Etching full-year revenue of JPY 1T and prober revenue exceeding JPY 100B now in sight; management makes concrete commitment to achieving gross margin above 50% within two years

Summary

FY2027 1Q revenue of JPY 732.3B (+33.3% YoY) and operating income of JPY 211.4B (+46.1% YoY), setting new quarterly all-time highs. The company updated its WFE market outlook to $150B+ for CY2026 and $190B+ for CY2027, and revised 1H guidance upward to JPY 1.62T in revenue. The CEO explicitly stated the target of achieving gross margin above 50% within two years, noting that JPY 1T in operating income is now within reach this fiscal year. The impact of the Kumamoto earthquake on earnings was assessed as immaterial.

Key Points (Earnings Highlights And Growth Actions)

• Corporate Strategy And Market Assessment
  • WFE market projected at $150B+ for CY2026 → $190B+ for CY2027; AI data center-driven demand approaching 50% of total WFE
  • CY2026 breakdown: DRAM low-$40B range (+30%+ YoY), NAND mid-$10B range (+40%+ YoY), Logic/Foundry mid-$80B range (+15%+ YoY)
  • Proliferation of agentic AI is expanding AI demand beyond GPUs to CPUs and general-purpose servers, driving broad-based growth across all applications
• Current Business Progress And Drivers
  • Taiwan-directed revenue surged +18.9% QoQ to a 25.4% mix; China at 30.4%, with low-30% range expected for the full year
  • Field Solutions revenue of JPY 188.0B (+15.5% QoQ); parts & services at JPY 135.7B, reflecting high fab utilization rates
  • New equipment for non-volatile memory rose +32% QoQ, indicating a recovery trend
• Strategic Initiatives And Inflection Points
  • Announced expanded collaboration with NVIDIA; developing agentic AI and robotics solutions on the Epsira platform
  • Released Prexa SDP, a device prober for advanced logic, in April; targeting 10–15% of the prober market as new SAM
  • Unveiled a new target to achieve gross margin above 50% within two years, pursuing five initiatives including pricing optimization, next-gen equipment development, and startup efficiency improvements

Outlook And Strategy

• 1H revenue guidance raised to JPY 1.62T (+JPY 50B vs. prior), operating income to JPY 458.0B (+JPY 27B vs. prior)—both half-year all-time highs
• 2H growth expected to exceed 1H; customers continue to request accelerated deliveries and incremental purchases
• Mid-term plan targets of JPY 3T+ in revenue and 30%+ ROE remain On Track; 35% OPM is In Progress, but JPY 1T in operating income is now within reach this fiscal year
• Cryogenic etching for 400+ layer NAND to enter volume production starting CY2027; POR already secured in new low-resistance metal deposition
• DRAM interconnect etch equipment: cumulative revenue through 2030 projected at JPY 1T
• Miyagi Production Innovation Center: completion targeted for summer 2027, aiming for 4x labor productivity and 3x production capacity

Positive Factors

• Q2 new equipment revenue expected to reach a quarterly all-time high of JPY 708.7B (+33% QoQ)
• Three core businesses delivering strong growth: coater/developer +50%+ YoY, etching +25%+ YoY, advanced packaging +70%+ YoY
• Etching full-year revenue of JPY 1T and prober full-year revenue exceeding JPY 100B presented as part of the outlook
• Interim dividend of JPY 384 (vs. JPY 264 in prior year), a record high; 1:5 stock split also contributing to broadening the investor base
• Share buyback program of up to JPY 150B underway (approximately JPY 11.5B acquired as of end-June)
• CEO explained that the WFE outlook is a demand-based figure built from bottom-up customer forecasts—not a particularly bullish assumption

Concerns And Risks

• OPM of 28.9% still leaves a meaningful gap to the mid-term plan target of 35%; specific quantitative impact of pricing optimization and cost structure improvements has not been disclosed
• China revenue mix remains elevated at 30.4%, warranting close monitoring of any changes to US-China regulatory restrictions
• Q2 OPM expected to decline from Q1 due to higher personnel costs (salary increases, performance-linked bonuses), among other factors
• Some partner companies in Kumamoto remain shut down following the earthquake; aftershock risk persists
• WFE share has trended lower over the past five years (CEO attributed this to FX, US-China regulations, and investment pullback by a specific customer)
• Middle East geopolitical risks and supply chain disruptions not currently causing notable disruptions, but warrant continued monitoring

Performance Highlights

FY2027 1Q revenue of JPY 732.3B (+33.3% YoY, +2.9% QoQ) and operating income of JPY 211.4B (+46.1% YoY), marking quarterly all-time highs across revenue, gross profit, and operating income. OPM of 28.9% and gross margin of 46.8%, broadly in line with the prior quarter. Net income attributable to owners of parent company was JPY 164.3B (−23.3% QoQ), primarily due to the absence of gains on sales of cross-held shares recorded in the prior quarter.

Segment Performance

• SPE New Equipment Revenue: JPY 531.3B (+34.5% YoY)
• Field Solutions Revenue: JPY 188.0B (+33.1% YoY)
• Parts & Services Revenue: JPY 135.7B (+37.5% YoY)
• Used/Refurbished Equipment Revenue: JPY 52.3B (+23.1% YoY)
• Gross Profit Margin: 46.8% (+0.6pt YoY)
• Operating Income Margin: 28.9% (+2.6pt YoY)
• R&D Expenses: JPY 72.0B (+15.9% YoY)
• Capital Expenditure: JPY 39.9B (−24.4% YoY)
• Free Cash Flow: JPY 80.5B
• Cash on Hand: JPY 409.6B
• Interim Dividend Per Share (Forecast): JPY 384 (vs. JPY 264 in prior year, +45.5%)

Q&A List

• Q: Could you provide the growth rates by application for the CY2026 and CY2027 WFE market outlook? On a fiscal year basis, which applications will drive growth into 2H?
  A: Last year, the mix was Logic/Foundry 65% and Memory 35%, but this year Memory is growing more, shifting the mix to roughly Logic 60% / Memory 40%. There is no significant difference between the calendar year and fiscal year view, and demand related to agentic AI remains extremely strong. HBM, NAND, GPU, and even CPU use cases are expanding, with agentic AI driving overall WFE growth, primarily in leading-edge areas.
• Q: For CY2026 WFE of $150B+, could you provide the composition for DRAM and NAND respectively, and any composition changes expected in CY2027?
  A: For CY2026, DRAM is in the low-$40B range, NAND in the mid-$10B range, Logic/Foundry in the mid-$80B range, and factory automation/wafer-level packaging approximately $10B, totaling $150B. YoY growth rates are DRAM +30%+, NAND +40%+, and Logic/Foundry +15%+. CY2027 is expected to grow approximately 20% overall, with no major shift in composition.
• Q: Regarding the five initiatives for profitability improvement, could you provide the timeline and quantitative impact of each?
  A: The first initiative—high-value-add next-gen equipment—and the second—upgrades—involve continuously developing new models and version upgrades on a 2–3 year cycle, contributing to yield improvement and tool uptime enhancement. A key strength is the ability to propose solutions across both scaling and advanced packaging through a broad equipment lineup. The third initiative—startup efficiency—addresses the surge in fab construction through modularization and automation to enable lean startup teams, and benefits are already materializing. The fourth—cost reduction—is being pursued continuously in collaboration with suppliers across the entire supply chain. Including the fifth—pricing optimization—these five initiatives together are targeted to achieve gross margin above 50% within two years.
• Q: What was the primary driver behind the upward revision to the WFE outlook since the last earnings? The figure appears somewhat above market consensus—what is the rationale?
  A: The WFE outlook is the result of aggregating forecasts and requests from customers; it is not particularly bullish. The driver is that all applications—DRAM, NAND, Logic, and Packaging—are strengthening across the board. In addition to HBM, leading-edge DRAM, and NAND, AI server demand is extending AI tailwinds to CPUs and general-purpose servers as well.
• Q: If WFE were to expand toward the $250B or $300B level, could you respond as an equipment maker provided chipmakers supply adequate forecasts?
  A: Our strength lies in having development and production infrastructure organized as a supply chain cluster within Japan. We have been preparing with long-term forecast confirmation from customers since two years ago. That said, we also need to monitor hyperscaler cash flows and energy availability. We do not have the capacity to immediately address the maximum scenario, but our ability to reliably meet customer requirements within a two-year forecast window is a key competitive advantage for Tokyo Electron.
• Q: Is there a benchmark figure for how much WFE capacity you can support before and after the Miyagi Production Innovation Center comes online?
  A: Once the Miyagi Production Innovation Center is operational, we will secure 3x our current production capacity. Initially we had assumed timing in the 2030s, but we are pulling this forward and accelerating in line with market trends. The methodology to reach 3x is already established—it is simply a matter of accelerating timing to match demand—so we can cover considerable upside.
• Q: On pricing optimization, roughly what percentage increase are you implementing relative to existing prices?
  A: Given that discussions are being conducted in parallel with multiple parties, we will refrain from disclosing a specific percentage.
• Q: Is it fair to say that next fiscal year, the WFE outlook combined with pricing changes would result in meaningfully larger revenue growth? And that pricing is the biggest near-term lever for margin improvement?
  A: That understanding is correct in terms of the top line. Near-term, pricing has the largest impact, but relying solely on pricing is not advisable, so we will continue to diligently execute initiatives one through four as well.
• Q: When you say JPY 1T in operating income is within reach, does that mean achievable this fiscal year, or is it a longer-term target? What are the drivers behind the expected QoQ decline in Q2 OPM?
  A: JPY 1T in operating income refers to this fiscal year. The Q2 margin decline reflects personnel cost factors including July salary increases and higher performance-linked bonuses, as well as product mix effects. However, we are targeting levels above the current plan.
• Q: Regarding the directional trajectory of OPM from next fiscal year onward—given the substantial WFE growth, wouldn't top-line expansion alone bring you close to 35%? What level will the new mid-term plan target?
  A: 35% is the near-term discussion; we intend to aim well beyond that. Leveraging growth in existing businesses, investment in efficiency, and SAM expansion—utilizing technologies including plasma, thermal control, pressure control, chemicals, bonding equipment, and wafer total solutions—we will consistently pursue world-class profitability.
• Q: What caused the share decline over the past five years? What will be different going forward to enable share recovery?
  A: Three factors drove past share decline. First, FX—JPY depreciated from JPY 115/USD in 2020 to JPY 146/USD last year and is currently in the JPY 160/USD range. Second, US-China regulations triggered advance purchases of US-origin equipment, displacing our slots. Third, investment pullback by a specific customer where we had high share. Going forward, we will pursue company-wide pricing optimization; deploy new equipment in applications such as cryogenic etching, DRAM half-pitch etching, and low-resistance deposition without relying on specific customers; and ramp technologies where we have a first-mover advantage, such as wafer-to-wafer bonding, to drive share recovery.
• Q: What factors contributed to gross margin improvement this quarter? Were there contributions from product mix or FX beyond pricing optimization?
  A: The single largest factor in gross margin improvement was FX. Product mix also contributed as sales of higher-margin products grew. Pricing optimization is also gradually taking effect.
• Q: Regarding next fiscal year's gross margin—should we expect further improvement, or could it flatten depending on FX?
  A: There is some uncertainty around FX, but the direction is continued improvement toward gross margin above 50% through disciplined execution of the five initiatives.