Advantest Corp

TSE:6857

Q1-2026 Earnings Call

[Operator]

Thank you very much for joining Advantest Corporation's Financial Briefing for the first quarter for FY 2025 despite your busy schedule. I'd like to introduce attendees from our side today from the left side of the slide, Mr. Douglas Lefever, Representative Director, Senior Executive Officer and Group CEO; Mr. Koichi Tsukui, Representative Director, Senior Executive Officer and President, Group COO; Mr. Sanjeev Mohan, appointed as CCRO, Chief Customer Relations Officer as of July 1 this year; and Ms. Hisako Takada, Senior Executive Officer and CFO. I am Simba from the IR department, serving as your moderator of today's session.

In this financial briefing, Douglas will first report the financial summary. After that, Ms. Takada will report financial results for FY '25 first quarter, and then Douglas will present FY 2025 outlook before entertaining questions from the audience. We plan to close this session at 5:30 p.m. Japan time.

In today's financial briefing, we will use Japanese, English, Japanese simultaneous interpretation. [Operator Instructions] Today's presentation materials are available on TDnet and our company website. The audience joining us from the telephone line is kindly requested to download the materials. Before we begin, we would like to remind you that today's briefing contains forward-looking statements, all of which are subject to risks and uncertainties that may cause our actual results to differ from those in such forward-looking statements. Now Doug will present the summary of this quarter. Doug, please go ahead.

[Douglas Lefever, executive]

Good morning, and good afternoon, everyone. Thank you for joining our Financial Briefing for the first quarter of fiscal year 2025. We've delivered an outstanding start to the fiscal year, posting highest ever quarterly sales, operating income and net income. Our first quarter performance underscores the sustained strength of AI-related demand and is a testament to our ability and commitment to scale supply capabilities. This result could not have been achieved without the dedication of our production partners and suppliers. I want to extend my sincere appreciation to all of them for their continued support and collaboration. We also achieved a notable expansion in both gross and operating profit margins. This performance was made possible by a unique alignment of numerous factors: economies of scale driven by higher sales, including pull-ins, a favorable product mix, disciplined cost management, absence of one-off losses and the fruits of prior investments, particularly in capacity expansion.

Looking ahead, we are raising our full year guidance to reflect the stronger-than-expected performance in the first quarter. I will give details of this later in the presentation. While we anticipate a temporary digestion period in the latter half of the year, we expect growth to reaccelerate in FY 2026. This lumpiness is largely driven by the timing of next-generation device transitions. Since customer demand does not flow evenly throughout the year and can shift abruptly, we have been strengthening our operational agility and supply chain resilience to better respond to these fluctuations.

As we move forward, the central thesis we laid out in the third midterm plan of complexity-driven growth remains firmly on track and is expected to unfold for the remainder of the midterm plan period.

With that, let me turn the call over to Takada-san to provide details on our first quarter results. Takada-san?

[Hisako Takada, executive]

I will now explain the summary of results for the first quarter of FY '25. In the first quarter, we achieved our highest-ever sales and profit on a quarterly basis. Continuing from the previous fiscal year, amid growing customer demand for AI-related product deliveries, we worked to expand the procurement of parts and product supply capabilities in order to meet delivery time lines to the greatest extent possible and successfully carried out timely product deliveries. Despite the yen appreciating against the U.S. dollar compared to the previous quarter, we achieved record high quarterly results, driven by a significant increase in SoC tester shipments.

Now before going into the details of our performance, I would like to first explain the changes made to our reportable segments. In efforts to provide comprehensive test solutions that include not only test equipment but also peripherals, Advantest revised its reportable segments starting from FY '25 based on the management approach perspective. Specifically, the previously 3 segments have reorganized into 2 segments, Test Systems business and Services & Others.

The Test Systems business segment includes SoC testers and memory testers as well as other systems. Products that are highly correlated with tester demand such as test handlers and device interfaces. In addition, products related to the system-level test business acquired from Astronics Corporation in the U.S. in CY 2019 are also included in other systems.

Service & Others segment includes support services, nanotechnology products and consumables businesses such as test sockets and interface boards for testing, which were acquired in the past through acquisitions.

Now let me move on to the details of our financial performance. Now I'll talk about quarterly sales by segment. Test Systems business is displayed on the right-hand side. SoC tester sales were JPY 191.3 billion, an increase of JPY 42.4 billion quarter-on-quarter. We were able to increase product deliveries compared to the previous quarter, mainly for high-performance computing/AI-related semiconductors, which continue to grow in complexity and performance. Memory tester sales were JPY 33.5 billion, maintaining a higher level comparable to the previous quarter, mainly driven by high-performance DRAM.

Now I'll talk about servicing others. While sales for support services maintained a steady level, sales for nanotechnology products declined compared to the previous quarter. Next, sales by region, ship to region. Starting with Taiwan. Sales increased significantly quarter-on-quarter, primarily driven by SoC testers. This is mainly due to higher quality assurance requirements for high-end semiconductors at several U.S. fabless companies. This resulted in an increase in sales to the related foundries and OSATs. South Korea, sales of memory testers and related device interfaces increased.

Now on to sales, gross profit and operating income. Gross margin increased quarter-on-quarter, primarily driven by the growth in sales of high-end SoC testers with high profitability. SG&A, including the total of other income and expenses decreased by JPY 27.5 billion quarter-on-quarter. As written in the footnote, in the previous quarter, an impairment loss of approximately JPY 21.4 billion was recorded for goodwill and intangible assets. Also in the first quarter, we recorded a gain of approximately JPY 2.5 billion from the partial transfer of a business. As a result, the operating profit margin for the first quarter reached 47%, marking a record high.

Now R&D expenses, CapEx and D&A. R&D expenses were JPY 17.1 billion and CapEx was JPY 6.1 billion. On the right-hand side, you can see our cash flow. In the first quarter, there was a decline in operating cash flow quarter-on-quarter due to an outflow associated with corporate tax, bonus payments and other items. Finally, balance sheet for the period ended June 30. Cash and cash equivalents were JPY 273.4 billion and inventories were JPY 209.3 billion as of the end of June. Ratio of equity attributable to owners of the parent was 64.5%. As our business continues to perform strongly, we will continue to work on cash allocation and balance sheet management while optimally balancing growth investment and capital efficiency.

This concludes my presentation. Now I will hand it over to Doug.

[Douglas Lefever, executive]

Thank you, Takada-san. Let me now share our perspective on the business environment and our outlook for the tester market in calendar year 2025. The fundamental dynamics of the semiconductor industry remain largely unchanged. Growth continues to be driven primarily by AI-related applications, while demand in other segments such as automotive and industrial remains relatively subdued.

Although the overall level of uncertainty has eased somewhat compared to 3 months ago, some risks persist. These include potential and ongoing geopolitical tensions and the possibilities of sharp fluctuations in foreign exchange rates. With these factors in mind, I will now update our market size forecast as follows. For the SoC tester market in calendar year 2025, we are raising the market size estimate range to USD 5.7 billion to USD 6.3 billion, up from our April estimate of USD 4.2 billion to USD 4.8 billion. Back in April, although we had observed robust demand, we maintained our January TAM estimate due to prevailing macroeconomic uncertainties. Now 3 months later, visibility has improved, and we have revised our forecast to reflect stronger-than-expected AI-related demand and our enhanced supply capabilities.

For the memory tester market in calendar year 2025, we are maintaining the market size estimate range of USD 1.7 billion to USD 2.2 billion, a relatively high level by historical standards. Taking all these factors into account, we now expect the semiconductor tester market to grow by about 33% year-over-year at the midpoint in calendar year 2025.

In light of the first quarter results and the outlook for the remainder of the fiscal year, we are raising our full year forecast as shown on the slide, with the numbers stated all in Japanese yen. Sales of JPY 835 billion, operating income of JPY 300 billion, income before taxes of JPY 297 billion, net income of JPY 221.5 billion and basic earnings per share of JPY 302.71 per share.

The upward revision of JPY 80 billion in sales is primarily driven by SoC testers with better-than-expected progress, particularly in the first quarter of the fiscal year. We expect a temporary digestion phase in the second half of the fiscal year for SoC testers due to the timing of next-generation device transitions with the growth projected to reaccelerate in FY 2026.

We now expect fiscal 2025 full year gross margins to reach approximately 60% and operating margins to reach approximately 36%, marking a historical high on an annual basis. As mentioned in my opening remarks, the strong margin profile in the first quarter was driven by a combination of factors. economies of scale, a favorable product mix, disciplined cost management and the benefits of past investments. Among these, economies of scale are particularly amplified, supported by demand pull-ins that boosted sales. While these factors are likely to be less pronounced in the remainder of the fiscal year, we will continue to invest in further capacity expansion and in other key areas as the anticipated ramp of next-generation devices from FY 2026 is expected to reaccelerate our growth trajectory following the temporary digestion period in the second half of fiscal 2025.

The exchange rate assumptions from the second quarter onward are JPY 140 to the U.S. dollar and JPY 155 for the euro. Please refer to the footnote #2, which shows the effect of exchange rate fluctuations on our operating income.

Now I'd like to specifically speak about our ongoing efforts to expand production capacity in anticipation of further growth in tester demand. Over the past several years, we have increased our production capacity by approximately 3x. This has enabled us to shorten lead times and respond effectively to rising demand. As we look ahead to a $1 trillion semiconductor market, we will continue scaling our capacity, both in SoC and memory testers. Going forward, we plan to expand capacity by more than 70% compared to fiscal year 2024. To support this, we will be adding production capacity with our partners. Furthermore, we will be investing in strategic inventories to maintain quick response times.

Next, I will explain the details of our sales forecast. For SoC testers, we revised our fiscal year 2025 sales forecast up by JPY 88 billion from the April projection. In the first 3 months of this fiscal year, we successfully capitalized on the sustained growth of AI-related demand by scaling up our supply capabilities. While we expect lumpiness in sales and deliveries in the second half, we are also preparing for what we expect to be a reacceleration of complexity-driven growth in fiscal year 2026 as new devices currently under development go into volume production. Meanwhile, demand in non-AI segments remains soft.

For memory testers, our fiscal 2025 memory tester sales outlook remains largely unchanged from the April forecast. As our customers continue to advance their technology road maps, we are placing the highest priority on expanding our supply capabilities in this segment as well, ensuring that we are well-positioned to support their evolving needs. For support services, we expect steady demand due to the continued growth of our installed base. Sales of test interface boards and test sockets remain on plan, while the nanotechnology business is experiencing some delays in demand.

Finally, I would like to close with the following remarks. We are pleased with a strong start to FY 2025. While the second half of the fiscal year may see a temporary digestion, we expect growth to reaccelerate in fiscal year 2026. Therefore, scaling our capabilities in our supply chain remains our highest priority. At the same time, we remain fully focused on executing on our 4 key strategies of outpace the growth in our market, expand adjacently into new businesses, drive operational excellence and enhance sustainability.

As we look ahead, we are encouraged by the evolving industry dynamics and confident in the position we are in. At our Q2 fiscal year 2025 financial briefing scheduled for the end of October, we plan to elaborate further on these topics as the third midterm plan is well due for an update.

This concludes my presentation. Thank you for your attention.

[Operator]

Asking questions regarding specific companies. CLSA Securities, Yoshida-san.

[Yu Yoshida, analyst]

Yoshida from CLSA. I'd like to ask you about the quarterly sales momentum trend. I know that you are seeing an adjustment phase in the second half of the fiscal year, but could you please give us the current color of the quarterly outlook for the rest of the quarters in this fiscal year? Also I think Takada-san talked about the market outlook for 2026 in the last quarter as an optimistic view. But do you have any clearer view for the next year growth pace at present?

[Douglas Lefever, executive]

Okay. Thank you, Yoshida-san for your question. So first question was about the color of the remaining quarters for the year. So clearly, our first quarter was a banner quarter, and there is going to be some digestion. We see that the lowest quarter for the year will be in the third quarter with the fourth quarter resuming some growth trajectory that will then continue into FY '26. So that's sort of the profile that you can think about for the sales on a quarterly basis.

As far as '26 goes, what we've been able to say is just more qualitatively that we're very optimistic about 2026. With the additional wafer capacity and advanced packaging being added into the market, that's going to drive additional unit volume and test capacity needs. We've also seen that the hyperscale CapEx growth is remaining intact, and that's also a very encouraging signal for 2026. And then as the device complexities continue to become more sophisticated, that requires additional test content. And all those things continue to give us optimism about 2026.

And then we're hopeful at some point in time that the consumer and automotive segments also return to some level of growth. So for those reasons, without giving actual numbers, we do feel more and more confident about 2026.

[Yu Yoshida, analyst]

Just for the clarification. You mentioned about the capacity addition of the -- 70% capacity addition. But when will be the time to fulfill this new capacity in the future?

[Douglas Lefever, executive]

Yes. Thank you for the follow-up. I would say, number one, we're able with our current capacity to meet all the current needs of our customers, which we've put a lot of effort into over the last several years and expanding. As I mentioned in the prepared remarks, we have tripled the capacity in the last several years. But as to this next step function in capacity additions, we're targeting for the end of 2026 to add both of this for our SoC platform as well as our memory platforms.

[Operator]

Next. We will take a question from Damian Thong, Macquarie Securities.

[Damian Thong, analyst]

Congrats on the quarter. I just want to follow up on the capacity increase. The baseline here then is the last fiscal year. So I can understand that you are targeting for SoC tester, for instance, revenue somewhere in the ballpark of the [ mid-$700 billion ]. Is that the capacity amount we will be looking at? And then on top of this, the second part of the question I'd like to ask is maybe you can get a hint on where you see the growth in the adjacencies that you talked about earlier, in, I presume including in services as well as, for instance, in -- how you call it, in design support activities.

[Douglas Lefever, executive]

Thanks for the questions, Damian. Let me make sure I understand the 2 questions. One was just on the level of expansion for SoC testers with our production capacity expansion. And the second one, I believe, was about the engineering and test services business that we're developing.

I'll answer the first one, and I'm going to ask Sanjeev Mohan to answer the second one. On the first one, on the SoC side, the range of expansion is going to be in the 60% to 70% range based on our 2025 levels. And so we're having a significant expansion of the capacity. And one thing to keep in mind is we're just not building to the capacity that's necessary to only meet the next wave of demand. Obviously, we're going to put additional capacity in place in order to handle some of the volatility that we've seen in the past couple of years with unforecasted business. We've learned that it's very difficult for our customers to forecast some of the spikes in these AI-related waves. And for us to be able to respond quickly to those demands, we have to build in some additional buffer levels of capacity in order to meet those spikes. So that's -- the basic number is about 60% to 70% on the SoC from '25 to end of '26 where we see that being put in place.

And then I'm not sure I caught, so we may have to clarify a little bit more on the second question. But I do want to introduce Sanjeev Mohan. So Sanjeev is taking over for Mak Nakahara, who for many years, led our global sales and support activities in the company. Mak is continuing with the company as a close adviser to me in the CEO office. But Sanjeev now, who's been overseeing all of the U.S. and North America as well as European sales is taking over the global sales role for the company. And so I'm going to have Sanjeev answer the second part of the question.

[Sanjeev Mohan, executive]

As far as the adjacent growth, I mean, there are a few areas that we have been investing in. the SLT, System Level Test, we expect that business to grow in the future as the nodes get smaller, the demand for System Level Test will continue to increase. And as a company, we continue to invest heavily in that area. So that's going to be one significant business that we expect to grow.

We also have invested in our DI, Device Interface business. And we expect that business to continue to do well as more and more customers are asking for turnkey applications. And then there is engineering services or warranty support. As you can tell by our results, we are shipping more and more systems and that helps provide organic growth for warranty support. So that's another area that we expect in the future to do well and continue to grow.

In regards to other services, as a company, we have understood that our customers want more from us. And I think that provides opportunity for us to get into some services areas that we have not done in the future. I don't want to get into details of that because it is something that we are developing, but that's another area that we hope will add to our business results.

[Damian Thong, analyst]

Can I just make one follow-up, small one? For the 60%, 70% increase, can I just clarify the baseline for that? Is that the average for 2025? Or should we think of it from the, say, the end of 2025? Sorry, from the end of 2024, early...

[Douglas Lefever, executive]

Yes. I mean from a baseline level, we're -- I would say, without quoting an exact number for our [indiscernible], we can ship more than 3,000 systems in a year. So you can kind of use that as a reference point then to build off of, if that's helpful.

[Operator]

Next question will come from Wadaki-san, Morgan Stanley MUFG Securities.

[Tetsuya Wadaki, analyst]

This is Wadaki speaking. So my question is, I guess, the focus really is the earnings, the sustainability earnings, whether it's special demand or temporary demand. So I think what I want to know is that was there an element of special demand in first quarter sales? And also, I want to know if there's upside to the second half forecast. And for the first quarter, SoC testers, like if you break it down between GPU and ASIC, can you give colors? So that would help me kind of explore how sustainable the current momentum is.

[Douglas Lefever, executive]

Thank you, Wadaki-san. So for the first part of your question about sustainability of some of the large numbers we saw in the first quarter. On the sales side, to a large degree, there was many pull-ins. And so we had originally not expected to have such a large quarter. We thought it would be spread out a little bit more. So there was a large degree of pull-ins. At the same time, the demand also was a bit higher than we had originally expected. So that's kind of the top line theme there.

On the profitability side, it's really the stars sort of aligned perfectly for us in the first quarter. So there is a really good product mix. There is a good degree of upgrades and licensing that always drive higher profits. As I mentioned in the prepared remarks, there were also some economies of scale and efficiencies. And then we didn't have any onetime write-downs. So that all led to this really, really great result in Q1.

Now some of those things are sustainable and some of them are not. And the things that are sustainable are things like as we look into the future, probably the product mix may not be quite as good, but still going to be very rich with the SoC versus memory. We feel like some of the efficiencies that we're driving are going to continue. But certainly, we're not going to expect the lumpiness over time to be perpetual across all of these different quarters. So I think as we look into Q3 and Q4, some of the effect of those pull-ins are felt in the lower sales.

And also, there's a lot of device transitions that are happening right now. So as some of the big AI accelerator, both on merchant GPU as well as the custom ASICs are coming up as well as the memory side with HBM transitions, there's a lot of work being done, investment being done to bring up those new types of devices that will show up later, more likely in FY '26. As far as the breakdown between kind of traditional GPU-based accelerators and the custom ASICs, we -- yes, we're not able to really give you that split because it gets into customer-specific things that we like to stay away from. But I mean, as you can guess, it's still largely on the traditional GPU basis. And we see the custom ASIC stuff growing now with a much larger portion coming in '26.

[Operator]

Next, Goldman Sachs, Nakamura-san.

[Shuhei Nakamura, analyst]

I just wanted to also touch upon the second half guidance or maybe your September quarter guide as well as the second half guidance. I understand that there was a lot of pull-in into June quarter, but nonetheless, it seems like your guidance implies a significant decline into September quarter as well as second half. Is it a reflection of already a fixed sort of negotiation with your customers? Is it mostly a done deal should think about? Or is there some conservatism also baked into the guidance given the lead time? That will be my first question.

[Sanjeev Mohan, executive]

Yes. So this is Sanjeev Mohan, Nakamura-san. So as far as -- so long term, I mean, if we just step back for a minute, the business, the AI boom will continue. So this goes back to the sustainability question, we think the '26 will be strong and the business will continue to be very good. Q1 just happened to be much stronger than we anticipated. So it is -- from our perspective, it isn't that there is a significant decline in the second half. It's more that Q1 was much stronger and then there were some pull-ins. As you also might know from just checking the industry data that a lot of the capacity gets placed during the first half or first few months of the year. And our customers asked us to pull in.

As now we look into the calendar year, there's only a few months left and the preparation is really now started for the next year. So this is why Doug mentioned that we expect Q3 to be kind of the -- our Q3 fiscal year to be kind of the bottom and then the business to pick back up again and accelerate going into Q4 and then into 2026.

[Shuhei Nakamura, analyst]

Just a quick follow-up. Could you also speak about the competitive dynamics for your SoC tester side, especially vis-a-vis your closest competitor in the U.S. in the markets such as GPU as well as the custom ASICs market?

[Sanjeev Mohan, executive]

Yes. I think we are positioned very, very well right now. I would say that we should hold -- continue to hold our market position that we currently have. It's also very difficult for customers to switch test platforms in the middle of the ramps. So for the foreseeable future, we believe we have a very strong market position and competitive position, both in the GPUs and custom ASICs.

[Operator]

Next, BofA Securities, Hirakawa-san.

[Mikio Hirakawa, analyst]

You raised SoC tester market for calendar '25 from $4.5 billion at the midpoint to $6 billion, about over 30%. Could you give us a sense how you split this increase between the increase of quantity or number of chips and the increase of the testing time?

[Douglas Lefever, executive]

Thank you, Hirakawa-san. That's a good question, difficult question, I'd say. Before I talk about the test content or unit volume, I think I want to just go back and remind everyone that when we were putting back in January, our forecast for TAM for '25, this was right on the backdrop of the DeepSeek events, and there was a lot of uncertainty. And then when we reiterated that TAM in April, that was on the backdrop of the deliberation day, the tariff discussions that happened in April. And so many companies at that point didn't offer any kind of market sizing. Many companies pulled their full year guidance, and we didn't want to do that. We wanted to put our best estimate forward even though there was a ton of uncertainty. So some of the 30% increase is a direct effect of us just being a little bit cautious given the uncertainties at the time. So that's probably at least half of the 30% was just the uncertainty factor.

As far as test content or unit volume, I think it's probably without trying to give a number, I would lean towards more of the unit volume basis as there was adjustments in wafer starts or advanced packaging capacity that moved around, that would suddenly create some demand that was unforecasted, and we were able to respond to those demand fluctuations. So hopefully, that helps you.

[Operator]

Next, Jefferies Securities, Nakanomyo-san.

[Masahiro Nakanomyo, analyst]

This is Nakanomyo speaking from Jefferies. Can you hear me? Well, sorry, maybe my question is a bit technical. With regards to the upward revision of SoC TAM, so SoC TAM is going to grow by like 40% at midpoint, maybe. But then your sales growth is only 20-some percent. So what's the difference between TAM growth rate versus SoC revenue growth rate? Is it -- what accounts for the discrepancy between sales upward revision versus TAM upward revision for SoC testers?

[Douglas Lefever, executive]

I think one thing that gets difficult is that our sales numbers we quote on a fiscal year basis and the TAM numbers we quote on a calendar basis. So that often leads to some discrepancy. But we have -- in our midterm plan, we have overall market share KPI of being greater than 58%. And so I can report that on SoC, we continue to be well above that metric, and we're also well above that metric for the memory test. But yes, I apologize, but certainly, the calendar versus the fiscal year creates some confusion. Yes, sorry. Sanjeev also just mentioned, exchange rate fluctuations because we show the TAM in dollars and our sales. Yes. On a general level, our share in SoC has gone up. And the memory tester, we remain relatively steady.

[Operator]

Next, Mizuho Securities. Yamamoto-san.

[Yoshitsugu Yamamoto, analyst]

This is Yamamoto from Mizuho Securities. Can you hear me now? Apologies. I have a quick question. So for FY '26, can we expect an increase in sales in next year, that's FY '26?

[Douglas Lefever, executive]

Yes. Thank you, Yamamoto-san. I think I'll just repeat earlier without talking numbers, but we say we're very optimistic, and we're seeing reacceleration into 2026. So we'll be able to talk more about that as we get further into the year and have a little bit more visibility. But right now, there's no reason to believe that '26 is going to be a down year.

[Unknown Analyst]

So this Q1 sales is very strong. So can we expect a similar big number in March '27?

[Douglas Lefever, executive]

Yes. I mean this is -- the Q1 number, like I mentioned, was very special. Everything was aligning perfectly for us. Certain things that happened in this quarter are certainly things that we would hope as a company to be able to repeat long term, but it would be irresponsible for me to suggest that we can have a quarter this big in the future.

[Unknown Analyst]

Of course, I know also Q3 would be bottom. So from Q4, can we expect sequential growth toward the end March '27?

[Douglas Lefever, executive]

Yes. I think it's fair to say that Q3 will kind of be the lowest part of the year and Q4 will come up, and we would expect that trend to potentially continue into the first quarter of FY '26. That's our expectation right now.

[Operator]

Next, Citigroup Global Markets, Shibano-san.

[Masahiro Shibano, analyst]

My name is Masahiro Shibano from Citi. I have one quick question to you, Doug, about your '27 outlook. I know it's really early to tell. However, you've showcased your very constructive outlook into calendar 2026. So what do you make of 2027 outlook based on what you are hearing in the street? And also the question in the same context about the capacity. Do you think the capacity you're adding right now is a permanent one? Or is it going to be more like a temporary addition?

[Douglas Lefever, executive]

Okay. Yes. Thank you, Shibano-san. As far as we look out beyond '26 to 2027, the only thing that I would mention is that the areas that we look at as signals would be wafer starts and advanced packaging capacity that's being put in place by our customers. And then we'd also look at the end market, for example, the hyperscale capital budgets. And in both those cases, I think there has been enough public discussion around continuation of the current trends. If those trends continue, then there's optimism that this growth cycle will continue beyond '26 and into '27.

However, we know from our experience that there can be cycles that happen quickly. So we don't assume that's going to be the case in how we run the company. As to the production that we're putting in place, because we have a long-term belief in the industry, as I mentioned, getting to $1 trillion in semiconductor revenue, we know that we're going to have to add this type of capacity in a permanent fashion. So this would not be temporary capacity. In fact, even longer term, we probably will have to expand further, and we have some of those plans that we have initiated already. Thank you.

[Operator]

Next, Okasan Securities, Shimamoto-san.

[Shimamoto Takashi, analyst]

This is Shimamoto speaking from Okasan Securities. So first quarter was very strong. And so I just want to understand the strength behind the first quarter sales again. Does it have to do with any impact on tariffs from Trump administration? Or is it just that strong sales for one specific customer? Or was the strength seen across the board, across many customers? How is it that your sales deviated so much from your expectation?

[Douglas Lefever, executive]

Yes. Thank you Shimamoto-san. Sorry. As far as why -- the second question about why our sales deviated so much is mostly because of the pull-ins. If you were to spread some of the first quarter and even second quarter expectations across the year, it would look different. So it's not that -- as Sanjeev said, it's not that the second half is so bad. We just pulled from second half into the first half and even to the first quarter. As far as the other factors, as I mentioned earlier, too, there were additional unit volumes that came into play that allowed our customers to ship more semiconductors that they did not even forecast. And so we were able to respond quickly to those scenarios and capture that business in the first quarter. Did I answer your question?

[Shimamoto Takashi, analyst]

So the pull-in, the reason for the pull-in, did it have anything to do with the tariff impact or any political aspect to that pull-in? Or like it just -- is it just like good demand and being able to supply and meet that demand?

[Douglas Lefever, executive]

Yes, I apologize for not answering that the first time. No, there was no tariff level factors really that presented themselves for this business. It was more just a very large AI-related demand.

[Operator]

Next, Tokai Tokyo Intelligence Lab, Kamisaki-san.

[Shouichirou Kamisaki, analyst]

I'm Kamisaki from Tokai Tokyo Securities. My question is with regards to memory testers. So right now, I think HBM is driving your demand. Going forward, is it going to be bit growth that will drive demand? Or is it going to be HBM generation transition that will drive memory tester demand? Can you give color as to what will drive memory tester demand?

[Sanjeev Mohan, executive]

Yes, I think there -- this is Sanjeev Mohan again. So there are a lot of factors and a lot of -- I mean it's a really good question. So HBM is a growth driver for us, first of all. And as the customers transition to HBM4 and HBM4E and higher stacks, that will drive more demand for us. Having said that, even though HBM is a growth driver, we have a very favorable product mix and dominance in particularly in the DRAM market. So our -- we are very optimistic about our memory business as well. We think the growth should continue as the AI demand continues and the data center builds continues, that will drive more and more product volumes and for the memory products as well. And I think there should be a good growth opportunity for us.

[Operator]

Well, we are almost at the end of the session. Maybe we'll just take one last question. Next, Aletheia Capital, Steven Liu-san.

[Steven Liu, analyst]

So I just have a question regarding like your product mix in terms of the usage. So we do know that in previous -- before AI, like wafer sorts and final test was similar in terms of the ratio. But given the increasing usage of chiplets in chiplet architecture and more and more chiplets in the future, do you have -- could you please share some color in regards to your ratio in terms of wafer sort demand as well as final test demand? As well, can you also share some color in regards to partial assembly handlers, which you sell as well as die-level test and partial assembly test. Could you just share some color regarding this? We don't need concrete numbers, but I think there should be a change in these sales trends. That's it.

[Sanjeev Mohan, executive]

Yes. So I think you are hinting at it, and you're correct. I think the importance of wafer sort grows. These packages are very expensive with the chiplet strategy that most companies are adopting now, the value of a known good die is increasing. So we expect the overall business for the wafer sort will continue to grow probably faster than what we would see at final test. As you also mentioned, the partial die or die level prober, we also think that's a very exciting opportunity for us that we will be competing for.

[Steven Liu, analyst]

So is that also like a reason why you changed your reporting segments, moving the test handlers and the system-level test into one big business? And moving on, could that -- is it okay to assume that for next year's growth because we talked about sequential growth moving on from the fourth quarter, that's actually coming -- that's actually also due to the increase of wafer sorts? Is that -- can we assume that?

[Douglas Lefever, executive]

Yes. Steven, this is Doug. I think definitely, there's going to be -- as Sanjeev mentioned, there's going to be such an emphasis on known good die and testing at the silicon level. And so for sure, there's going to be new solutions that have to be developed. And one of the key areas is to be able to do thermal control at that die or partial assembly level because that's something that typically can't be controlled at a monolithic wafer level. And so that does represent additional upside. There is likely to be a change in the test flow at the wafer and die level, which could present some additional insertions. So we see that as upside.

That's not the reason that we changed the reporting segment. The reporting segment was a little bit that we had before is a little bit antiquated with the Mechatronics Systems. And so we wanted to simplify it into kind of the capital equipment or the Test System Business and then the service and others more in line with what many other companies are doing in the industry. And so that's the reason for that. But very good questions. It doesn't mean that the final test on the first part of your question isn't going to go away and System Level Test actually is an area where we see expansion as well. And so it's all additional content, additional insertions.

And one thing that we talk a lot about with our customers is this distribution of test and the ability to move test content around in the back end to allow the optimization of test content. And we intend to play in nearly all of those insertions in order to service that distribution. I hope that helps.

[Operator]

I see other hands being raised, but we will conclude this session. Thank you for attending our first quarter FY '25 briefing despite your busy schedule.