the future competitive landscape and market conditions, which we will closely monitor, we plan to announce a tentative updated forecast in 2Q. For NAND, we believe that the tester demand globally has declined, and the full year forecast projected in April, we feel will deteriorate by perhaps 20% to 30%. So we do realize that such a risk is in horizon, and TAM will also decrease at the scale.

Now as for China memory testers, aside from the actual demand in order to expand their business, the intent is to make strong investments, but needless to say, we will keep close watch and embrace business opportunities as well.

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division - MD, Senior Research Officer and Analyst [4]

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So I see. So for the postponed investments into flash memory in Korea and Japan, around when do you think these postponed investments will start?

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Unidentified Company Representative, [5]

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So our fiscal year 4Q, that is 2020, January to March time frame, we hope to see a start.

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division - MD, Senior Research Officer and Analyst [6]

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My second question, this regards to market conditions as well. Taiwanese OSATs with locations in China are now impacted by the U.S.-China trade friction and plans to transfer sites elsewhere are underway. What is the level of demand expected from such trends?

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Unidentified Company Representative, [7]

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May I clarify the question. OSATs located in China transferring elsewhere, what would be the expected demand from such a trend, would that be the question?

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division - MD, Senior Research Officer and Analyst [8]

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Yes. So let's say, Powertech. They have plans to move their production site to Taiwan and Taiwanese high-tech manufacturers with sites in China, there are dozens of such companies that are planning to move their sites away from China. So I'm assuming that you may benefit from this trend.

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Unidentified Company Representative, [9]

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So I believe that you're asking whether we benefit from a change in the supply chain.

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division - MD, Senior Research Officer and Analyst [10]

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Exactly.

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Unidentified Company Representative, [11]

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Regardless of the production location, we assume that there will be no major change in demand. And expected uptake in testers in China, this demand shifting to Taiwan, the Philippines or Malaysia, we do not believe that this will contribute to a plus alpha in demand. The Chinese government is saying that they will penalize OSATs that move off China. So I'm assuming that the OSATs will leave their testers as is in China and newly procure equipment or testers outside of China, which may lead to a promising dual investment.

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Tetsuya Wadaki, Nomura Securities Co. Ltd., Research Division - MD, Senior Research Officer and Analyst [12]

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You may not have any leads yet?

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Unidentified Company Representative, [13]

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As of now, we do not have such inquiries.

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Unidentified Company Representative, [14]

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Next from Merrill Lynch Japan Securities, Mr. Hirakawa.

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Mikio Hirakawa, BofA Merrill Lynch, Research Division - Research Analyst [15]

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My name is Hirakawa from Merrill Lynch. I do have 2 questions. Now my first question regards the Q1 orders for SoC testers. And I understand that the smartphone is contributing to the uptake. So can you cite the actual increase in order numbers? And also, in orders, the 5G smartphone, both for development and mass production, what was the ratio versus your overall financials?

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Unidentified Company Representative, [16]

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So SoC overall uptake, if I may, for Soc orders, a JPY 6 billion uptake versus our initial plan. But to what extent is smartphone-related is extremely difficult to deem. But I can say that for 1Q, there has been a major fluctuation in our supply chain, and there has been shifts in the supply chain as well. So for instance, litigation settlements and the U.S. entity list are some examples. But based on this backdrop, I believe I can say a large portion pertains to smartphones. But let me add that the industry has yet to reach 5G mass production level. So 5G-related investment is on the rise, but the mass production level is for the future.

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Mikio Hirakawa, BofA Merrill Lynch, Research Division - Research Analyst [17]

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And let me state my second question. For 1Q SoC orders, again this is on the increase versus last year. So for 2019, when we look at the onset for this year, SoC testers, I believe, will further grow even more and I think the orders give us this expectation. So for 2019 share outlook, how do you deem this? And in relation to the share outlook, at the beginning of the year, you did mention a more fierce competition. So I believe that you set a significant buffer for gross margin. Now has your gross margin shrunk due to the severe competition?

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Unidentified Company Representative, [18]

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As for market share for FY 2019, according to the tester tight market trends and if you look at our outlook, we did grow our share during FY '18, and we stand at a position where we can sustain and improve. For gross margin, I believe, back in April, I explained that we had increased our share dramatically, and hence, there may be heightened competition as a result. However, it does turn out that SoC did not have major clashes. And as a result, gross margin level has not deteriorated all that much.

Now Mr. Hirakawa, you questioned the SoC order uptake and I did respond that it was JPY 6 billion. Let me amend this number. Compared to our initial SoC outlook, there has been an uptick of JPY 15 billion just in Q1. So for the first quarter, the order level has increased dramatically.

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Mikio Hirakawa, BofA Merrill Lynch, Research Division - Research Analyst [19]

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So let me confirm. So although it may be difficult to deem the exact portion related to smartphones, a large amount within this JPY 15 billion is attributed to smartphones. It's this understanding correct?

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Unidentified Company Representative, [20]

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Yes, I do believe so.

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Unidentified Company Representative, [21]

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Next from SMBC Nikko Securities, Mr. Hanaya, please.

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Takeru Hanaya, SMBC Nikko Securities Inc., Research Division - Research Analyst [22]

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This is Hanaya speaking. Let me state my first question. For tester full year sales outlook, I believe that the semiconductor test systems have been revised upwards. However, overall profit outlook remains the same. I understand that 2Q, 3Q, you have taken a conservative approach keeping an eye on order level. So amongst testers, SoC demand will rise, I believe, and that has been reflected in your numbers. However, overall profit outlook remains unchanged. So does this mean that cost-wise, you will utilize allocated costs. However, amortization, CapEx, R&D, labor costs unchanged or perhaps other cost increases are occurring. Hence, no change in the profit outlook.

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Unidentified Company Representative, [23]

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That is quite a tough question for the lack of words. So our investment for developments and CapEx are on schedule. And there are no major changes in our expenses as well. So simply put, as you have just mentioned, if the SoC ratio increases, gross margin should rise as well. And I believe that this will be the rule of thumb. However, I have mentioned that price competition has yet to emerge. And at the same time, there are still uncertainties of ForEx impact. So for now, the full year profit outlook remains unchanged. There may be comments saying that perhaps this is a conservative approach and perhaps it is. But again, we will not change our outlook at this point in time.

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Takeru Hanaya, SMBC Nikko Securities Inc., Research Division - Research Analyst [24]

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Now my second question is more of a confirmation. The memory tester recovery timing that you illustrated for fiscal year 4Q, the January-March period, I believe, was cited. Now previously, I think you mentioned it should be around October. So there has been the shift in timing?

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Unidentified Company Representative, [25]

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Yes. So 3 months or perhaps more. There has been a shift in timing. So order recovery will begin in 4Q. However, on a daily basis, memory prices fluctuate, depending on the Japan-Korean relationships, and it's very difficult to forecast, but we do believe that orders will be recovering in 4Q.

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Unidentified Company Representative, [26]

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So next, I would like to ask Mr. Sugiura from Daiwa Securities.

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Toru Sugiura, Daiwa Securities Co. Ltd., Research Division - Research Analyst [27]

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This is Sugiura from Daiwa Securities. So a similar question, if I may. My first question pertains to SoC testers, and I believe that underpinning the surge is a smartphone. But major smartphone manufacturers have now been included in the entity list. So perhaps this was a onetime surge in demand for this quarter. So for 2Q and onwards, there will be a curbing in demand or regardless, is the demand base strong and 2Q and onwards, there should be no curb in the demand? So I do realize that this is a short-term perspective, but again, for a smartphone tester outlook, if you can give us a short-term outlook, please?

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Unidentified Company Representative, [28]

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Let me take your question. With a major smartphone company that you referred to, we do have some businesses. But actually, not much. And with semiconductor design companies and affiliated companies, we do not have direct businesses, in particular. Therefore, we are indirectly affected by the turbulent move in the smartphone market. But our sales are not affected neither negatively nor positively.

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Toru Sugiura, Daiwa Securities Co. Ltd., Research Division - Research Analyst [29]

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I'm aware that you don't have direct business with them, but your business is through test house and OSAT. Do you think the current demand is coming from surge happening at the test house and OSAT? Or do you think that the surge will continue, and the strong orders are sustained in the second quarter and onward? Would you comment on the perspective on the entire supply chain?

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Unidentified Company Representative, [30]

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I don't think the strength is supported by the surge. But the key driver for the upside of SoC sales in the first quarter is 5G. We are receiving orders from our major customers for engineering applications. But at this moment, we don't think the upside will be sustained in the second and the third quarter. However, around the end of the year, they are proceeding to the phase of device volume production going through engineering applications. Therefore, throughout the year, I think that we can expect considerable orders for 5G-related SoC at this point of time. Inclusion in entity list happened in May, so we didn't observe the surge related to that. Orders in the first quarter was strong across the board, not simply boosted by the single company. Expecting that momentum throughout the year will be too optimistic. And we think SoC might slightly fall in the second quarter and onward.

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Toru Sugiura, Daiwa Securities Co. Ltd., Research Division - Research Analyst [31]

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Secondly, as for the recovery in memory testers, you said that it will be in the fourth quarter. Out of NAND and DRAM, on which do you have higher expectations? You refer to South Korea and Japan, then you might expect more on NAND. And I'd like to have the confirmation on that point. And if we see recovery, will it be driven by smartphones or data centers? How do you see the background of the recovery?

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Unidentified Company Representative, [32]

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Thank you. As for recovery in DRAM, and DRAM and NAND, as explained before, recovery in the high-end DRAM would come first for us in the fourth quarter. High-end DRAM products, including DDR5 and LPDDR 5, as mentioned, and HBM 2 will be growing from the fourth quarter and onward. They will be backed by the bit growth of memory for smartphones and high-performance computing. As for NAND, as of today, we recognize that recoveries of GAFA and other major server businesses are slow. And therefore, the recovery from the fourth quarter, we will start with DRAM, followed by NAND.

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Toru Sugiura, Daiwa Securities Co. Ltd., Research Division - Research Analyst [33]

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So just for confirmation, are you talking about the recovery in orders? Or are sales picking up from the fourth quarter?

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Unidentified Company Representative, [34]

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Orders will come back first. Definitely, orders will come first.

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Toru Sugiura, Daiwa Securities Co. Ltd., Research Division - Research Analyst [35]

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Will orders be picking up from the fourth quarter?

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Unidentified Company Representative, [36]

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Yes.

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Unidentified Company Representative, [37]

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Next question is from Mr. Miyamoto, Mitsubishi UFJ Morgan Stanley Securities.

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Takeo Miyamoto, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [38]

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I'm Miyamoto, Mitsubishi UFJ Morgan Stanley Securities. Firstly, gross margin in April to June improved notably from January to March. Would you give us a breakdown by factor for improvement? Gross margin in the first quarter was strong due to better product mix, as explained with more of the better margin products. I understand that SoC tester strong growth. But does it explain all? For example, were there any one-off or special factors in January-March period due to which the April-June apparently looked better comparatively?

In January-March quarter, since this is the fourth quarter of the year, there was an inventory variation loss for the end of the fiscal year. But in this first quarter, equivalent inventory variation loss was not posted. That said, the impact of product mix improvement was larger, is that right?

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Unidentified Company Representative, [39]

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Exactly.

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Takeo Miyamoto, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [40]

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Secondly, you made the corrections on the orders upside, JPY 15 billion. You might have thought that the first half would see some upside. And how much of your expected upside has already materialized? Qualitative comment is also welcome.

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Unidentified Company Representative, [41]

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As mentioned before, as for the upside JPY 15 billion in SoC, it was above the initial plan by JPY 15 billion.

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Takeo Miyamoto, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [42]

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Was all the upside expected in the first half already materialized in the first quarter? Or would you expect more to come?

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Unidentified Company Representative, [43]

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Let me check for a second. There was some shift. For the entire first half, upside over the plan will be about JPY 15 billion.

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Takeo Miyamoto, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [44]

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So you mean that upside in the first quarter is almost the same as the expected upside in the first half, is that right?

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Unidentified Company Representative, [45]

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Well, yes.

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Takeo Miyamoto, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [46]

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In other words, you are not revising the initial forecast for the second quarter at this moment, is that right?

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Unidentified Company Representative, [47]

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That's correct.

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Unidentified Company Representative, [48]

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Next question is from Mr. Maekawa, Crédit Suisse Securities.

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Hideyuki Maekawa, Crédit Suisse AG, Research Division - Research Analyst [49]

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I'm Maekawa, Crédit Suisse Securities. I have 1 question on 5G. Trying to put things in perspective, I'm slightly confused. In the Q&A session regarding SoC on JPY 15 billion upside, for the question from Mr. Hirakawa, you said that investment for 5G is not so substantial and engineering application of 5G has strong demand. The upside is JPY 15 billion. And for display, you made downward revision, presumably by about JPY 20 billion. Is all JPY 15 billion upside relevant to 5G? Or was there any contribution by the front-loaded demand by the entity listing of HiSilicon of Huawei. I'd like to have more of the quantitative comments on 5G. And you commented on engineering applications, but in your companies, the track record of demand growth drivers, we seldom saw the contribution of R&D phase, but rather, involving production phase of semiconductors. Testers tended to grow. But this time, unlike the previous cases, was engineering demand growth so notable to deserve description as a key driver?

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Unidentified Company Representative, [50]

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Sorry for causing some confusion. Regarding 5G-related businesses, the most advanced 5G baseband and APU products, which require the 7 nanometer, based on the latest design rules are not yet in the volume production phase but in the engineering phase on the side of customers. And as Yoshida explained, with the technological evolution, semiconductor manufacturer, their manufacturing years are growing increasingly challenging and we share that sense. Engineering application require more testers than before. Then you may wonder whether that explains all of JPY 15 billion upside. And actually, that is not the case. Inquiries from high-performance computing related customers on volume production nodes have been on the rise. And that makes parts of JPY 15 billion upside.

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Hideyuki Maekawa, Crédit Suisse AG, Research Division - Research Analyst [51]

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Then can I take a guess, majority of JPY 15 billion is from 5G demand but it is also supported by HPC?

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Unidentified Company Representative, [52]

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Yes, volume production of AI network-related products make contributions as well.

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Hideyuki Maekawa, Crédit Suisse AG, Research Division - Research Analyst [53]

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You didn't see major growth in LTE-related products this year?

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Unidentified Company Representative, [54]

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Excuse me, what related?

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Hideyuki Maekawa, Crédit Suisse AG, Research Division - Research Analyst [55]

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LTE-related.

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Unidentified Company Representative, [56]

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Are you asking about the additional businesses in LTE-related products? Are you referring to the surge that was questioned before?

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Hideyuki Maekawa, Crédit Suisse AG, Research Division - Research Analyst [57]

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Yes.

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Unidentified Company Representative, [58]

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We don't see the direct impacts, but amongst smartphone makers and the chipmakers who are supplying to smartphone makers, intensified competition might have pushed up demand. I'm not sure whether that should be regarded as surge. South Korean, American and Chinese makers are striving to increase their respective market share and seem to be expanding production and accelerating development.

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Hideyuki Maekawa, Crédit Suisse AG, Research Division - Research Analyst [59]

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I see. As a follow-up question on 5G, in the previous information meeting, you said that net growth of 5G market would be from $200 million to $400 million. But given the upside of 5G orders this time, though it is in initial stage, are you going to revise up the previously mentioned $200 million to $400 million of 5G market expansion? Or do you think that this is a growth of short term and the long-term market perspective remains unchanged?

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Unidentified Company Representative, [60]

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I said that only in the initial stage, 5G market growth will be $200 million to $400 million. As the industry is in the initial stage, our perspective remains almost unchanged from the initial forecast of April. But we see some acceleration of the investment. And that was reflected in the first quarter results. 5G-related devices will continue to grow steadily over the long term, with the expansion of applications. It will continue to grow over years. Industry is not in the volume production phase, but in the production sample stage. We are seeing that demand. Therefore, with device diversification in 2020 and '21, we can expect strong volume growth of device. And we are feeling customers' needs for the reinforced engineering support.

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Unidentified Company Representative, [61]

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Thank you very much. We are receiving more questions, but we are running out of time, so we'd like to close Q&A session with this. Thank you very much for joining us for FY 2019 the first quarter information meeting despite your busy schedule.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]