6857.T FY2027 Q2 Earnings Call Transcript
Date: 2026-10-28
Source: Financial Modeling Prep

Conversation:
Unknown Executive: [Interpreted] We'd like to have first question from Mr. Nakamura of Goldman Sachs Japan.
Shuhei Nakamura: Very strong results. So hats off to the management team. My question is related to SoC testers. You raised your SoC tester revenue outlook quite substantially compared to your July forecast. Just wanted to understand what's driving this upward revision for SoC? Is it mainly coming from GPU, ASICs or core F CPU? And also, you mentioned that you're expanding your production capacity to 10,000 units at an accelerated pace compared to your original plan. Just wanted to understand when exactly do you expect to reach this 10,000 units of SoC tester capacity?
Douglas Lefever: Thank you, Nakamura-san. Thank you for those questions. Sorry, first translation. [Foreign Language] Now I'll go. Sorry for jumping on. To answer the first question, Nakamura-san, really across the entire device segments within the compute market, we're seeing elevated demand. So for GPU and then for custom ASIC, definitely, those are still running very hot. But then probably the biggest factor is the CPU business. I think the industry did not foresee the amount of CPU demand that would go along with agentic AI. And so that is really a third layer now on top of GPU and custom ASIC. On the production capacity side, we originally said by the end of fiscal '28 for our 10,000 systems, not really prepared to give an exact date for the 10,000 systems, but it has to be accelerated pretty significantly given the demand, and we have high confidence that we'll be able to do that. So I think we'll be able to pinpoint that timeframe probably in the next quarter or so. [Foreign Language]
Shuhei Nakamura: Just for a quick follow-up. You mentioned CPU as a third pillar of strong server demand. Is it mainly driven by the CPU volume that we're seeing? Or is it a longer test time? I think you used to mention that CPU test times are not as long as for GPU or ASICs, but I just wanted to see if you're seeing longer test times for CPU as well. [Foreign Language]
Sanjeev Mohan: Nakamura-san, this is Sanjeev Mohan. So you're correct. The test times for CPU are not as large as GPU or custom ASICs in some cases, but they're also not small either. They're actually pretty significant. But as Doug mentioned, the volumes of the server devices is quite large, driven by Agentic AI. So -- and also for inferencing, the ratio of CPUs to GPUs have gone up as well. So combining all those factors, the CPU is providing quite a boost to the ATE results. [Foreign Language]
Unknown Executive: [Interpreted]. Next, I would like to ask Mr. Shimamoto of Okasan Securities to ask a question.
Shimamoto Takashi: [Interpreted] My question is concerning your prospect for the tester market TAM for year 2027. You mentioned that the upcoming 2027 environment is really favorable. But what are the drivers to actually lead this kind of the growth further? And it is possible for you to actually share with us some quantitative growth rate, if you know some and share with us.
Douglas Lefever: Thank you, Shimamoto-san. Yes, we won't quantify completely until January in our third quarter call as we normally do. But I do want to give you a little bit of information for your question. In the last couple of years, the ATE TAM CAGR has been about 50% or a little above 50%. And so we don't see that slowing down, and it's going to be led by the same factors, GPU, custom ASIC and CPU. And so we see the similar drivers as this year just with continuing growth. We also can look at some of the statements from our customers about their expectation for year-over-year, both with the fabless customers we have and also the foundry partners who are looking at the CAGRs of mid- to high 50s all the way through '29. So I think we feel quite confident that the TAM will be in line with the previous years and potentially even larger. [Foreign Language]
Unknown Executive: [Interpreted] Next, we'd like to ask Mr. Wadaki from SBI Securities Company to ask a question.
Tetsuya Wadaki: [Interpreted] I would like to ask you about the growth, the possible growth of tester market. You mentioned that the kind of prospect is visible for next 2 years or so, but my hunch tell me that the market is continuing to grow for another 4, 5 years. There's some reason to my hunch that is the CPO development. 2 days ago, there's articles about the CPO and CPO requires quite long the testing times as equivalent to that of chiplet. Otherwise, that there's the risk of the product may be discarded. So the CPO development is one reason. The other reason is that Terafab, the test market, because of those 2 reasons, I would think that the tester market will grow for another 4, 5 years. And what is your perspective?
Douglas Lefever: Thank you, Wadaki-san. On the question of CPO, yes, you're right. The test times are quite lengthy in order to guarantee good yields for the optical engines. And so that does give quite a bit of a tailwind for that part of the business. We've said in the past that we see a double or tripling every year for the next couple of years, getting to somewhere in the $1 billion ATE market size, which is great. It's great growth. And we're excited about that, and we're participating in all the insertions. But still compared to the overall SoC market that's above $11 billion and growing also totally at a 50% plus CAGR. It's still going to be relatively small compared to the rest of the market. But I believe it will be something that will be a bigger part of our business in the foreseeable future. I happen to agree with your views also on the 4 to 5 years. We're not making any kind of disclosures about our view. We will be releasing our Mid-Term Plan 4 in the May time frame, and that will give some visibility out into '28 and through '29. But I actually share some of your conviction about the upside. Maybe I'll pause there and let the translator speak. [Foreign Language] Okay. And on to the question about Terafab. Obviously, we can't make any detailed comments about customers and they fall into that category. But the one thing I will say is that it's very real. And I think it will lead to meaningful business in the future. So I think there's a genuine need for additional capacity in the world, both SoC and memory. And so we're excited about the potential prospects of that business for Advantest. [Foreign Language]
Unknown Executive: [Interpreted] Next, we'd like to ask Mr. Yoshida from CLSA Securities Japan.
Yu Yoshida: I would like to ask about your market share outlook. 3 months ago, you explained that your SoC tester market share will be going up to 70% or more in the future. Do you have a sense that you can reach the level of this market share in the next year? [Foreign Language]
Douglas Lefever: Okay. Yes. Thank you, Yoshida-san. Yes, I mentioned last quarter that we do see a path above 70%. I didn't give a time frame, but I do stand by that remark. I think that we're seeing continued growth, not just in our current customers' expansion, but we're also picking up some market share now. And so I think we went from 56% SoC in '24 to 66% in '25. And based on some of the recent results, we have growing confidence that we'll be able to meet that 70% threshold and maybe even beyond in the near future. [Foreign Language]
Yu Yoshida: Please let me clarify. I think this year, market share can be more like flattish, but it may gap so like, towards next year. Well, is that correct understanding? And also, if that is correct, what would be the driver for next year? Would there be a favorable customer mix or application mix? Or are you regaining the market share from your competitor in some specific customers? [Foreign Language]
Douglas Lefever: Yes, I think we do expect to gain share in '26. So we don't see that as being a flat year-over-year trend. And then I go as far as to say that in 2027, we'll continue that share gain. And it is both. It's both that the customers where we have incumbency are continuing to expand at a high rate. And we're also in a position now to pick up meaningful market share in accounts where we weren't necessarily the incumbent. So the industry now, particularly for high-performance compute is largely considering the 93K as an industry standard. And so we think that those share gains are going to continue to be meaningful year-over-year. [Foreign Language]
Unknown Executive: [Interpreted] Let me add my remark as well. The market share of the 70% is not what exactly declaring it. Whenever we make such the official statement, that will be taking place in the end of fiscal '26 and the beginning of the fiscal '27, in other words, April.
Unknown Executive: [Interpreted] I'd like to ask Ms. Shikanai of JPMorgan Securities Japan to ask your question.
Mio Shikanai: I'm Mio Shikanai from JPMorgan. First of all, congratulations on another strong quarter. I wanted to ask you a question about your earnings upgrade. So while you maintained your CY '26 SoC touch market outlook unchanged, you've raised your full year guidance. Should we assume that this revision is primarily driven by stronger fourth quarter expectation rather than the third quarter? And what has driven the increase in your own sales outlook despite an unchanged market forecast? And if you could add a little bit about the pricing. If I remember correctly, last quarter, you mentioned about the DRAM pass-through to your customers. If there's any updates there, it would be great to hear. [Foreign Language]
Sanjeev Mohan: This is Sanjeev. Thank you, Shikanai-san. So I think for Q3, we already showed higher revenue than Q2 -- sorry, Q2 than Q1. And as Doug mentioned that we are continuing to expand capacity, and that's work in progress. So we expect to ship more systems in Q3, and then we expect to ship even higher systems than in Q4. So we definitely see that the trend will continue in terms of increasing our revenue for the second half for SoC systems. For the memory systems, we also believe that Q4 for us will be quite strong. So -- and all of that, as mentioned, is a result of expansion in capacity and ability to ship more systems as we move forward in time. As far as the pricing is concerned, we're maintaining pretty healthy margins already. So -- and we're able to absorb the cost of increase in components and other things that we need. So we don't believe there will be a material impact, and we will maintain competitive pricing as we move forward. [Foreign Language]
Mio Shikanai: Just to clarify, so you revised up both for third quarter and fourth quarter. And the main reason behind that was because your capacity expansion is going faster than you have initially expected for this fiscal year? [Foreign Language]
Sanjeev Mohan: Yes. That's -- yes, we can say yes to that follow-up. [Foreign Language] Sorry. So you know the answer. Yes, the assumption is true. I mean, really, we're very proud that from the first half to the second half, top line when you adjust for the currency exchange, basically 28% growth half-over-half, which is pretty significant and speaks to the ability for us to expand capacity and meet those demand opportunities. [Foreign Language]
Unknown Executive: [Interpreted] Mr. Alex Chan from BNP Paribas Securities.
Alex Chang: Congrats for the great results. And I have 2 quick follow-ups. First one is that in terms of the gross margin, it seems like this quarter gross margin is a new high. I remember management comment that the memory price inflation would have some meaningful impact on the margin, but it seems like the impact is quite limited. Can we confirm that from this level, the memory price inflation impact has been completely absorbed by the company and company didn't raise the price or pass this cost inflation to customers and the company is comfortable with the current memory price? And -- or if there is any potential impact if the further increase of the memory price? And second follow-up is that could you give me some color on your share -- market share difference between x86-based CPU versus ARM-based CPU. If ARM-based CPU share is going to increase in the future, would that mean any negative impact to you or positive impact? [Foreign Language]
Douglas Lefever: Okay. Thank you, Alex. This is Doug. Let's start with the margin question. Definitely, we felt the pain of DDR pricing. We consume a lot of DDR in both our SoC and memory testers. And so a good part of the first half versus second half operating margin decrease has to do with kind of that step-up in pricing. In the first half, we enjoyed kind of the old DDR pricing with our inventory. But now as we look into the second half and into the future, we'll have to be contending with these higher spot prices, just like everybody is. We are definitely pursuing ways to counteract those margin pressures. We constantly have the ability with new configurations and licensing and new instrumentation to reprice our products. And so that's a big part of our strategy without just doing a direct price increase, which we don't like to do. So we will continue to have those kind of headwinds with DRAM prices and also other component inflation. But still, we're operating at such a high level. [Foreign Language] Second question is about kind of CPU landscape. And I answered this, I think, last quarter, and I'll say the same thing again, which is we're very well positioned across the entire CPU market, both at the x86 accounts as well as the ARM-based companies. So we feel very good about our position with the 93K across the board. And for us, who wins and who gains market share between x86 or between the players. And on the ARM side, we don't really care so much because we have the same tester positioned at all of those accounts. So that's one of the reasons you're seeing the second half top line growth is because we're so well positioned in the CPU market. [Foreign Language]
Alex Chang: Can I have a quick follow-up question? [Foreign Language] Yes, sure. So I mean, compare your revenue growth versus your peers, it seems like for this quarter and last quarter, you outperformed a lot, and you mentioned that the CPU was the main driver or main contributor. Can we confirm that your market share in CPU tester could be even higher than your market share in the AI accelerator tester. Is that the key reason? [Foreign Language]
Sanjeev Mohan: It's a good question. I think we don't like to break it down like that as you're asking. I think what's important to note is that in the entire high-performance compute market, we have a very high market share, whether it's GPU, custom ASICs, CPU, we probably have majority of the market share in all of these spaces. In addition to that, there's like networking and a few other things. Silicon photonics was brought up earlier, where our market share is also very strong and growing. So it's a combination of all of the above. Situation really has not changed in many years. We continue to be a dominant player for the accelerators. We definitely are the dominant player in the custom ASICs, and that goes for CPU as well. [Foreign Language]
Unknown Executive: [Interpreted] So next to Mr. Nakanomyo of Jefferies Securities.
Masahiro Nakanomyo: [Interpreted] Now I don't know whether it is appropriate to ask you this question. However, being an analyst very active in the stock market, we actually look at the various data, especially with respect to the Taiwanese SPE import data. In the past, there were some kind of very good correlation between those data and SoC testers. But this second quarter, the situation is slightly different and there is significant gap. There's no correlation. And I wonder why. Is this something to do with SoC logistic issues or maybe that the way the statistics data are taken or maybe that the equation or formulas have been changed. Please explain why it is gap in the second quarter.
Douglas Lefever: Thank you, Nakanomyo-san. Yes. We -- unfortunately, we just can't comment on that. I've seen the reports where people are trying to track Malaysia exports, Taiwan imports. And I think there's a lot of noise in those models. I would really encourage you to maybe look at other KPIs rather than that. I think you can try to get a head start maybe on what will be our numbers. But I just don't know that that's the best way to do it because there's a lot of -- that's a very imperfect data is what I would say. So I can't explain why you've seen a difference in the trend because we don't look at those numbers ourselves. [Foreign Language]
Unknown Executive: [Interpreted] I would like to ask Mr. Kinoshita of UBS Securities to ask your question.
Atsuhiro Kinoshita: [Interpreted] Once again, congratulations for wonderful, superb results and performance in last quarter. My question is about the operating income margin and your improvement. Well, in the second quarter, you have registered a very good margin and margin improvement. And you mentioned just now about the annual margin will also be expected to be higher. And could you -- as much as possible, could you please explain to us the contents or the reason why that the DA margin -- OI margin is being improved?
Douglas Lefever: Okay. Yes. Thank you, Mr. Kinoshita. I think I talked a little bit before about the decrease from first half to second half. A big part of that was the inflation on the components that we put into our systems. Another thing that in the prepared remarks is that we did have a reversal of inventory that happened in the first half as kind of a onetime event that did lead to some higher-than-normal first half margins. Those won't be carrying into the future, we think. So we're kind of settling in at this 50 -- low 50s. And as I also mentioned, we have the ability as devices become more complex, the configurations of the testers continue to expand. And those are margin expansion opportunities for us, both on the SoC side and the memory side. And so we've been able to use that fact to offset a lot of the inflation that we're seeing with the components. I hope that answers. [Foreign Language]
Atsuhiro Kinoshita: [Interpreted] I have another question, if I may. People say that memory is in big shortage nowadays. And your company actually mentioned that the SoC tester and CPU could be very promising drivers for -- to really boost the performance in the future. But considering the generative AI system, you have to have many components, including memory, CPU and custom ASIC. And all those components need to be synchronized otherwise. I mean, if there is a shortage of memory and if memory is not incorporated into the system, you are not able to ship as a product. And when you consider that the future performance, whether -- I wonder whether the shortage of memory have some impact. So could you please comment on that?
Douglas Lefever: Yes. I mean, it's true. It's -- memory is scarce in the world right now. And there's a lot of factories being built right now. But largely, the last couple of years, the wafer starts have been moved from older legacy DRAM into high-end HBM and server DRAM, and that's caused big problems for industrial and other automotive applications. And so we're not immune to that at all. What I will say, though, is we're part of a community that includes our customers, and they understand that for them to get testers, they have to provide us the memory. And so we went through this and the supply chain shortages in '21 and '22. And the industry really rallied around each other to make sure that the components were going to be provided for the equipment suppliers because there was an understanding that if they didn't do that, that would lead to greater shortages across the board. So I think it's tight, no doubt, but we also have very, very good suppliers that are helping us. [Foreign Language]
Unknown Executive: [Interpreted] As it is almost time to close this briefing, we'd like to take our last question. So Mr. Hanaya of SMBC Nikko Securities, please have your last question.
Takeru Hanaya: [Interpreted] I'm honored to actually give your last question. Now my question is about the production ramp-up -- production capacity ramp-up. You mentioned that you're about to really achieve the goals of the 10,000 unit production. For timing, it's not disclosed yet though. But of course, that you made effort to really increase production capability because there are some needs that you have to fulfill. And do you have some aspiration that you are going forward from 10,000 to 15,000 and beyond? Or is this just too early to actually look for that kind of aspirational future? And what is your idea of incorporating perhaps in the upcoming MTP will actually deal with that. And so that could you please share with us your thought about further production capacity expansion?
Douglas Lefever: Yes. Thank you, Mr. Hanaya-san. Yes, we have already some aspirations. So from 5 to 10 was a big step, and we're accelerating that as fast as we can. And yes, we'll give some more details about the timing of that perhaps at the next call. I'll say, I believe the next step will be another doubling from 10,000 to 20,000. That's something that we're actively talking about inside the company based upon the customer demand. Obviously, we're not prepared to talk about the time frame for that right now. But I think certainly, by the time we release our Mid-Term Plan 4, we may be prepared to talk about it then. [Foreign Language]
Unknown Executive: [Interpreted] Although we have received additional questions, we'd now like to conclude the session. Thank you very much for taking time to join our financial briefing despite your busy schedule today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]