Coater/Developer growth of over +50% YoY and Advanced Packaging growth of over +60% YoY unveiled; management explicitly targets gross margin above 50% within two years

Summary

Envalith had the opportunity to attend the company's earnings briefing held on April 30 at 5:30 PM. FY2026 full-year revenue reached a record JPY 2,443.5B (+0.5% YoY), while net income of JPY 574.4B also hit an all-time high, aided by gains on the sale of cross-held equities. FY2027 H1 guidance calls for revenue of JPY 1,570.0B (+33.1% YoY) and operating income of JPY 431.0B (+42.2% YoY), projecting a record half-year. CEO Kawai explicitly stated the goal of achieving a gross margin above 50% within two years, outlining a three-pronged approach—price increases, productivity gains, and new model introductions—to reach the mid-term plan's 35% OPM target. The company also shifted its guidance disclosure period from full-year to half-year, transitioning to a more timely information disclosure framework.

Key Points (Earnings Highlights and Growth Actions)

• Business Strategy And Market Outlook
  • CY2026–27 WFE market assumed at $150B–$170B/year (over +20% vs. CY2025), with leading-edge devices up over +30%
  • Key change vs. three months ago: incremental and pull-in requests for AI server-related demand
  • CY2025 WFE mix of DRAM+NAND 35% / Logic 65% shifts to DRAM+NAND 40% / Logic 60% in CY2026
  • China's share of WFE declines gradually from the upper 30% range in CY2025 to the mid-30% range in CY2026
• Current Business Progress And Drivers
  • 4Q revenue JPY 711.8B (+28.9% QoQ), OPM 28.9% vs. 21.0% in 3Q—a sharp recovery driven primarily by shipment timing skew
  • Full-year gross margin 45.3% (−1.8pt YoY) weighed down by rising component costs, product mix shift, and overseas field service engineer headcount expansion
  • Etch equipment annual market share declined approximately −0.9pt YoY, mainly due to customer mix and delivery timing shifts from regulatory impacts
  • Field Solutions revenue JPY 626.0B (+16.3% YoY), driven by rising customer utilization rates boosting retrofit and parts demand
• Strategic Initiatives And Inflection Points
  • Guidance disclosure period changed from full-year to half-year to address growing scale and uncertainty in customer capex
  • First official commitment to achieving gross margin above 50% within two years, through price increases, productivity improvements, and new model launches
  • Advanced packaging bonding-related equipment (bonder/debonder/laser tools) expected to generate cumulative revenue of approximately JPY 500B over the next five years
  • Launched device prober Prexa SDP; supports leading-edge packaging processes through Known Good Die (KGD) sorting

Outlook And Strategy

• FY2027 H1 guidance: revenue JPY 1,570.0B, operating income JPY 431.0B (OPM 27.5%), targeting a record half-year
• H2 expected to outpace H1 growth, with continued shipment increases centered on DRAM and leading-edge logic
• FY2027 full-year R&D spending planned at JPY 330.0B (+18.8% YoY), capex at JPY 190.0B; new Miyagi production facility slated for completion in summer 2027
• Coater/Developer revenue expected to grow over +50% YoY, etch over +25%, and advanced packaging over +60% in FY2027
• CEO stated that the mid-term plan targets (revenue JPY 3T / OPM 35% / ROE 30%) are within reach on revenue and ROE
• FY2027 interim dividend planned at JPY 361/share, maintaining a consolidated payout ratio of 50%

Positive Factors

• CY2026–27 WFE market in the $150B–$170B/year range, with leading-edge devices at over +30%—the segment where the company's strengths are most leveraged
• Coater/Developer market share at 91% (CY2025), positioned to benefit from EUV multi-patterning, DRAM EUV adoption, and capacity expansion investments across the board
• Process-of-record (POR) lock-in for memory capacitor processes and HBM interconnect processes; 100% share in GAA isotropic etch—a dominant competitive position
• Advanced packaging revenue grew from approximately JPY 200B in FY2026 to a growth plan of over +60% in FY2027, with probers alone expected to exceed JPY 100B
• FY2026 full-year FCF of JPY 433.2B (record high) and total shareholder returns of JPY 437.4B (also record high) underscore robust cash generation and capital return capabilities
• Product lead times shortened from 4–5 months to 3–4 months, enabling the company to accommodate customer pull-in requests

Concerns And Risks

• Prolonged Strait of Hormuz blockade risk: transit volumes remain approximately 95% below pre-conflict levels, raising concerns over supply chain disruption for components
• OPM at 27.5% in FY2027 H1 guidance still trails the mid-term plan target of 35%, with persistent inflationary headwinds from FX (approximately −JPY 70B impact vs. mid-term plan assumptions), labor costs (+9–10%), and logistics costs (+10%)
• Taiwan subsidiary received a guilty verdict regarding unauthorized acquisition of TSMC trade secrets (fine of TWD 150M); while organizational involvement was denied, this warrants monitoring as a business risk in Taiwan
• Etch equipment market share declined YoY; the extent of recovery in the current period and beyond—given customer mix and regulatory-driven delivery timing shifts—remains a key focus
• Shift to half-year guidance disclosure reduces full-year visibility, increasing the difficulty of earnings forecasting for investors
• China revenue mix at 34.1% for the full year remains elevated, with potential for tighter export controls driven by geopolitical risk

Performance Highlights

FY2026 full-year revenue reached JPY 2,443.5B, marking a second consecutive year of record highs. Operating income declined to JPY 624.9B (−10.4% YoY), primarily due to aggressive R&D investment (+11.1%). Net income hit a record JPY 574.4B (+5.6% YoY), boosted by JPY 115.4B in gains from the sale of cross-held equities.

• Field Solutions Revenue: JPY 626.0B (+16.3% YoY)
• Gross Profit Margin: 45.3% (−1.8pt YoY)
• Operating Income Margin: 25.6% (−3.1pt YoY)
• ROE: 29.6% (−0.7pt YoY)
• R&D Expenses: JPY 277.8B (+11.1% YoY)
• Capital Expenditure: JPY 216.0B (+33.2% YoY)
• Total Shareholder Returns: JPY 437.4B (record high)
• Free Cash Flow: JPY 433.2B (record high)
• EPS: JPY 1,254.57 (+6.1% YoY)
• Coater/Developer Global Market Share: 91% (CY2025)
• Dry Etch Equipment Global Market Share: 23% (CY2025)