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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for attending the earnings conference call of Advantest Corporation for Fiscal 2021 Second Quarter ended September 30, 2021. Participants from Advantest are Yoshiaki Yoshida, President and CEO; Atsushi Fujita, CFO; Kimiya Sakamoto, Executive Vice President of Sales Group; and Yasuo Mihashi, Executive Vice President of Corporate Planning and Stakeholder Relations.
First, CFO Fujita will go over the financial results for the second quarter, followed by a presentation on the FY 2021 outlook by CEO Yoshida. We will then take your questions.
The entire conference call is scheduled for an hour. Materials are available from TDNet as well as the company website.
Before we start, a cautionary statement. This presentation contains forward-looking statements that are based on Advantest's current expectations, estimates and projections. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause Advantest's actual results to be materially different from those expressed or implied.
Without further ado, CFO Fujita.
Good afternoon. This is Fujita speaking. I will go over the financial results for FY 2021 second quarter.
Please turn to Page 4, summary of the results for the second quarter. In our earnings forecast 3 months ago, we expected that the second quarter orders would decrease compared to the first quarter, partly as a reaction to the rapid increase in orders in the first quarter. However, it has turned out that as semiconductors continue to make performance and complexity gains, the industry's need for future expansion of test capacity has increased and customers' motivation to invest in testers has become even more stronger, mainly for leading edge products.
In addition, as the global semiconductor shortage continues, chip makers also actively placed orders for testers as part of aggressive capacity building investments for various trailing edge semiconductors. As a result, second quarter orders increased significantly. Sales were JPY 3 billion, below our second quarter forecast announced in July due to logistical difficulties caused by the impact of COVID-19 restrictions. Details of orders, sales and profits will be explained in the following slides.
Please turn to Page 5, orders by segment in the second quarter. Record high quarterly orders were achieved for the fourth straight quarter, thanks to the continuing high demand environment. Orders in the second quarter alone were equivalent to our full year sales in FY 2017.
In the Semiconductor and Component Test Systems, orders totaled JPY 169.6 billion, up 46% quarter-on-quarter. Orders for SoC testers climbed once again, this time by JPY 50.2 billion to JPY 147.7 billion. In particular, orders for high-end SoCs, such as application processors, APU, which are the core components of smartphones and high-performance computing devices, HPC devices, drove order strength. Inquiries for trailing edge devices used in automobiles, industrial equipment and consumer electronics were also strong.
Memory tester orders were JPY 21.9 billion, up JPY 3.2 billion quarter-on-quarter. In addition to high level of DRAM orders, orders for flash memory increased.
In Mechatronics Systems, orders totaled JPY 17.6 billion, up 25.3% quarter-on-quarter. With tester orders booming, device interface and test handler orders were also strong. Orders for EUV-related nanotechnology products also increased.
In Services, Support and Others, orders totaled JPY 16.7 billion, down 46.4% quarter-on-quarter. System-level test orders declined in reaction to the large number of orders received in the previous quarter.
Please turn to Page 6. As for the second quarter sales by segment, we delivered total sales above the JPY 90 billion level for the third consecutive quarter as our system-level test business grew in addition to continued demand for testers.
In Semiconductor and & Component Systems, we achieved JPY 60.1 billion, down 10.8% quarter-on-quarter. Breaking that down, SoC tester sales were JPY 48.2 billion and memory tester sales were JPY 11.9 billion. Some SoC testers could not be delivered due to logistical disruptions. Memory tester sales also decreased from the previous quarter, much as expected. Mechatronics Systems totaled JPY 9.4 billion in sales, down 17.3% quarter-on-quarter. Sales of test handlers and device interfaces decreased in line with the decrease in sales of memory testers. In Services, Support and Others, sales of JPY 21.3 billion was achieved, up 16.5% quarter-on-quarter. System-level test product sales have made steady gains mainly for high-end SoCs.
Next page, please, Page 7. If we take a look at orders by region, on the left, in Taiwan, continuing the trend seen in the first quarter, orders for high-end SoCs, mainly smartphones and HPC-related products increased significantly. In China, as in the first quarter, orders for both SoC testers and memory testers continued to hold a high level and strong customer motivation to invest. In South Korea, we received active inquiries regarding various smartphone-related semiconductors.
In terms of sales by region on the right. Setting aside the lag caused by temporary factors such as logistics, our regional breakdown generally conform to expectations. With orders dramatically surging, some parts of our supply chain are not able to fully keep up with the pace of demand, and this is a top priority for us at present.
Please move to Page 8. With regard to the second quarter operating income, the gross margin was 55.0%. Although sales fell short of our July forecast, our gross profit margin was generally in line with expectations. SG&A expenses, including all other income and expenses, was JPY 28.7 billion. Operating income amounted to JPY 21.4 billion, representing 23.5% as a percentage of sales.
Please move to Page 9. R&D expenses in the second quarter totaled JPY 11.7 billion with its ratio to to sales at 12.9%. The CapEx was JPY 4.7 billion. Our system-level test business has been doing well, and we have begun to expand production capacity in the United States to keep up with the ongoing increases in the demand. Depreciation and amortization was JPY 3.6 billion. With regard to the second quarter cash flow. Free cash flow was JPY 20.2 billion. Please move to Page 10. The balance sheet as of the end of September 2021 shows total assets at JPY 435.0 billion. Cash and cash equivalents at JPY 146.7 billion and equity attributable to owners of the parent at JPY 286.1 billion, with its ratio at 65.8%, down 0.8 percentage points from the end of the previous quarter. The progress of the share repurchase announced in July has been disclosed in our filing. By the end of September, 1.8 million shares of common stock had been acquired for JPY 17.8 billion, equaling 18% of our upper limit of 10 million shares and 25% of our upper limit of JPY 70 billion.
That is all from me on the financial results of the second quarter. Thank you for your attention.
Good afternoon. This is Yoshida speaking. I will cover the FY 2021 outlook.
Please turn to Page 12, overview of the semiconductor tester market trends in the calendar year 2021. In 2021, chip makers are continuing to actively invest in semiconductor performance improvements and production capacity expansions to resolve the global semiconductor shortage, in line with the growth of final demand and higher final product performance. The 2021 semiconductor tester market is expected to grow by approximately 30% year-on-year to approximately $5.5 billion. We expect that the 2021 SoC tester market will grow by approximately $300 million primarily reflecting growing demand for leading-edge processes to approximately $4.1 billion, indicating a growth rate of 37% year-on-year. Our outlook for the memory tester market remains unchanged at approximately $1.4 billion, representing a year-on-year growth of about 17%.
Regarding our market forecast for 2022, we cannot give exact figures. But there is no sense that the current serious semiconductor shortage will be resolved rapidly, and we believe strong semiconductor demand will continue.
In addition, with regard to semiconductor performance gains, which was the driver of the large tester orders in the second quarter, we expect continuing demand in the future amidst further device neutralization. Based on the above, we believe that a favorable market environment will continue for the present and that a sharp drop in tester demand is not likely. At the same time, we are aware of the need to put an even greater effort in resolving procurement issues linked to the ongoing semiconductor shortage as we also use numerous semiconductors in our testers.
Please turn to Page 13, forecast for FY 2021. Based on our first half results and future outlook, we have raised our full year forecast to JPY 565 billion in orders, JPY 400 billion in sales, JPY 105 billion in operating income, JPY 105 billion in income before income taxes and JPY 78.8 billion in net income. Orders are expected to decline in reaction to the sharp increase in orders in the first half. However, ongoing semiconductor performance gains are currently raising baseline demand for semiconductor test. Therefore, we expect that orders will continue to trend positively in the second half. We will do our utmost to secure the parts needed to avert opportunity losses amidst strong demand, aiming to set new records for both sales and net income for the second straight year.
Gross profit margin is expected to be around 55% to 56% for the full year. The impact of rising parts prices in the second half is accounted for in our expectation that GPM will hold the 55% line. This forecast is based on the exchange rate assumptions of JPY 110 to the U.S. dollar and JPY 135 to the euro for the second half. Our latest forecast for the impact of exchange rate fluctuations on full year operating income is plus JPY 1 billion per JPY 1 depreciation against the U.S. dollar and minus JPY 150 million per JPY 1 depreciation against the euro.
Please turn to Page 14, forecast by business. First, outlook for the semiconductor and component test systems. We have increased our 2021 full year SoC tester sales forecast by JPY 8 billion from our July forecast to JPY 202 billion. As expected, demand for testers continues to be strong due to the increasing complexity of APUs, HPC devices, et cetera, resulting from migration to smaller nodes.
In addition, due to the global shortage of semiconductors, we anticipate ongoing demand for additional testers for automotive, industrial and consumer products. We have increased our 2021 full year memory tester sales by JPY 3 billion from our July forecast to JPY 72 billion. In addition to high-speed DRAM test where Advantest is particularly strong, nonvolatile memory demand is also exceeding expectations.
Please turn to Page 15, outlook for Mechatronics Systems and Services and Other business. Sales forecast for Mechatronics-related business remains unchanged at JPY 48 billion. We anticipate strong demand for device interfaces and test handlers, which are highly correlated with our tester business.
Sales of nanotechnology products are also robust amidst the adoption of EUV technology. We have raised our sales forecast for our Services, Support and Others business by JPY 4 billion to JPY 78 billion. This is based on the increase in demand in our system-level test business and the growth of field service revenues linked to the growth of our installed base of semiconductor testers.
Please turn to Page 16, which shows mid- to long-term initiatives. We continue to execute our growth strategy in line with the 10-year mid- to long-term management policy formulated in April 2018. Our second midterm management plan formulated in May of this year also emphasizes that aggressive growth investment is a necessary key to achieving growth.
We will continue to aggressively invest in fiscal 2021, which is the first year of our second midterm management plan. Even though this is the first year of the midterm management plan, the demand has been exceeding our expectations. Our goal is early achievement of JPY 400 billion in sales. But depending on how the circumstances develop, we may revise the targets of the midterm management plan.
Please turn to Page 17. I would now like to discuss business expansion and reinforcement initiatives. To achieve mid- to long-term growth, we are reinforcing our core businesses and moving into adjacent business domains through R&D investments and capital investments and also utilizing methods such as M&As and partnerships.
I would like to highlight 2 growth investments we are making in this fiscal year or fiscal 2021. One is capital investments. We plan to expand our manufacturing capacity for system-level test products in Arizona in response to major customers' plans to increase production in the United States.
The second is the acquisition of R&D Altanova of the U.S. as announced in our press release the day before yesterday. In sectors such as HPC, 5G and IoT, semiconductor demand is expected to go on increasing, while semiconductor performance also improves. At the same time, high-precision test is becoming indispensable for semiconductors used in these high-end fields. From this perspective, we aim to further reinforce our business foundation and support of our customer base with this acquisition.
On Page 18, let me explain about acquisition of R&D Altanova. R&D Altanova is a leading supplier of consumable test interface boards, which are used to connect semiconductor devices with testers. If approval by the relevant authorities go smoothly, we expect that closing of the transaction will be completed by the end of the year. R&D Altanova's advanced engineering and manufacturing capabilities, excellent customer base and first-rate technical team will complement Advantest's semiconductor test equipment business.
We believe we can accelerate the growth of R&D Altanova's business by leveraging our global customer base and production process expertise. We also believe that combining their products with our solutions will help us meet the needs of our customers and further strengthen our presence in future growth areas, such as high-performance computing.
Like these sockets, interface boards are consumable products, which need to be customized for each device. These products will contribute to the diversification and stabilization of our earnings base by strengthening recurring business.
Moving on to Page 19. To sum up, we believe that the current active tempo of investments in production capacity for a resolution of the global semiconductor shortage as well as the investments in semiconductor performance gains will continue for the present. We anticipate that a stable unfavorable market environment will also continue for the present as there is no sign of a sharp drop in demand for testers. Under these circumstances, we're steadily implementing business expansion initiatives such as reinforcing our core businesses and developing adjacent business areas through capital investment and M&As, promoting diversification of our earnings base.
In addition, we are working to stabilize price procurement and increase production capacity to meet surging customer demands. Although demand is presently strong, we will continue to be alert to the following risks: issues with parts procurement due to supply chain bottlenecks and logistics difficulties decrease in demand due to slowdowns in the highly anticipated global economic recovery, potential impacts from U.S.-China conflict and economic security policies on the semiconductor industry was striving to achieve the targets of our midterm management plan.
That's all from me. On Page 20, you can find information on ESG and external evaluation, and I hope you can take a look at your convenience. Thank you for attention.
We will now take questions. First, Mr. Wadaki from Nomura Securities.
Thank you for your presentation. I am truly impressed with the level of orders in the second quarter. Advantest has great insights into the tester market and yet you failed to foresee such a high order level. What happened? And what were the factors that were not expected? And you're projecting that high level of orders will be maintained, albeit with a slight decrease. So what are the structural changes that are taking place in the market?
First of all, we feel embarrassed that we failed to foresee the order level of JPY 200 billion for the second quarter in our July forecast. But in fact, there were many major differences. Overall orders exceeded our forecast by JPY 105 billion, the biggest upside being JPY 83 billion for SoC testers. In addition, JPY 3 billion upside for memory testers, JPY 10 billion upside for Mechatronics Systems and JPY 4 billion upside for Services, Support and Others. In all businesses, orders exceeded our projection. The biggest factor was the overshooting of SoC testers of JPY 88 billion.
So where did that come from? We believe there were 3 drivers. One, there is a concern about the tight supply of semiconductors, which is driving production capacity expansion motivation. Second is the longer lead times for our products. And the third is demand growth associated with application processors, APUs and high-performance computing HPC chips, which are poised to migrate to more advanced nodes in 2022 and beyond.
We initially projected full year orders at JPY 350 billion, and now we are projecting JPY 400 billion. But with the spread of concerns of semiconductor shortages and material shortages, there is a recognition that request for additional 50% or 30% supplies cannot be met. Given such factors, customers are assuming longer delivery lead time and are placing orders way in advance, 5 months, 6 months or 7 months in advance. Anticipating the situation for the first quarter of next year to a certain level. They are incorporating the production plan for the next year, especially in light of move towards advanced nodes. So I think what happened is that they have advanced order placements, anticipating production for the next year as well, especially in relation to high-performance computing devices and APU. So those were the major reasons for much higher orders than expectation.
Of course, no one believes that this level of orders will continue forever. And we are projecting orders of JPY 200 billion for the latter half of this fiscal year. We believe we have pretty good visibility into the third quarter. And the second half orders are split evenly between the third and the fourth quarters at JPY 100 billion each. By historical standards, this represents a rather high level of orders. So yes, the order level might have peaked out, but JPY 100 billion level is not a low level. And we believe that this rather high level will continue.
I see. My next question is on how you are benefiting from economic security policies. OSAT companies are planning the construction of many facilities in the U.S., Europe and Japan going forward. And since they purchased testers, this would mean that tester facilities would have to be located nearby. And I think this is good news in terms of stimulating tester demand for the test industry. Do you agree to such expectations?
There are such products that we are currently enhancing including sockets and interface ports, for which it will be better to be manufactured close to our customers.
But in the case of testers, for example, V93000, we are supplying globally from Malaysia. So in that respect, unless we are mandated by the government to do so, I don't think we will be building tester manufacturing facilities in many different parts of the world.
Sorry, maybe my question was not very clear. OSAT plans might be building facilities one after another in the U.S., Europe or Japan, which might lead to additional demand for testers. And I was wondering if you agree.
In relation to economic security policies, establishing supply chain redundancy would be a positive development over a short period of time. However, over a long term, it would mean larger capacity globally. And should the trend shift to less-restricted trade towards liberalization, this might result in overcapacity. I think the pendulum will always be swinging from one side to the other. And so we should remain cautious. But yes, over a short term, I think supply chain redundancy would appear as tailwinds for this industry.
Mr. Wadaki, this is Mihashi speaking. I'd like to add some comments. The foundry -- supply chain to be established in the U.S. would require solid local supply chain to ensure quality local production. However, whether that would cover the entire volume is a different story. And we have to keep in mind what CEO Yoshida just described, the potential overcapacity. So we have to closely monitor the future development, but we do expect that the additional demand for the testers will materialize to a certain level in the process of the production system being established in the U.S.
Next is Mr. Yoshida from CLSA Securities.
This is Yoshida from CLSA Securities. My first question is on the order forecast for the latter half of this fiscal year. You're projecting JPY 200 billion overall. Can you give us the breakdown in terms of SoC testers versus memory testers, mechatronic systems and services support and others? Also, you mentioned earlier that you do have certain visibility into the third quarter. So can you give us the breakdown between the third and the fourth quarters?
First, I, Yoshida, would like to briefly comment on that. We are projecting half and half between the third quarter and the fourth quarter. Although the visibility for the fourth quarter is still not that clear, as far as the third quarter is concerned, I think half of that JPY 200 billion is for sure. I defer to Sakamoto of sales for details.
For the third and the fourth quarters, orders for SoC testers are projected to decline from the first half as a net result of decline in SoC testers and no change for memory testers.
I see. What about Mechatronics Systems and services support and others, how do they compare to the first half?
Mechatronics Systems are projected to decline and the same for Services, Support and Others.
I see. My second question, earlier, you referred to planned SLT production capacity expansion in Arizona and the recent acquisition of R&D Altanova. This should get you closer to MPU vendors in the U.S. So do you think this enables you to expand your existing tester business?
Do you mean the impact on our existing tester business in relation to MPU vendors?
Yes. Given that existing tester business has shrunk quite a bit recently, I was wondering whether you expect to revamp that business supported by new adoptions by U.S. MPU vendors.
This is Mihashi speaking. Since we are talking about business with specific customers, I'm afraid we'll have to refrain from commenting on specifics. But suffice it to say that we are always striving to provide customers with greater value from a variety of different angles. And our consumable business together with SLT business will provide us with such opportunities.
So do I take it that there are no specific projects?
We cannot comment on that.
This is Yoshida speaking, not just the tester business, but the value of the consumables business alone is going to be substantial. And linking that with the tester product is something that we are always working on.
Next is Mr. Nakamura from Goldman Sachs.
This is Nakamura from Goldman Sachs. I have 2 questions. One is with regard to the overall production capacity from the perspective of upward elasticity of sales. Is it fair to assume that the logistical disruptions that prevented you from meeting your sales forecast in the second quarter were only a temporary drag? I'm asking since you are projecting over JPY 100 billion for each quarter in the second half. Also, we are expecting the order backlog at the fiscal year end to be JPY 273.8 billion, which would mean that sales for next year would easily exceed JPY 400 billion. Do you foresee any potential issues with your production capacity, including EMS and with the upward elasticity of your sales?
First, regarding the logistical disruptions experienced during the first half, one was in relation to a typhoon that hit China and Taiwan in mid-September, which resulted in cancellations of most of the flights, and it was hard to secure the next available flights. And therefore, deliveries had to be wait until the October.
Also elsewhere, there were substantial delays in customs clearance and other processes. We believe that had resulted in delay in sales materializing in the first half, but that's one-off. And in fact, we expect a recovery in the third and fourth quarters.
Regarding the production capacity, what we are most concerned about in terms of production is not the production capability per se, but the ability to secure necessary components, the ability to procure necessary components. In other words, one can manufacture, but due to shortages of 1 or 2 key components, the completion of the assembly and shipments cannot be made. I think that issue is beginning to emerge. Our testers consist of 0.5 million components per unit. That's 10x as many as building an automobile.
Accommodating sudden and sharp increase in demand would be extremely difficult under the current operating environment. But parts we use are manufactured and supplied by our customers. So right now, all our executive officers are talking to our customers and are trying to convince the customers that semiconductors are very important in building semiconductor production facilities.
And that without these devices, shortage of semiconductors cannot be resolved. We are doing our best to explain that to our customers. In order to raise the semiconductor production, we are asking for prioritize supply of semiconductors to ensuring component procurement to build the testers. In terms of the production capacity, we believe we have capacity in place to support roughly JPY 120 billion in quarterly sales and nearly JPY 500 billion on an annual basis.
I see. A follow-up question. To what extent have you secured components?
Actually, the situation is changing every day. Our current revenue projection is JPY 400 billion. And of course, we will be making every effort to achieve that. However, in today's world, there's no telling what could happen along the supply chain. And that is true on the entire industry level. And therefore, we cannot rule out the possibility of things getting worse going forward.
But there is also a possibility of things improving going forward. I think there are expectations that by the middle of next year, semiconductor shortage will have been resolved, but we're not convinced that we can be that optimistic.
I see. Secondly, I would like you to elaborate more on the background of this surge in orders for SoC testers. The first question is about the delivery timing. Moreover, you said performance gains and device miniaturization have been driving the demand for testers. But exactly what is driving this demand? Is it advanced packaging or changes in the transistor structures associated with miniaturization.
Yesterday, one of your competitors said, if gate-all-around is used at 3-nanometer node, testing time will significantly increase. So if you can explain more about that, it will be appreciated.
I'm sure there are many of us who want to comment on this. So I'll give a brief response first. What is driving our leading-edge process business are primarily fabless players in the U.S. and foundries in Taiwan. We're not in a position to identify which customers they are, but I just want you to make your own guess.
The business is being led by mobile phones. But in addition to that, we see evolution in service. Display drivers, which used to be set to be underperforming has been picking up rapidly recently.
Now I would like to hand over to Mr. Sakamoto.
Sakamoto speaking. Currently, what is driving large orders in SoC testers, as was said, APUs used in devices like smartphones. Furthermore, as we anticipated, HPC and AI applications have been showing a very strong growth, which has become really a business driver for us.
As I said at the last earnings briefing, transitions to more advanced process nodes have been planned every year, which is resulting in even higher performance of semiconductors and more complex production technologies. And we believe this trend will remain unchanged for the time being. And what is often called technology buys for testers have been showing a very strong growth just as we expected. And in addition, miniaturization is benefiting memories, and increased multilayers is benefiting NAND flashes.
And there is also what we call capacity buys associated with miniaturization in memories. So both SoC technology buys and capacity buys are expected to be intensified with strong growth.
Mr. Nakamura this is Mihashi speaking. To answer your question on miniaturization and the impacts of 3D on ATEs or SoC testers, we have been saying all along that with progress in miniaturization of semiconductors, if the transistor count grows, this results in the longer testing times which leads to a growth in the volume of ATEs required. As Sakamoto said, it is not the case that this situation started just recently, but it has been continuing for the last 3 to 4 years.
Moving forward, as the environment encourage further miniaturization is expected to remain in place in Taiwan, South Korea and the U.S., as you are aware, the trend of us benefiting from miniaturization will also remain unchanged.
Aside from competitors, for the next 2 to 3 years, new architectures for transistors will be formed. If the architecture of transistors changes in order to ensure reliability, you need to continue and expand the evaluation of how the transistors with new architecture will perform in a way different from the one for conventional FinFET. This overall trend will bode well for our business going forward as a tailwind as we are the company who provides equipment for ensuring the quality.
The next question is from Mr. Nakanomyo from Jefferies Securities.
Nakanomyo from Jefferies Securities. My first question is about somewhat minor details about what you said. You mentioned the visibility for the third quarter. In that sense, looking back on 3 months ago, the forecast you came up with then for the second quarter turned to be way off the mark. Is there a possibility that the same thing could happen in the third quarter? Or is it the case that a majority of the upside in the second quarter is attributed to orders placed in advance and such a trend has almost run its course, thus making the third quarter result much more visible?
It is really embarrassing for us to see our forecast proven wrong all the time. No, that's not what I'm saying. In fact, many of the large-scale orders we received in the second quarter have been expected to be placed in the third quarter when we made forecast in July, which means that we fail to foresee that much coming.
Considering the market environment, customers decided to place orders early. But things are now beginning to settle down more recently. We have been telling our customers how long the expected lead time will be or saying it will take about 6 months to delivery. In that sense, instead of placing orders in a hurry, customers are now learning to place orders in accordance with their own plans. Therefore, we believe we're not so widely off in our forecast for the third quarter.
When it comes to the fourth quarter or beyond, since our customers' plans for the second half of the next fiscal year will begin to form more concrete shapes, there is obviously a possibility to see an upside in the fourth quarter or to see a downside as well for that matter.
It's now much clearer. I'm afraid my second question is, again, a very rudimentary question. earlier, for HPC, you said U.S. fabless players will become providers of new businesses for you going forward. I would assume there are newcomers amongst those players as well. I was wondering to what extent you have been winning businesses from those tablets players in the U.S. and how your performance compares with our competitors in that regard? And what, if any, are your differentiating factors?
Sakamoto from sales. Since you're likely to be completely able to identify who we're talking about, I can't go too much into details about specific customers. That said, however, the first thing I can say is, as far as HPC is concerned, we command an extremely high market share or have been able to engage customers. This, as I said, has allowed us to increase the share of HPC or AI in our SoC testers year-by-year. Moreover, while gaming was a primary application previously, we are seeing an increase in applications for data centers with more progress made in TX.
In addition, in terms of capturing new customers, as you referred to, different customers have been emerging, not just in the U.S., but in other regions. And we're in a very strong position to address those players as we already have enough expertise in testing. Therefore, areas like HPC and AI for us are expected to grow further, and we believe we'll be able to continue to gain a large market share. What are the reasons for you to have been able to realize that?
Well, one of the reasons is that customers we have been doing business with are growing. But the biggest reason is that our test solutions have been accepted by our customers, demonstrating tangible results for them and making contributions.
In terms of resources or the degree of reinforcement of the resources, have you been leading the path for the past 3 years?
Are you asking about human resources?
Yes.
In terms of support for applications, we have always been spending a lot of resources. We have captured information ahead of others through our interactions and technical exchanges with our customers to allow us to preemptively address their needs. Moreover, a new system called V93000 exascale SoC tester, which is now a mainstay in our business, has been designed by incorporating specifications most appropriate for HPC test, which has allowed us to differentiate ourselves from competitors.
The next question is from Mr. Damian Thong from Macquarie Capital Securities.
Damian Thong from Macquarie Capital Securities. My congratulations on your excellent financial results. I have one question. Your forecast for the operating margin for the second half is 27.1%. Obviously, expected sales of more than JPY 200 billion is a major contributing factor. Now in the next fiscal year, as the share of SoC testers in your product mix is expected to be even larger. Given the cost and gross margin, do you think the operating margin will go up further? Or will it remain flat? If you can share your thoughts with us, it will be appreciated.
The operating margin has been derived by taking into account a certain amount of increase in cost of procurement of materials and components. We would love to enhance the ratio much more if we could. But we also seek to make investments in further future growth such as M&As. And once we do acquire a company, we will need to spend money on post-merger integration and reinforcement of our operations including human resources, which should push up the cost. Therefore, given all these possibilities, it will be preferable to increase the operating margin. Further, we do not intend to aim for, say, 30%. Instead, we'll make steady upfront investments and increase capital investments, which should result in an increase in our depreciation expenses. In this context, this figure is our best guess based on what is visible at the moment.
Now if our sales exceed JPY 400 billion some time down the road, the margin may well be changed. But as long as we remain at the order of JPY 400 billion, our view is that this is a reasonable estimate.
I see. My next question is about semiconductors, which is supplied by your customers. If you look at your competitors, they are being significantly affected by the rising cost for procurement. Am I correct to say that you have more price bargaining power than your peers. In other words, do we not have to worry so much about increase in the prices of semiconductors?
There are many different ways to put it. But if our customers raise the cost of semiconductors they supply to us as raw materials, that would in turn push up the prices of our testers ultimately. In that sense, we do have a leverage.
What is the most serious issue though is that the volume of semiconductors we use is not that large. Therefore, we need to convince our customers fully that though the volume is low, the semiconductors are crucial for us. For example, if they receive orders from automobile companies, the volume will be enormous, and therefore, occupies a fairly large portion of the capacity of their wafers. So some customers tend to give more priority to those orders. Therefore, we are requesting our customers to give priority to us in their supply of semiconductors saying that even though the volume we use is small, providing us with enough semiconductors will eventually lead to hundreds or thousand size small supply of wafer.
There's a multiplier effect that comes into play there. If you give us 1 piece of wafer, you'll be able to operate on 100,000 pieces of wafer down the road. But if you do not, your operation will take time and will not be able to resolve the issue of semiconductor shortage anytime soon. That's how we are making our requests to our customers.
In terms of cost, it's not much of a matter of negotiating the price down or up. If the price is higher, we're fine with that. It will simply mean that the price of our products will rise as well.
The key is the priority in procurement. I guess you've given greater priority and are in a fairly advantageous position.
Yes, we have been requesting our customers in that way and are beginning to gain understanding.
Thank you very much. We have received more questions. But since we have run out of time, we'd like to end the Q&A session. Thank you for your attendance today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]