Fujitsu and Renesas Electronics: Contrasting Q2 Results and Future Outlooks

Earnings call: Fujitsu reports robust growth in service solutions By Investing.com

Fujitsu Limited (TYO: 6702) has reported a solid start to FY 2024 with a strong performance in its Service Solutions segment during the Q1 Financial Results Meeting. The company announced a 7.8% year-over-year increase in revenue to ¥501.6 billion in this sector, fueled by high demand for DX and modernization services in Japan. Adjusted operating profit for Service Solutions soared by ¥14 billion from the previous year, reaching ¥34.9 billion. Despite some challenges, Fujitsu's consolidated revenue grew by 3.8% to ¥830 billion, with the company emphasizing its commitment to expansion and investments for sustained growth. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Fujitsu's earnings call highlighted the company's resilience and strategic initiatives to bolster growth and profitability. With a clear focus on expanding its Service Solutions offerings and navigating the challenges of a dynamic market environment, Fujitsu is positioning itself for long-term success. Full transcript - Fujitsu (FJTSY) Q1 2024: Takashi Koto: Since it is time, we would like to commence Fujitsu Limited FY 2024 Q1 Financial Results Meeting. Thank you very much for your attendance despite your very busy schedule. I will be serving as the MC today. My name is Koto from Investor Relations. First of all, let me introduce the speaker today, Takeshi Isobe, Representative Director, Corporate Vice President, CFO. As for today's proceedings, first of all, Isobe will be speaking about the overview of Q1 consolidated financial results for about 15 minutes. After that, from around 3:45, we will have Q&A session for the media and from 4:05, we will have the session for investors and analysts. For the Q&A sessions, all the participants will be able to see. If you would like to ask questions there is a need to participate through zoom webinar. As for the method of participation, please make sure to confirm through the e-mail that we have sent in advance. Now, let us begin without further ado. CFO, Isobe, the floor is yours. Takeshi Isobe: This is Isobe speaking. So I would like to explain about the financial results of 2024 first quarter. Please turn to Page 3. I will start by presenting our financial highlights. The most important segment is Service Solutions. We continue to have strongly high revenue and operating profit building on the previous year. Revenue for the first quarter was ¥501.6 billion, an increase of 7.8% over last year's first quarter. In particular, business in Japan continues to see a healthy demand for DX and modernization services and revenue rose 11% over the prior year. Adjusted operating profit in Service Solutions was ¥34.9 billion an increase of ¥14 billion compared to the first quarter of fiscal 2023. In addition to the impact of higher revenue, there has been steady progress in profitability improvements. The adjusted operating profit margin improved to 7%, an increase of 2.5 percentage points from the prior year. Total consolidated revenue was ¥830 billion, an increase of 3.8% over the previous year. Revenue rose in service solutions, hardware solutions and device solutions. Adjusted operating profit was ¥23.6 billion, up ¥21 billion from the prior year, the adjusted operating profit margin 2.8%, an improvement of 2.5 percentage points from the prior year, primarily from service solutions. Page 4 shows an overview of the financial results for the each business segments. I will discuss the results for each segment starting with the next slide, but this gives you an overview of the segments. Service Solutions, our growth driver, started the fiscal year with strong growth in both revenue and profits. In Hardware Solutions, profit fell as there was a pullback from last year's high profit deals and the negative impact from the weak yen. Results in Device Solutions, on the other hand, benefited from the weak yen and both revenue and profit increased. In intersegment eliminations and corporate, a reduction in inventories led to an improvement in unrealized gains, among other positive factors, but there has been no particular shift in our expansion and investments to achieve growth over the medium and long-term horizon. From Page 5, I will show results for each segment. Page 6. First, I will discuss Service Solutions. Revenue was ¥501.6 billion, an increase of 7.8% from the prior year. Primarily in Japan, there was a strong increase in demand of DX and modernization services and revenue from events continued to increase. Revenue from business in Japan rose by 11% from the prior year. Adjusted operating profit was ¥34.9 billion, up ¥14 billion from the prior year, enabling the segment to achieve a solid start to fiscal 2024. I will now explain the components of this profit increase using a waterfall chart. Page 7. This chart shows the factors that cause increases or decreases in adjusted operating profit in Service Solutions compared to the prior year. On the far left, adjusted operating profit in the first quarter of fiscal 2023 was ¥20.9 billion and that is the starting point for examining changes in profit during this fiscal year's first quarter. The first factor is an increase of ¥14.2 billion, an adjusted operating profit from the impact of higher revenue. The strong growth in revenue in Japan drove an increase in gross margin. The second factor is an increase of ¥8.1 billion from improved profitability. We continue to make progress initiatives to improve productivity, such as the standardization in our development process. In addition, in regions, international regions, there was a positive impact from the carve-out of a low profitability business. The gross margin improved by 2 percentage points from the previous year. The third factor is a decline of ¥8.3 billion from higher expenses, primarily investments in growth business. We continue to actively implement investments in the direct growth of our business, such as the development of events offerings, the aggregation of knowledge to support the rapid growth and our modernization business investments in employee training and development and enhanced security. Adding these up, adjusted operating profit for Service Solutions in the first quarter of fiscal 2024 is ¥34.9 billion. Page 8. I will now provide supplemental information on each of the factors in the previous waterfall chart. First is the status of orders, which led to the increase in revenue. This page shows orders in Japan. Orders in Japan fell by 3% in the first quarter compared to the previous year. I will comment on each industry segment. First is the private enterprise business segment in which orders were up 6% from the prior year. There was continued growth in projects related to digital transformation and sustainable transformation as well as modernization deals for mission-critical systems with continued strength across a wide range of customers, including those in manufacturing, mobility, retailing and distribution sectors. Orders were flat in the finance and business segment compared to the prior year. We were able to win large scale deals to upgrade mission-critical systems for financial institutions, enabling us to receive a scale of orders on par with the high level of orders in last year's first quarter. In the public and healthcare segment, orders fell 15%. This represents a pullback from the first quarter of last year when we received orders for large scale multiyear deals. Our deal pipeline for the second quarter and beyond is growing. And although the level of orders in the first quarter was below last year's level, we are not particularly concerned about the future. In the mission-critical and other segments, orders were up 31% from the prior year. We received multiple large scale deals such as upgrades for mission-critical systems. Overall, our business in Japan is continuing a solid growth trend in deals across a wide range of customers. There was a pullback in the first quarter from the multiyear contracts we won in last year's first quarter, but the pipeline of expected orders in the second quarter and beyond is solidly expanding. And for the full year, we expect a continuation of these strong trends. In addition to the high volume of backlogs from orders we had received through to the end of last year, the expansion trend and opportunities for orders remain strong and we expect to be able to continue the steady growth in revenue. Page 9 shows the orders in the international regions. Orders in Europe region fell 14% compared to last year. This represented a pullback from last year's large scale deals, primarily in the Nordic areas. Orders in Americas region increased by 4%. The solid growth in orders continued, primarily for Fujitsu Uvance, and we were able to exceed the high level of orders received in last year's first quarter. Orders for the Asia-Pacific region were up by 14%. In Oceania, we were able to win a multiyear contract renewal from a finance related customer taking the growth in orders up a notch. Page 10 shows the progress of Fujitsu Uvance, which we are positioning as the most vital area for the growth of our business and the transformation of our business portfolio. Overall, orders received in the first quarter sharply expanded, growing by 50% over the prior year to ¥109.2 billion below that is revenue. In the bar graph, the deep blue portion depicts revenue from the four vertical areas, which are cross industry areas that solve societal issues. The light blue presents revenues from the three horizontal areas, which are technology platforms that support the cross industry areas. Overall revenue from Fujitsu Uvance in the first quarter was ¥96.5 billion, up by 37% from the prior year. Of that, ¥19.1 billion was from the vertical area roughly three-folds in the scale of revenue compared to the prior year. The ratio of revenue in Service Solutions from Fujitsu Uvance rose from 15% in the prior year to 19%. The graph on the right hand side shows our revenue targets for this fiscal year and next fiscal year. The revenue target for this fiscal year is ¥450 billion, up from ¥367.9 billion in fiscal year 2023 nearly an increase of ¥100 billion. In the first quarter, the Uvance business got off to a good start in both orders and revenue and our progress is on pace to slightly exceed our target for the first quarter. We are seeking to achieve our target for Uvance revenue of ¥700 billion in fiscal 2025, the final fiscal year of our medium-term management plan in which we seek to have Uvance representation 30% of total revenue in Service Solutions. For Page 11, I would like to comment on profitability improvements and the status of growth investments. The increase in profit from profitability improvement was ¥8.1 billion and the gross margin improved by 2 percentage points from the prior year. Starting last year, every year we have been able to improve our gross margin by roughly 2 percentage points. Productivity improvements are clearly continuing, such as through the standardization of development work, automation, the expansion of in-house work and the expansion in the utilizing of offshoring. In addition, customers have also acknowledged the quality and the value we deliver and our progress in setting suitable pricing is another positive point. Moreover, the impact of the shift in our business portfolio implemented in international regions is already starting to materialize. On the right hand side, growth investments and other expenses increased by ¥8.3 billion. Investments have increased. We have continued to deliberately and proactively invest in areas directly related to business growth, such as the development of Fujitsu Uvance offerings, the aggregation of knowledge to support the expansion of our modernization business, investments needed to develop and recruit specialist human resources and investments to strengthen our security. We have created our three growth pillars of Uvance modernization and the consulting business and we are working hard to accelerate that growth. Next is Page 11. I will briefly touch on the status of each sub-segment in Service Solutions. First is global solutions, revenue was ¥129 billion, up sharply by 23.8% from the prior year. On an adjusted basis, the sub-segment posted an operating loss of ¥2.3 billion. Revenue grew strongly, primarily from Fujitsu Uvance as for profit, however, because of stepped up expansion in investments in absolute terms, the sub-segment ended with a loss. We accelerated the development offerings in Uvance, primarily in the vertical areas and we are strengthening investments in delivery standardization, such as the expansion of the modernization knowledge center. We are making progress as planned in dealing with expansion of our offerings business and the strong demand for DX and modernization services and we expect that through the impact of higher revenue and improvement in the gross margin. We should be able to achieve a solid level of profit for the full year. In region Japan, revenue was ¥272.6 billion, up 4% from the previous year. The adjusted operating profit was ¥37.9 billion, approximately 1.5x the level of profit of the previous year. Modernization related demands such as DX business and upgrades of mission-critical system continue to increase and revenue increase from a wide range of industries such as mobility, finance and public sectors. In addition to the impact of higher revenue, we also continued making progress on improving profitability. The adjusted operating profit margin therefore had significant 4% improvement from the prior year to 13.9%. In regions international, revenue was ¥142.2 billion, up 0.9% compared to the previous year. Adjusted operating profit was a loss of ¥0.5 billion. Loss decreased by ¥3 billion from the previous year. For revenue, although there were positive effects from foreign exchange movements, there was also the negative impact of the carve-out of the low profit German private cloud business. On the net basis, revenue was essentially unchanged from the previous year. In terms of profit, the effects of the business portfolio transformation led to improved profitability. Page 13. This page shows the other segments besides service solutions. First is hardware solutions, revenue was ¥228.5 billion, up 5.4% from the previous year. There was an adjusted operating loss of ¥3.6 billion, a deterioration of ¥6.3 billion from the previous year. System products, in terms of revenue, saw an increase due to foreign exchange movements. But on the other hand, in terms of profit, there was an increase in the cost of procuring components tied directly to the weak yen, which had a negative effect on profitability. In addition, on top of the impact of foreign exchange movement, there was also drop off of the previous year's highly profitable business deals, which resulted in decrease from profit from the previous year. Network (LON:NETW) products was also similarly impacted by weakened yen. Excluding the impact of foreign exchange movement, revenue was about the same level as the previous year. The operating loss also improved slightly from the previous year. We expect that demand in and out of Japan for fiscal year 2024 will continue to be lower as the previous year. On the other hand, we are continuing our development investment for the next growth cycle. So the segment will continue to struggle with profitability. Below is our Ubiquitous Solutions, revenue was ¥48.7 billion, down 18.5% from the previous year. Adjusted operating profit was ¥4.4 billion, about the same level as the previous year. The decline in revenue was due to exiting business in Europe. As we mentioned last fiscal year in regard to business in Europe, it was very competitive environment in which it was difficult to ensure profitability. It is for this reason that Fujitsu exited these regions in April 2024. In terms of profit, exiting business in the low profitability regions in Europe trimmed losses, or in other words, had a positive effect, the increasing costs from the weakened yen, however, had a negative impact. And these two combined led to profit remaining essentially unchanged for the previous year. Page 14, Device Solutions, revenue was ¥71.6 billion, up 6.2% from the previous year. Adjusted operating profit was ¥7 billion, an increase of ¥4.7 billion from the previous year. The impact of foreign exchange rate movements in this segment was different from the hardware solutions. Ubiquitous solutions. Excluding the impact of foreign exchange movement, the demand stopped declining. Demand is starting to recover. But the strong surge in demand anticipated to come after second half of the fiscal year. Below is the intersegment elimination and corporate, there was an operating loss of ¥90.1 billion, with a decrease in expenses of ¥8.6 billion compared to the previous year. In the first quarter, group-wide business growth investment were slightly lower, in addition an improvement in unrealized profit due to shipment of inventories, which had temporarily retained in intergroup transactions at the end of the first quarter of the fiscal year, positively impacted the result. The business growth investments managed by intersegment elimination of corporate include advanced cutting-edge research, mainly in the field of AI and quantum computing, enhancements to our overall managements' foundation. We will continue the deliberate implementation of these investments for our medium to long-term business. We have been advancing One Fujitsu project for global group-based ERP deployment project has an investment to strengthen our management foundation. We plan to launch this project in the services business in Japan in fiscal 2024. We will accelerate our digital transformation to further increase the speed and optimization of the business. Page 15. We will talk about the status of cash flow and the balance sheet. Page 16. Cash flow, excluding one-time cash inflows, core free cash flow was ¥167.7 billion, a reduction of ¥15 billion from the previous year. The main factors in the reduction of core free cash flow was a temporary increase in the balance of accounts receivable from a high level of revenue at the end of the first year and the pullback from the previous year is a sale of share holdings. We anticipate core free cash flow to increase. Free cash flow, which is in the table at the bottom of this page, was ¥130.4 billion, an increase of ¥4.8 billion from the previous year. Page 17 shows the status of assets, liabilities and equity. I will omit an explanation of this page. This concludes my overview of the financial results for the fiscal year. Though it is not on the slide, I will briefly comment on the progress towards our plan. Fujitsu's operating profit is skewed toward the second half of the year and the fourth quarter. So although we cannot afford to be overly optimistic, results for this quarter slightly exceeded our internal start of the fiscal year. In segments, the results for Service Solutions showed a slight improvement. Outside of this, there was some variation due to two factors impact and the results were mostly in line with the plan. Demand in Service Solutions such as orders received was anticipated. There was also pullback for the large scale orders one during the previous year. So, orders may seem slightly weak compared to the previous year, if not only look in the first period on the profitability this is exactly as planned. So having said that, although I mentioned that this is better than planned, there is no point at which I can say it is significantly better than our plan. So although it is not very concrete explanation, I dare say that there was very little significant failures or negative details as steadily expanded our business, one could say that we had a firm handle on things. We will continue working to maintain, accelerate the starting speed from the first quarter to steadily achieve the plan. Page 18. I will now explain our financial forecast for fiscal 2024. Page 19, this is our financial forecast for fiscal 2024. Revenue is forecasted to ¥3.760 trillion. Adjusted operating profit is forecasted to be ¥330 billion. And adjusted profit for fiscal 2024 is forecasted to be ¥26 billion. All of our forecasts remain unchanged. In addition, there is also no change to the forecast for each segment, for cash flow, starting to the next year. We are progressing as planned. Lastly, I briefly touched on earlier that the results for the first quarter slightly exceeded our internal plan. We believe we are off to a good and steady start to achieve our target. On the other hand, we are still at the very beginning of this year. There are still many things that we need to address areas in which we must further accelerate our efforts and actions that we must do to handle our strong business to deliver value to customers. We strongly believe people will be at the core as for deployment and change to the structure in which the right people are in the right place, including reskilling of internal human resources, securing external human resources and the standardization of manufacturing innovation to meet the changes to our business portfolio, it will be important that we carry this out quickly. It is also for this reason that we believe that taking firm action will be handled this. We believe this initiative will deliver each of the existing system integration projects while also growing overall business with Fujitsu Uvance modernization and consulting as the main pillars. We will believe that these will be essential for steadily improving productivity. From the second quarter onward, we will continue to engage the steady achievement of our plan through the expanding of the business and improving the profitability. This concludes my presentation on the overview of the financial result. Lastly, I would like to announce Fujitsu IR Day 2024 on September 10, our five Corporate Vice Presidents, including myself, will explain Fujitsu's business strategies for achieving our medium-term management plan and the status of our progress towards achieving it. We believe that this event will be an important opportunity for having direct discussions between the participants and those in charge of Fujitsu business and for understanding Fujitsu business strategy, we will share the details and specifics related to how to participate in the event in a separate statement. We hope many will attend. A - Takashi Koto: Mr. Isobe, CFO, thank you very much. From now, we would like to start the Q&A session for the media. For the investors and analysts, after the Q&A session for the media ends, we have allocated time for your Q&A session from 4:05 p.m. Japan Time. So we kindly ask you to wait to that time. [Operator Instructions] [indiscernible] I will un-mute you, so please go ahead with your question. Unidentified Analyst: My name is [indiscernible]. Can you hear me? Yes, the cloud strike software updating caused the global system failure. I have two questions. With this system breakdown was your internal system impacted, can you please share with you the current confirmation status? Takeshi Isobe: So I will answer one question each then. The Windows blue screen system failure is your question, what happened the other day. Regarding internally for Fujitsu, there is no specific impact. Regarding the specific comment or the impact scale, I will not able to share that with you, but there are some customers that were impacted. So we are providing them with thorough support. However, on an overall basis, we are able to have good control. Unidentified Analyst: Thank you very much. My second question is listening to your answer your company is on the side of providing the system to minimize the risk of a system failure, what are you working on and your thoughts regarding the system risks? Takeshi Isobe: Thank you very much for your question. Regarding the system failures, the content or the size of that, it is quite diverse. There are failures due to the defect that the system itself or system receives some sort of attack and it causes the failure or due to the natural disasters, the system and network will get cut off. So as you can see, it is quite diverse in the type of failures for the system. So either way, the disaster recovery measures, especially for those who have a large social impact, we consult with the customers and responding appropriately and also the potential bug for each system defect by securing measures to respond to that, we are controlling the situation so that such risks do not occur. We have the system quality officer within Fujitsu who is responsible for the system equality. And on a global group basis, we are able to look at the situation cross-functionally, but having said that, various natural disasters or technology keeps evolving. Therefore, we are receiving various attacks all the time. So, those types of matters occurring is the premise saying that and having the system failure as a premise, how can we promptly respond is something that is important for us to be prepared on a daily basis, ourselves causing various troubles and there maybe times that we cause trouble and inconveniences. However, we would like to secure the measures to respond to such situations. So if such situations occur, how can we minimize the trouble itself or the damage itself and how quickly we can recover, some of them does not start from us, and in some cases, we would like to respond in a way to provide a broad support to some trouble or failure that occurs somewhere else that does not start from our company, but this is what we are working. I answered your question. Thank you very much. [indiscernible], thank you very much. Takashi Koto: Nikkei BP (NYSE:BP), [indiscernible], we will un-mute you please ask your question. Unidentified Analyst: [indiscernible] from Nikkei BP. Can you hear my voice? Takeshi Isobe: Yes, I can hear you. Thank you very much. Unidentified Analyst: The first question is about [indiscernible], I believe he will start to provide from September and how would that contribute to your performance? Can you talk about the outlook? Takeshi Isobe: Thank you for your question. Strategic partnership with Cohere Company, I think this is the question. We announced the other day, but this is enterprise generative AI and the Cohere Company has an advantage in this business and we were able to conclude strategic partnership, Japan and for the global market, exclusively, we will collaborate with Cohere to provide such services. Generative AI market and technology are progressing and evolving everyday. It is not possible for us to engage in every aspect of the business. So, we will like to have the strong partnership with a strong partner. Cohere is especially focusing on enterprise and technology and performance and accuracy. They are trying to minimize in this technology. So for us, enterprise Generative AI is something that we are trying to provide widely. So partnership with Cohere Company will work positively to the performance of the company. Having said that, to be more specific, with the conclusion of the partnership with this company, how much increase can we expect in our revenue, still is this through the strategic partnership or with the steady progress of the AI business, it's very difficult to make a valuation of which contributed with this partnership, how much impact can we expect in the performance, is a very difficult response, including the growth of advance generative AI business. We want to make sure that this business will expand and we will commit by including the strategic partnership that I hope that answered your question. Thank you. Unidentified Analyst: I have one more question which is related to network products. The demand is low, you said. But regardless of that, you will continue with the development investment? Can you provide supplementary explanation, and can you speak about the outlook until the payback? Takeshi Isobe: Yes. Thank you for the question on the network business. Network business, the technology cycle is different from the service. Business is slightly longer to be simple, from 4G to 5G, a few years will take place and to reach the next step, but it will take a few years. So, on daily basis, it's not a linear growth. But there still remains technology cycle in this business, naturally, the development is not made according to the demand, but for the next technology breakthrough, we will continue to do the development. Even with a weak demand, we will continue to maintain technology, and there is a need to do that. Unfortunately, for the next cycle, we are in the transition period in terms of demand in North America or in Japan. And in case of Japan, for example, what NTT is doing is IOWN. And North America, what AT&T (NYSE:T) is trying to promote is an open brand, and the technology is evolving globally on network. Energy saving is a must, and through network, information should not deteriorate. This is also important to respond to that globally and also domestically in Japan, towards the next breakthrough of technology, we are making sufficient investment. For '23 and '24 we had low demand, but the next peak of the demand will be '25 to '26. It may be sometime ahead, but we are also in view of '27, we should be able to recover our investment. That is all from me. Thank you. Takashi Koto: Thank you very much, Miss Nakanishi. Next, Matsuoka San, freelance, I will un-mute you, so please ask your question. Unidentified Analyst: This is Matsuoka, a freelance media person. Can you hear me? Takeshi Isobe: Yes. Unidentified Analyst: I would like to ask about the order situation in Japan. You have given the explanation. And moving forward, the order situation in Japan, my impression was it is going to continue to be quite strong. However, on the other hand, concerns, or do you have any concerns, or do you have any things that you consider as a risk? Takeshi Isobe: Thank you for your question. The first quarter was under the performance of last year. However, from the second quarter onwards, we expected to go back to a high level. So, given that situation, your question is, what is the risk? And towards the end, I did explain in my results explanation that will be results, resources, meaning the improvement of productivity. The technology has changed in our business portfolio, and the service area has changed. For example, SAP or Service Now or sales force skills, having resources we need to increase those personnel and also increase the information contents and in order to respond to modernization. More than the new technology, we need resources to know about the past technology in a very concrete way. We need to maintain them or we need to generate new resources. So, when the technology is changing, securing such resources, honestly speaking, is a difficult re-skilling of the internal employees, us acquiring external additional personnel is what we are working on right now. And internally, we have a job posting system that's implemented to recruit such resources. But this is not going to be positively effective overnight, so the re-skilling and job posting, the resource will be moving somewhere else. So, there will be areas that will have an increase in resource and areas that will experience a decline. So, optimizing the resource portfolio is quite difficult, it's not simply just increasing the number of headcount. We have to do it in a way and to structure the talent portfolio that is in line with our business portfolio. And we need to create a situation where in terms of compensation that it is going to reward those talented people, or those people will not stay. So, it's not just a Japan, but globally in terms of these talented resources, it's quite scarce. So, with AI and automation, we will work on improving the productivity, but at the same time, how can we secure the resources that are in line with our business portfolio, that is important. And if we cannot do that, and we cannot catch up with the speed, even though the demand is strong, we will not be able to fully respond to that demand. That is why we are working on this on a daily basis. And whether I should call this a risk, that is a bit questionable personally. However, if we are not able to do this at appropriate level, it can be considered to be a risk, and that's why I answered it as a risk. Thank you very much. Takashi Koto: Thank you very much Mr. Matzoka, from Nikkei, Haria San [ph], I will un-mute you, so please ask questions. Unidentified Analyst: From Nikkei Shimbun. My name is Haria. Can you hear me? Takeshi Isobe: Yes, I can hear you. Please go ahead. Unidentified Analyst: My question is about Uvance, on the growth of the revenue you have indicated, but how much contribution can we expect on operating profit? Now, originally in the Uvance business, compared with a contractor based business, I think the profit margin is higher, but normally there is upfront development. This is my - what I imagine. And if there is contribution to profit from when can we expect to see the contribution in service solutions that will be helpful. Takeshi Isobe: Thank you for your question. The contribution of Uvance to the business, what we are aiming at is gross margin of Uvance, and compared to the conventional system integration, we are looking for higher level. The revenue is increasing, but we don't think this is sufficient enough. Roughly speaking, vertical area, the values are directly delivered to the customers. At this point in time, their gross margin is close to 40%. This has a high level of difficulties, and the values are high. On the other hand, horizontal area, which is the foundation for building values in vertical and the gross margin here is roughly 20%. For here, rather than having the portfolio with the Fujitsu alone, by having a partnership with the partners, we are building this. For example, Microsoft (NASDAQ:MSFT), Azure, AWS, Service Now, SAP. By combining them together, we couple with the values to provide the offerings. So, the added values are less from our side, and the profit margin is still low. If possible, vertical and if the volume increases in horizontal just like pure play sauce, genuine offering can be provided, so we can look for higher profitability. But at this point in time, that area is very limited. On profit, we are still halfway through. That's the first point, having said that, for example, in this first quarter, ¥30 billion vertical area has a gross margin of 40% and this is making a steady contribution to the overall performance of the company. Furthermore, to grow the revenue offering development is something that we currently address. But as offering development in service area, as was pointed out, this is a different from the network business, they can have at an early stage, but the profit margin would require development cost, so we can minimize, but it may drag and also becoming loss making. Now in the global solution in the first quarter, it is loss making, but Uvance is not selling through global solutions. In Japan and also in overseas regions, the contribution to profit is high. So, overall, Uvance business, even at this point in time, is pushing up and driving up the profit of the company. But we do not consider now as a goal for the revenue of ¥700 billion next year, and we are also in view of even ahead of that. In 2025, we are expecting that the Uvance would account for 30% and towards the 2030, close to 50% will be included in the offering portfolio. Through that gross margin ratio is something we would like to expand. We are still halfway through, and we do not consider that this is sufficient. This is the image. Thank you very much. Takashi Koto: Thank you very much, Ms. Haria. We have passed the scheduled ending time, therefore we apologize that we would like to consider the next question as the last question so DZ News, Hayakawa San [ph], please go ahead. I will un-mute you. Unidentified Analyst: Thank you. The UK Post Office issue is my question, and if may I think you have come up with remediation measures for the post masters. So, if there are any progress since then, I would like to know the progress of the changes for the post office matter. Takeshi Isobe: Till now, there is no major change and matching each individual phase, we are responding and in order to age of this situation, we are being into it to see the actual - the progress is not still, has not changed yet. But we are in the midst of the statutory inquiry. So, from the last end of our last month, there is no specific change for the situation. Thank you very much. Takashi Koto: Ms Hayakawa, thank you very much. With this, we would like to conclude the Q&A session for the media. Next, we would like to receive the questions from the investors and analysts. The media members can also continue to listen. So, if time allows, please continue to be online. And for this session, due to the time limitation, we kindly ask you to limit your question to two questions, and we plan to end this session at 4:45 p.m. Japan time. So, we seek your understanding and cooperation. So, for those of you who have a question, please press the Raise Your Hand button. SMBC Nikko Security. Yoshizumi San, I will un-mute you. So, please go ahead with your question. Kazutaka Yoshizumi: This is Yoshizumi from SMBC Nikko Securities. Two questions, first is regarding the numbers, service solutions, Japan domestic orders backlog compared to the previous year, how much of an increase did it experience? Takeshi Isobe: At the fourth quarter, it was a 10% plus growth is what was mentioned. So, what has happened to this number, I just wanted to check. Kazutaka Yoshizumi: Thank you very much. Takeshi Isobe: There is no a large change from 109% to 110% is how it is proceeding right now. The first quarter orders were slightly low. However, last year, in the first quarter, we had a large scale deals that we won in the public sector, and that's a 2 years or 5-year contract, quite of a large scale. So, it did not impact that much of the backlog for orders. And after that we have a build up the order. So, the backlog is between 109% and 110% Thank you. Kazutaka Yoshizumi: The second question is regarding Page 35, the adjusted operating profit trend of the service solutions. If I look at the progress ratio this first quarter, it seems that the progress rate is quite high. But I thought looking at that, we can have expectations that there may be some upside this fiscal year second quarter, third quarter, if we look at that, is there some seasonality that's going to happen in regular to the usual years. It was there some seasonal factor, or the mainframe, the high profitability deals came in, or the license issue of VMware. Is there any impact from that, from second quarter onwards? So, can you please share with me your way of thinking of seasonality of this fiscal year. Takeshi Isobe: There is no specific large seasonality factor. And appreciate that you are saying that the progress in the second half will be very good, but it's only 12%, so it's just better than the usual years, because it's a better than usual. If we can build up the deals and this momentum, that will be great. But it's not that. It's just for this fiscal year, but enhancing the resources for consultation is what we are planning, and we need to expand that talent by re-skilling or increasing the headcount as are planned originally. But it's not something that if we spend a lot of money from the first quarter, that that's going to be realized. So, regarding that point, we do have some investment plans on in the latter half of the year. Having said that, I already explained about this in my presentation for the first quarter, unfortunately, it's not that that something is good, but it's that that we are having a steadily build up of the orders, and we are steadily improving the productivity. It's not that something special that is positive happened. It seems that the cruising speed for us is at this at this level for us. You were talking about VMware, it's an individual matter, so it's a difficult to answer, but the individual contract content varies. We are negotiating on the individual basis with VMware, or also with the customers directly, basically passing on the cost to the price or price revision is something that we need to thoroughly work on. I will not say that there is a zero impact, but we like to respond it so that the impact will be a minimum to our business. Thank you very much. Takashi Koto: Mr. Yoshizumi, thank you very much. Next is Tanaka San [ph] from Goldman Sachs (NYSE:GS) Securities. I will un-mute you, so please feel free to ask questions. Unidentified Analyst: Goldman Sachs Securities, my name is Tanaka. Is my voice coming through? Takeshi Isobe: Yes, we can hear you. Thank you. Unidentified Analyst: The first question is regions Japan, I would like to ask question on that. The improvement of the outfit ratio is quite significant. Service solutions, margin improvement was explained in the gross margin, but regions Japan, profit margin improvement, once again I would like to ask about the factors and the continuity in the future. Takeshi Isobe: Thank you for the questions. Regions Japan, the profitability is improving. I think that is visible. There is improvement by 4%. And with gross margin ratio, only 3% plus improvement for Japan. In addition to that revenue, good gross margin rate, it's relatively good already. So, with the increase of revenue, this is also working positively to the profit margin, increasing productivity, Global Delivery Center and Japan Global Gateway will be used and SI development process standardization and automation will progress. The benefit will be seen in high volume in regions Japan. Also increase of labor cost, and we also have Uvance. And the values we can provide should be confirmed by customers. For example, SAP for sophisticated product, rate card will be shown and they should recognize to match the values. So, in other words, for the increase of the sales price, we are also trying to promote that. Regions Japan has concentrated capabilities, so we will maintain the sales price and try to maintain the profitability at the time of the order. And these measures are working positively to push up the gross margin ratio by 3% plus. In actuality, global solutions, they are also benefiting as well, but the global solutions middleware sales may be high or low and gross margin ratio 2% is driven by regions Japan, mainly. I hope I answered your question. Thank you. Unidentified Analyst: In regions Japan, this is a follow-up question. Revenue progress is a slightly weak, but the current backlog or after the second quarter, I don't think there will be reactionary fall just like the first quarter. There should be improvement in order, but the recovery of a backlog and the order. Would that contribute in the second quarter and can we expect to see the acceleration according to plan, when will be the timing for recording that? Takeshi Isobe: Excuse me, it was a difficult to hear the second part of your question. Unidentified Analyst: Well, simply put, revenue of regions Japan and the timing for posting that on a full year basis, there is 8.5% increase in revenue. And when will be the timing for all the backlog to be reflected? Takeshi Isobe: After the second quarter, we feel that there is going to be two-digit growth. Unidentified Analyst: Understood. Thank you very much. And now moving on to the second question, in hardware solution, I have a question. The reasons for or decrease of the profit is written and versus a full year plan, the drop in the first quarter seems to be high, but that was just within your expectation and there seems to be a continuing a reactionary fall. And are we expecting to see the decrease in profit? Can you talk about the hardware plan? Takeshi Isobe: Yes, in hardware in the first quarter, the figures are so poor, but even with that, it's better than our plan network North American project order and also there was acceleration of the project. And actually these figures are slightly better than our plan, honestly speaking. Loss, there was a reactionary fall from the large projects, so we were expecting that. Actually in the second quarter versus the previous year, we expect that this would continue to be weak. What is not good about the Fujitsu it's becoming physical. There is a concentration in the fourth quarter and the second-half in a sense, this is a risk and we just need to continue to increase the figures. So from in terms of damage, this is the case, will you expect to see weak situation in the second quarter system product and reactionary fall will continue? Yes, versus the previous year, system hardware is the case and network this was fiscal year on a full year basis, just like last year, we will continue to have low level just like last year. Unidentified Analyst: Thank you very much for your response. Those are all my questions. Takashi Koto: [indiscernible] thank you for your questions. Next from Citigroup Securities [indiscernible]. Please go ahead with your question. Unidentified Analyst: This is [indiscernible] from Citigroup Securities. I have two questions. The first question is improving profitability at the time of the order being placed is what you have mentioned. So you are increasing the price and you don't mention that several times in your presentation. So which part is actually increasing when there is something that you can compare apple to apple even though you're providing the same service? Are you're having the unit price increased at a higher price and that part how much percentage points that increase? And I'm sure that you are having a projects or mix change where you have more profitable deals. So what is the average unit price? And to what is the changes in terms of the mix? Takeshi Isobe: Well in terms of the pricing control, honestly, speaking, it's hard to explain in the direct way. But for example, the Uvance, we are providing it at a certain rate card. But in the conventional SI, which is a man hour based business, there's an increase in our labor cost. So to a certain extent, we are having discussions with our customers and increasing the price. On the other hand, within the backdrop of the strong demand, when are we receive the orders? We take them from the good ones. Maybe that's appropriately said. But we will place priority on the deals that we can see that we will be, it will be profitable down the road for the risky or not sure, deals we are actually asking for the delay at the start of the deal itself. So in that sense, for us a baseline for the man hour based business. Basically it was a several percentage compared to 2 years ago and the price negotiation is conducted with the customers to increase it by several percentage points. That's the first point. The second point is Uvance. Please imagine SAP. It's a specific specialized area that is lacking resource and for business negotiations in that area. When the scale is large, we show the rate card and we have the customers understand the value. And the third is that when there are similar deals and a lot of large number in which area is that going to be profitable from the time we receive the order, we determine that conventionally, if the deal had a certain level of gross margin, we have taken in that project. And within that, we improved the productivity and tried to make it into a profitable business. However, from last year to this year, at the time of receiving the order. But of course in the past, of course, we were being careful about the very bad content, the deal. But, at the time of order taking, we look at to what extent of the profitability we would generate and looking at over a picture, we allocate the resources. And so with this type of mix, it's getting better and the Japan region is getting better by 3% plus. The productivity improvement or with standardization improvement about 1% plus. But the remaining improvement is generated from a sales price control or the profitability control part volume. So with the three type of measures or the specific breakdown or the specific pricing that we're providing, I would like to refrain from answering. Thank you. Unidentified Analyst: My second question is about, your companies defense and national security department, and you have that business towards the Ministry of Defense and I believe that's quite large. And this business area is our current performance, or this fiscal year is a plan, and in the medium-term, is the revenue - it says that the revenue is going to allow the - it says that the revenue is going to double and the profits going to double in this business area. Is that going to apply for your company as well? Takeshi Isobe: The Defense business, we are having many business in this defense area and I believe all of you understand. However, the budget or investment skill of a specific customer. I would like to refrain from commenting. However, responding to the customer needs, our customer's information system. Provision by providing that we are fulfilling the role we need to play and we like to continue that. As you know, this business or this particular area in a more sophistication effort is unnecessary and therefore especially for the information type equipment. We can play a role there, so we are planning a certain roads and we would like to and we are actually responding to the needs from this area. I would like to stop my answer there. I hope this answered your question. Thank you. Takashi Koto: Mr. Isobe. Thank you very much. Next is from UBS Securities, Yasui. We will unmute you. So please ask your questions. Kenji Yasui: Thank you. Yasui from UBS. First question, in the first quarter, operating profit is a still in red, but you are struggling in Europe, but the loss should be shrinking in Europe. If there is any major progress in Europe, please explain. And the second question is vertical and horizon of Uvance. The profit margin is quite different, but the vertical and the horizon. There is a plan for growth, but going forward, as the direction of a profit, can we expect our positive growth with the improvement the profit margin and horizontal. Are you expecting to see the expansion of the growth are invertible? Takeshi Isobe: Thank you for the question. Europe, overseas regions is to continue to have a low profit level and they still have loss. But as you said, the level of loss is shrinking, as I explained in Europe region last time at the end of the fiscal year when we provided explanation. But overall, there is concentration of business to Uvance and in each field they will make the utmost effort in a sense, as they just continue to do business autonomously. But we are trying to reduce that to concentrate more on global offering. In those processes in Germany, private cloud data center business operation was poor and it was loss making business. But at the end of the third quarter last year it was carved out. It was with the endowment, so it was a loss making when we carved out, but we completely removed the loss making business. The impact was not so high, but ¥2 billion loss of was reduced. That was a visible in the first quarter. Other than that corporate function we try to such and also we try to narrow down the low profit making business in the order of 1 billion level. This is not from the first quarter, but the largest one is German low profitability business got carve out. The second question is on Uvance. We will continue to improve the profit margin. I'm not quite sure whether there's a number one. But what we are expecting is the volume increase of vertical area. Vertical area gross margin I said is roughly 40%. But ultimately, we should be able to reach the level to be far above a 40%, but our image is a 45% or 50%, but more than that in the most recent quarter ¥3 billion level. Which will be roughly 180 billion this year and next year we're expecting for 400 billion, so or 40% plus gross margin volume if it increases, it will boost up the profitability overall. So we will make to inject the verticals and to ask the customers to understand, to expand their volume with the expansion of the volume. Naturally, the gross margin should improve the naturally in a sense, so this is an area where they like the focus, horizontal, the profit margin is very low, but I don't think that this is sufficient. Although this is not sufficient, on the other hand, SI is enough 40% can we reach that level cost structure or partnering approach should be a changed, otherwise we should not be able to see the breakthrough, 17% or 20% of gross margin maybe reaching 25%. This is our view overall. Kenji Yasui: What is immediate and what we would like to focus is the expand radical area to earn a gross margin. That is the image. This is a follow-up question. Within your company gross margin 45% business. I don't think that this is common, but if you are to look at the other business in maybe hardware base station business. But a high profit margin business line or service if you have any, can you let us know? Takeshi Isobe: Thank you for the question. It's not that we don't have any at all. Middleware is very good in terms of the profitability. And also we said, we will walk away from the general purpose equipments. But the profit margin is good hardware, middleware and network. It requires significant amount of development cost, although the gross margin is good, the development cost is high. So once we have the volume, it's really profitable, but it does, it is not retained within the company. So if the volume is high, there is a certain level of development cost. So this is a dilemma network. And just by looking at the gross margin, it's above a 40%. We have quite many above 40%, but on the other hand looking at services, it's not as bad. I should not be in my position to say that, but the gross margin ratio, especially for the domestic business 35% above 45% - 35%. So, if we can improve the profitability of 40% is something that we consider accessible. So vertical is roughly 40% as gross margin ratio, but from our perspective vertical offering gross margin target is not there, but even higher 45% or 50% pure-play SARS and also free recurring business that we should be able to reach that level. We are now pursuing that, but now we are trying to focus more on increase of the volume. So rather than 40% to reach 50%, but we are trying to grow 100 billion business to 200 billion business and also the 300 billion business just by looking at the gross margin. There are areas which are exceeding 40%, including maintenance business. I hope you understand that there are many areas at the same time, just with a gross margin. It's not the constituting OPPO business. So, there are a fluctuations. That is all. Thank you very much. Takashi Koto: Yasui san, thank you very much. Next Daiwa Securities [indiscernible]. I will unmute you. So please go ahead with your question. Unidentified Analyst: This is [indiscernible] from a Diva Securities, can you actually hear me? Takeshi Isobe: Yes, please go ahead. Unidentified Analyst: Thank you. At the beginning of the fiscal year, this fiscal year is 50 billion plus gross investments. When we look at the first quarter only compared to last year's, how much in money amount wise, isn't increasing? That's my first question. And the second question that to acquire consultancy using ¥20 billion and within your explanation you are going to even allocate that during the full year. The recruitment of these consultants including the recruitment environment, are you able to actually recruit that? Are you able to hire earlier than planned? I would like to know about the current situation. Takeshi Isobe: Regarding the business growth investment in the first quarter overall in total, it did not experience a large increase. If we look at it by segment on that service solution, it's about an ¥8 billion increase, is what I have explained, but on the other hand it is incorporated into the segment elimination of corporate, the growth investment, the R&D investment level was a bit low. And also I commented on the internal ERP system update. We had to spend quite of the amount and, the cut over is planned in the second-half and right now there's not much of investment. The concentrations is actually more in the second-half. So the elimination and the corporate asset declining and overall it is not going to be 50 billion, but it's only 7 billion of an increase at this point. And regarding the consultants or capability enhancement to spend above the ¥20 billion compared to the previous year. And go through that investment or hire people or trained and educate our people is also what I have explained this. But honestly speaking for the first quarter, we have not spent that much yet, especially hiring from the outside - no recently from the second quarter onwards, because we can't suddenly on higher but the second quarter onwards we're expecting our large number. But from second quarter onwards, it seems we are starting to see that we are going to be difficult to recruit. The specific level, it's not that because we increase the headcount, the business going to increase. But how can we increase the number of people we can recruit or how can we improve increase of the required talent, in other words with limited number of headcount, how can we improve the productivity? That's how difficult. The recruitment market is the right now we are actually starting to pivot towards internal resources and convert the internal resources to consultants. So even for us like the corporate functions, how many people are there that they can be converted to consultants? And we are studying the rescaling our people though the numbers still small regarding investment towards the consultants will occur from the second quarter onwards. I would like you to understand in that way and also the expenses that or the investment that is weird the way that we will be able to suppress that to a certain level and it doesn't mean that the suppression it is good. It's not that we believe that we cannot spend that much to our higher talent, meaning that the hiring environment is that difficult. Unidentified Analyst: So if that is the case, I think you're exactly right, not having that much expenses including, the first quarter that's going to work positively to your profit. However, your companies and medium term or to your core business towards the next fiscal year, medium term plan and not having increasing our consultant is going to have a negative impact. Is that correct? Takeshi Isobe: Yes, simply put, yes, it is a negative factor. Though, it may require more money. We would like to increase the number of consultants. On the other hand, but it's not that easy. It's what we're starting to find out and therefore it's not just simply bringing somebody from the outside. With a good compensation to us, it's not that easy. So we need to consider M&A, so we can actually fulfill that requirement by size. That's all. Unidentified Analyst: Okay. Understood. Very well. And that is all for my question. Thank you. Takashi Koto: Thank you very much, [indiscernible] san. Next from Mizuho Securities, [indiscernible], I will unmute you. Please ask your questions. Unidentified Analyst: [indiscernible] from Mizuho Securities. I have two questions. The first question, I'm sorry to ask again. Regions Japan increase in profit on Page 12 you have indicated, increase of revenue is 10 billion, and the increase of profit is even higher than that. So in regions Japan, gross profit increased by 3 points and I don't think this matches with my calculation. So is this due to the extraordinary factor last year, it was not so visible, but the loss are decreased or in the first quarter while still reversal of the provision, isn't there any extraordinary factor? May I ask this question again? Takeshi Isobe: Thank you very much for the question. We don't have any extraordinary factor 270 million in revenue and a 3% plus gross margin. So that is a roughly 8 billion to 9 billion. The revenue only increased by 10 billion and the gross margin with that increase is roughly 3.5 billion to 4 billion, so all that is factored for the increase of the revenue. Normally there is a decrease of on profitable business. There are many different factors, but last that first quarter there was a no major profitable business and so it's not a due to extraordinary factor. Unidentified Analyst: I see, understood. Thank you very much. And moving on to my second question, hardware solutions and there was a question on VMware and individual item you said that you were not able to explain, but I would like to ask the question from different angle the other day, VMware including your company, server providers. We supply will be suspended, so we want to be assured. So if there are hints that we would like to know in hardware solutions and how much on-premises solutions, do you have? I don't think there is much exposure, but is there any hints that can help us to be assured? Takeshi Isobe: Thank you for the question. It's very difficult to respond to the question on-premises. And we have a service for on-premises purpose and VMware agreement. Although the type of a contract that changes, it's not that the service itself will be suspended. We will have a more of a package and there could be possibility of the increase of the price, but it's not that that we will no longer be able to use VMware. And this it is a VMware if there is a service or solution that we cannot deliver values, we will use VMware and including the customers values they are supporting us. So we need to think about the passing on. The cost to the price, but with the major movement, if we cannot provide the VMware and it's not that we are causing inconvenience to the customers naturally with VMware. Overall transaction and we are still negotiating the relationship. So it's not the kind of response to cause any convenience to the customers in terms of the pricing, there are areas we are having a concerns, but are on the functionalities we should be able to secure them. Thank you very much. Takashi Koto: [indiscernible] san, thank you very much. We have come to the closing time. So we would like to close this Q&A session. And this concludes today's briefing session. Thank you very much for participating today and despite your busy schedules. For those of you who have participated, we kindly ask you to respond to our questionnaires. For those of you who have participated via zoom after the webinar concludes, you will see the questionnaire show up in your screen, so please respond to them. For those of you who are listening through YouTube streaming. We will kindly ask you to respond or accessing the URL that we will be sending you after this. Thank you very much for participating today.

Earnings call: Renesas Electronics posts Q2 results, plans cautious Q3 By Investing.com

Renesas Electronics Corporation (TSE: 6723), a premier supplier of advanced semiconductor solutions, reported its second quarter earnings for the fiscal year 2024, revealing robust automotive business performance but a cautious outlook for the upcoming quarters. The company's CEO, Hidetoshi Shibata, and CFO, Shuhei Shinkai, presented a mixed picture of financial health and strategic adjustments in response to the current market environment. Renesas announced revenues of 358.8 billion yen, a gross margin of 56.7%, and an operating profit of 110.6 billion yen for the second quarter, with a focus on continued investment in research and development despite the challenging market conditions. Renesas Electronics Corporation's second quarter earnings call highlighted the resilience of its automotive business amidst a challenging global market. The company's focus on maintaining robust R&D investment and strategic acquisitions like Transphorm and Altium suggests a commitment to innovation and market leadership. Still, the cautious outlook for the coming quarters, with planned inventory control and conservative revenue expectations, reflects the ongoing uncertainties in the global economic landscape. Renesas aims to navigate these challenges by leveraging its strengths in AI and digitalization to ensure long-term growth and market outperformance. Operator: Thank you very much for attending the Renesas' Second Quarter Earnings Report for Fiscal Year 2024 despite your busy schedule. Today, we offer simultaneous interpretation service. On the bottom of the screen, please click on the interpretation channel and select the language of your choice. Speakers, please turn on your video. Today's presentation, we have the CEO and Representative, President, Mr. Hidetoshi Shibata; and CFO, Executive Officer, Mr. Shuhei Shinkai, and other members of the staff are present. Mr. Shibata, will give us a word of opening, and then, CFO Shinkai will talk about the earnings. And after that, we'll have a Q&A session. Mr. Shibata, please. Hidetoshi Shibata: Thank you very much. Good morning, everybody. I am Shibata. In today's earnings, oh I think basically, it's a, we have to reflect on our performance. In the second quarter numbers, putting that aside, the first quarter, at the first quarter financial results, I think maybe our outlook is a bit optimistic. The reason I say this is mainly, one, the automotive business, there has been, we had been anticipating sustainable growth, but we have been robust. But, I think we have been adjusting to a more cautious outlook. That's the current status, number one. Number 2 is that so the industrial under a more wider sense of industrial demand, there has been adjustment. Compared to our initial expectations, it seems that this adjustment is continuing for longer and in-depth than our anticipation. Initially, we thought that the second quarter to third quarter, we'll start to see a recovery. But currently, the third quarter seems to be, continues to be tough. From the fourth quarter onwards, at some timing, the recovery will be seen, but we'll have to be very cautious about the outlook. And, we are thinking about controlling the inventory more significantly. In the third quarter, the channel inventory, so we can control that and to be able to manage that, the topline is going to go down. I think that is how we're going to manage our business. But that said, sooner, rather than later, the market will recover. That's our view. And going forward, our theme is more than ever growth. We are going to control the topline, the third quarter in terms of OpEx and R&D. In terms of investment, we will not put on the bricks and go forward. So, that means the operating margin it will decline a bit in the third quarter. But even so, we will continue investment in R&D so that we will continue to conduct initiatives towards our growth. So, in the second quarter, so unintentionally, we have increased the channel inventory in the third quarter, quickly we will we adjust that. On the other hand, towards growth we will continue to invest for R&A. So, that will be our outlook for the third quarter. So first, let's go into the details of the second quarter. I'll give you over to Mr. Shinkai about the financial results. Shinkai san, please. Shuhei Shinkai: I'm Shinkai, the CFO. I would like to give a presentation about the second quarter of this fiscal year utilizing the presentation material. Please turn to the next slide. And, then to the next slide. On the very bottom bullet, on 20th of June, we have completed the acquisition of Transphorm. So, the balance sheet as of the end of June reflects the consolidation of Transphorm. After we complete the calculation of PPA, we will retrospectively conduct the revision, but this PPA is expected to finish by this, fourth quarter of this fiscal year. The third quarter forecast reflects the contribution of Transphorm. Next slide, please. This is the financial snapshot for the second quarter. In the middle, darker blue, column, please refer to that. In terms of revenue, it was 358.8 billion yen. Gross margin of 56.7%. Operating profit 110.6 billion yen, at margin it will be 30.8%. Net profit, 96.7 billion yen. EBITDA, a 132.8 billion yen. In terms of the Forex, 153 yen to the dollar and 165 yen to the euro. Against the forecast, if you want to make a comparison, it's on the very right hand side, but I would like to refer to that later. Going to the next slide. This page is about the second quarter details. First of all, I'd compare to the forecast the company total and at the very right hand side, please look at the top box. In terms of the revenue, compared to the median range, we have slightly over outperformed. It's a 1.1% outperformance. So, basically, this is due to the currency impact. Excluding, the currency impact, is flat against our forecast. The automotive has increased slightly, and the industrial infrastructure and IoT has decreased. But in total, it was inclined with expectations. In terms of the gross margin, it's 1.2% up above our forecast. The impact of the foreign currency is basically flat. In terms of the product mix, the industrial infrastructure and IoT within the segment, the mix has worsened. But, in terms of manufacturing cost has gone down. So overall, we have been able to see a positive improvement. In terms of manufacturing cost, [its such] (ph) a decrease. The cost of the ramp up of the Kofu plant has gone down, and disposal and the ex-inventory relation losses has not shown up. These are the factors for this situation. Going to the operating margin is 0.3 percentage points increase for this quarter. In terms of the operating expenses compared to the forecast, it has increased. However, the impact is coming mainly from the currency. In terms of their calculation of the currency sensitivity, there has been an underestimation, so there has a big impact coming due to this Forex. To talk more in detail, in on the cost side to the non-major currencies has been impacted by the weaker yen, but we have underestimated this impact. So, that is the reason why we're seeing this level of impact. For R&D, basically, it's in-line with our forecast. And as a NRE adjustment has been, the transferred to that, so there has been some increase there. So, going to the quarter-on-quarter, comparison, in terms of revenue, it is increased by 7 billion yen. So, this is a 2% improvement. In terms of the gross margin, it has been basically flat. In terms of the operating margin, it is 1.5 percentage points, worsening. So, this is because the increase of the R&D. The first quarter, basically it has been at a low level. The second quarter, the R&D level has gone up compared to the first quarter. On the left hand side, the revised, the segment situation, I would like to give us some more color there. In terms of the gross margin, the automotive, due to the increase of utilization, it has improved. In terms of industrial, infrastructure and IoT, the product mix has worsened within the segment, and the gross margin quarter-on-quarter has gone down. In terms of the operating margin, automotive, because of the volume increase, the margin has improved. Industrial, infrastructure and IoT due to less volume and the margin has worsened quarter-on-quarter. Please go to the next slide. So, this is about the quarterly revenue trends. The second quarter is on the very right hand side. Overall, year-on-year is at 2.6%, and Q-on-Q it is 2.6% increase. Excluding forex for automotive, year-on-year, 11.5% growth and Q-on-Q, up 6.9%. And, as for IIoT, year-on-year, 24.5% decline in Q-on-Q, decline of 5.5%. And, going on to the next page, here we're looking at the financial indicators. And down below, free cash flow in the second quarter has grown. This occurs in the first quarter. There has been inter-corporate tax paid and also first quarter bonus payment, which have had an impact. And here, we're looking at the inventory levels. Q-on-Q, we are looking at the factors of inventory level change and outlook to the right. Now, DOI on a Q-on-Q basis has increased to 103 days. This is attributed to Die bank expansion which has pushed up work-in-progress. And, the same applies for the third quarter attributed to Die bank expansion. The 40 nano microcontroller will be the focus of the expansion. Now, for the channel inventory Q-on-Q, it is increasing to 11 weeks. As for automotive, as expected, we have seen a rise. However, the rise was minimal. Third quarter, in actuals as well as weeks of inventory, we have seen we've expect expected growth. However, attributed to the prospects, we believe the pace will be slower. As for IIoT, second quarter, we expected a decline. However, expectations are betrayed and we have seen a rise. And this is an impact of trade flow. Basically, a sell-through was weaker than expected, basically, around industry mass market as for individual factors, infrastructure related products, there has been a push out observed. And therefore, overall, we have seen accumulation of inventory, third quarter and beyond. For the actual and also WOI, we're expecting a decline. We expect growth in sell-through, which will have an impact. And going on to the next page, here we're looking at utilization. To the left, we have the front-end. On a wafer input basis, the second quarter is as expected. We have seen an increase. However, on the other hand, in the third quarter, because of the summer vacation, we have front-loaded production. And therefore, in this quarter as a reactionary trend, we expect utilization to drop Q-on-Q mid 10 percentage point range is expected. And to the right, we have the CapEx second quarter. We have seen the, EV purchase and also the integration of office, and we have decided on an investment. And next page, this is the forecast for the third quarter. And, please look at the dark shaded, area in the center. As for revenue, the midpoint forecast is 348 billion yen and gross margin 55.5%, operating margin 27.5%, forex assumption $157 yen, euro 170 yen. As for gross margin, year-on-year, it's a minus 3.8% Q-on-Q, minus 3.0%. Expect, eliminating currency year-on-year, minus 12.4% Q-on-Q, minus 3.9% is expected. In terms of, gross margin Q-on-Q minus 1.2% is expected. The earlier numbers were for revenue. And as for the factors attributed to the third quarter, we're expecting a decline in utilization rate. And, as for operating margin, 27.5% on Q-on-Q, that will be a 3.3 point decline. This is attributed to utilization drop and also the size down on scale and other rise in expenses and also forex, working towards a weaker yen. These numbers are expected. As I mentioned, as for OpEx, we will remain R&D expenses. We do not expect to cut down on R&D investment. And, going on to the next page. Let's turn to Page 14. And here, we are looking at the balance sheet end of June. We have conducted a refinancing. Working capital bullet, 260 billion yen committed commitment line, 150 billion yen has been increased to that number. And then, moving to Page 16, this is a non-GAAP reconciliation to the second, from the right, the non-recurring item. In the second quarter, 3 billion yen, this is basically attributed to non-cash mainly for expenses for re-organization of operating business structure. And, then looking at the highlight, at the outset, we have mentioned, we complete acquisition Transphorm and also for Altium closing July 1st. And with this, we would like to conclude the presentation. Thank you very much. So, let's go to the Q&A session. Shibata san, would you please turn on your video? Operator: First, I would like to give you some information about how to ask questions. For those who have questions, please, utilize the raise hand button. We will appoint you, in order of your raising hand, and then please, say your company name and name. So, would you unmute yourself and then ask your question after you are appointed. Due to the time constraint, one person, please limit yourself to two questions. First, UBS Securities, Kenji Yasui, would you please ask your question? Please unmute yourself and speak out. Kenji Yasui: I am Yasui, from UBS. Thank you very much for taking my question. I have two questions. First, is about your free cash flow. So, according to your numbers, the first half is about 110 billion yen positive. This is on Page 7 of the presentation. On the other hand, if you look at the Tianjin, the free cash flow is minus [85.2] (ph) billion yen. So, there is about a 200 billion yen. So, I think the Transphorm acquisition was at 50 billion yen. But, it seems that the additional cash has been used for the acquisition through your subsidiary. The second, I've a question is about three quarter guidance. Shibata san, you said that there has been some forecast. In terms of forecast, you have to adjust. So I think, about automobile sector, I think it's very difficult to have a precise forecast for the data centers. I mean, the major smartphone companies that we have missed the mark or you said that the share has declined. Can you give us a direction in terms of what you're going to see going forward? Hidetoshi Shibata: So, for your first question, Shinkai san, will answer the question. For the second question, I will take, will give you the answer. Shuhei Shinkai: So in Page 7, so we have a note on the bottom of this page. So, the acquisition of a subsidiary of the shares of subsidiary and deposits provided to Wolfspeed (NYSE:WOLF). So, we have excluded that. And the impact, or the point I can give in, so this $1 billion worth and Transphorm acquisition, funds, is what, is a difference that you're seeing between the two numbers you had just mentioned. Hidetoshi Shibata: So, towards your second question. Well, so the industrial market, including the mass market, I think we have seen a major gap there. For instance, I give you an example, and I got, excuse me, Shinkai just gave me an example. It was a specific customer at the smartphone manufacturers. Is there a major change in your outlook? No. Basically, that matter is in-line with our expectations. In terms of the infrastructure business, we have the AI that's growing strongly and this conventional data center business. So, these are two combined will be included in industrial segment. As of now, compared to the first quarter, we have reduced our outlook in this business. But on the other hand, I think you can more or less have an image. But, then the number of customer base is small in this industry. And so, there are some fluctuations due to a customer specific, market specific factors. So, in terms of our adjustment of our forecast, it's not because the demand itself has weakened. So, the other companies, device what we and our partners use and the platform, demand is going down right now. So, that's the reason why we're seeing adjustment. So in this area, it's not that there has been some substantial re-adjustment of the substantial, change in our fundamental outlook. So, I think we have seen the gap is that the industrial and the multimarket, mass market outlook. In terms of industrial, we have downgraded our outlook substantially. Specifically, it's not a specific segment. If I'm pressed to say so, it's so called, hard or factory automation. I think, basically we have to downgrade our outlook substantially in this area. But overall, industrial business more or less, we have reduced our outlook here for the mass market business. It's not a great magnitude that we are adjusting our forecast, but overall it's a bit weak. So, that's the reason why, we have made a downward revision in terms of our forecast. In terms of the mass market business as I have mentioned, it's not the case that a specific segment is, performing worse because there are small industries in here. But, if by dividing into categories, Japan seems to be weak. Well, in terms of geography, that is Japan seems to be weak. China, it's rather, robust. It's not that different from, the our initial outlook. So overall, for the mass market outlook, we have downgraded the outlook. Well, I have, talked on about this, but let me summarize what I have just said. In terms of the content, we have made a downward revision for the industrial business and the mass market business. That's mainly where we have made an adjustment with the industrial business. Factory automation, it's a major, I think that's the major factor. But overall, the industrial market is weak. But the mass market, not as much as the industrial, but it's still continuing adjustment. And Japan as a geography seems to be weak. So, that's my view. Kenji Yasui: Thank you very much. Operator: Thank you very much. Well then, from Goldman Sachs (NYSE:GS), Mr. Takayama, please present your question. Kindly unmute yourself. Daiki Takayama: Thank you very much. Just following up on the current discussion, automotive and non-automotive, and also for other factors, the breakdown and also the growth is what I'd like to hear about. And, you are conducting an adjustment interest scenario, October and December. Are you going to raise the utilization rate, or will there be somewhat of a recovery? And therefore, for non-use app, non-auto applications, we would like to hear. And, as for auto application, will it remain brisk? Going, paying attention to the overseas market it appears to be somewhat weak. I would like to hear about your thoughts. Hidetoshi Shibata: As you have mentioned, it is as you have said, as for automotive, while the variance is not that large, even while the market is strong, we are conducting a downward revision. And hence, what I have just mentioned is in reference to the end demand. It's not about our revenue, but it's about demand in the market. And, as we go into the third quarter as to what will happen, 2% to 3% or so, might see somewhat of a decline in that margin. In the fourth quarter, it's very difficult to predict at this stage. However, as of now, we are taking a more cautious look than before. And hence for a third quarter and fourth quarter, we will continue to maintain a cautious approach for the automotive. But, for the mid-term to long-term, on a year-on-year basis, the currency on basis, you recognize that there is somewhat of a growth, and hence, the trend in terms of growth remains unchanged. And therefore, first quarter next year and beyond, we will put into shape the outlook based on which we will decide on the fourth quarter utilization rate. As of this point in time, I am not taking a pessimistic view. On non-automotive, on that point, as we have reiterated for industrial use, we have applied a rather substantial revision of the outlook. And as for the third quarter, from the second quarter, there will be a decline. The first quarter earnings, when we conduct a report, what we had envisioned was to, I do recall that I used the word UV, U-shaped recovery. However, more of a drop and then thereafter an upward trend. However, we are seeing somewhat of more of a mild U-curve. And that is what we expect to see up until the third quarter. In fourth quarter, we expect a recovery. However, we cannot maintain an overly optimistic view. And therefore, for the fourth quarter prospects, internally we will take a cautious approach in pursuing operations. Industrial in the third quarter not to a large extent but double-digit, compared to a double-digit expectations that we have indicated previously, we're seeing somewhat a cautious approach in fourth quarter 20%. We will be reducing our outlook. But, that is how we will see the third quarter, and we expect there to be a gradual recovery into the fourth quarter. And, therefore, the fourth quarter, the expectations were that, we will see a quite a substantial growth. However, in the earlier earnings report, we have now changed our outlook to see a mild recovery into the fourth quarter. As a mass market, there's not been a dramatic change. But, for the third quarter into the fourth quarter, we maintain the view that there will be a pickup. However, we are now shifting to a cautious approach as for infrastructure related. Of course, the outlook in terms of substance is remains unchanged. However, depending on particular customers, there are of course, ups and downs. But, the outlook remains basically unchanged. In terms of numbers, July and September, will you be able to quote? I'm sure you'll be reading the numbers later. To reiterate, what I mentioned is end demand. In terms of the numbers overall, second quarter and third quarter, somewhat of a pickup is expected. And, in central market situation, we expect a recovery, and we do not expect to see a downfall in the market situation. However, as we mentioned in this current earnings report, of course, the reflection is that we had expected there'd be a strong recovery in the second quarter, and we have a major channel inventory numbers. However, we have seen somewhat of a slowdown, and therefore the channel inventory situation has changed. And, of course, this is where we will apply adjustment. And third quarter, this will mean that there will be somewhat of a sacrifice in terms of revenue for third growth. Daiki Takayama: And for the second item, broadly speaking, in the half year, I'm sure that your operational excellence is very strong, and you're conducting an adjustment earlier than the peers to register an out pour perform. And then in the long-term perspective, with acquisitions in place, you will grow more than the market trend. However, I would be led to believe that you'll be impacted by the cycle. In the six months to a year or anywhere in between, the external impact could come into play. Are you going to be more or less trending on par with the market or due to individual factors against your peers, how are you going to grow your topline in order to outperform? Or will you be able to see that? Of course, I understand they would be very difficult to, of course, overshoot in a very short-term. However, six months into a year will you be surpassing the market? Is there something that you'll be able to factor in? How do you see this? Hidetoshi Shibata: As we have pointed out, of course, really turning to the focal question in the short-term. Of course, we believe that it would be aligned with the market. Shall I say, idiosyncratic in terms of growth factor that is not, of course, shaken by market trends. And, of course, we are looking, towards AI. And, we have mentioned in Capital Market Day, in terms of the proportion to the overall company revenue, it's still very small. And, hence, it will continue to grow on a secular basis. But in terms of company, for cyclical, for say industrial and overall where there's a volume, say automotive, of course, we will be pulled by trends in these areas. But for AEST EV in the automotive compared to the past, the proportion is growing now topping 20% of overall. And, with the growth vector against the overall revenue as it continues to grow, the issue of cyclicality can be somewhat subdued. But in terms of trend, we will be impacted by the market cycle trend, and this will likely continue. And internally, we are studying how we will be able to establish a growth vector that is not, and to operate so that we are not impacted by the market cycle. In the, Capital Market Day come next year, and I do hope that we will be able to speak about the mid-term prospects. As for the long-term, the major theme is about the broad-based market and how we will be able to grow on the digital platform. The market cycle, to begin with, of course, we are looking at the overall market. And hence, we will be looking at the margin that we can enjoy so that we will not be impacted by a certain sector in the market. For the time being, as we've seen in direction of the revenue, we will be impacted by the cycle. However, we hope to be able to reduce or mitigate the impact of the market cycle, and we hope to be able to tie that into growth. Daiki Takayama: Thank you very much. Operator: Next. BofA Securities, Hirakawa san, please. Please unmute yourself and ask a question. Mikio Hirakawa: Thank you very much. I'm Hirakawa from BOA Securities. So, I have two questions. The first question is about the, China related business. For the FY '23, the sales of China ratio was 23%, and the previous year was about 28%. It has gone down year-over-year. So, currently you talked about the China situation is more or less, robust. But, in terms of the economic situation and a competition what is the situation of the China business? And, in the long-term, looking at the semiconductor policy or the strategy of China, what do you think about your Chinese strategy? So, that's my first question. Hidetoshi Shibata: So, if you look at the current situation, it's a slight growth in China, within China, I think things are, kind of patchy. So, some customers that are growing, they are growing, smoothly and aggressively. So, we will focus on customers that has a potential to grow. So I think, basically, our growth in China compared to the market trend is slightly stronger. And going forward, we are anticipating is that going to be stronger than the market growth. So, I think in China, we're going to grow, slightly, in the mid-term to long-term. It's nothing new that we are doing. But going forward, the local suppliers' competitiveness is going to become stronger. And, our customers in an applications, so in the short-term, they tend to have excess capacity and go into very aggressive price competition, and we are continuously seeing that trend. And, the pricing pressure coming from that situation is becoming stronger. And, I think going forward, it become stronger than ever. So, from our point of view, in the China market, rather than trying to increase our share, we would like to focus on the strength and go into fields that we can leverage the strength and then try to compete in other areas. And, in terms of the other topline, we want to grow steadily. In some cases, even if we lose some share to the local competitors, so we have to accept that. So, in terms of topline profit, that will be a focus in China. In terms of share in the China market, that will be our second priority. Specifically, about this view, there's nothing new that we're doing. So, for the time being, I think there will be our stance, in the China business. That's all from me. Mikio Hirakawa: Thank you. My second question is that under COVID, there has been some difficulty for procuring, semiconductors. And, there's some I think, basically, some companies are arguing that, they are more competitive because they have enhanced capability to produce the semiconductors. But, is your stance, the China Plus One strategy, is that becoming a disadvantage? So, if that becomes a disadvantage, then how are we going to respond to that? Hidetoshi Shibata: Well, basically, it's not the case that we are at disadvantage in any area. I don't think that we are in a disadvantage position. Of course, in the foundry partners, China Plus One strategy, they are strongly aware of that type of strategy, and they foundry partners are taking necessary initiatives. It's not the case that, if we are in a disadvantage because we don't have an in-house fab. But as you know, in during the pandemic, due to this situation, I think, basically, we have lost some position. That's the mobile share losses. But, I think the situation has changed since then, and the foundries, instances against foundries has going forward. So, we are not worried. The fab-like strategy that we're taking internally, do we have any concerns? No. Absolutely, not. We'd like to, I think we can go forward, with our strategy going forward as well. Thank you very much. Operator: Thank you very much. Citigroup Securities, Mr. Fujiwara, please. Kindly unmute yourself and present your question. Takero Fujiwara: Thank you very much. Citigroup Securities. My name is Fujiwara. I also have two questions. First of which is the following. This may be a repeat for industrial. I have a question, beyond expectations sell-through has declined, and therefore, logistics has supply has increased, and therefore, you have had to conduct a downward revision. With sell-through being weak, what is the backdrop? What is your analysis? I would like to inquire. Customers have their inventory, was it more than expected, or was it that the end demand was weak? In terms of supply and demand, the demand, is it just being pushed out or on FA-related demand the layers are also increasing. The share of the customer might be declining. Is that because the demand is declining? If this is also a factor, we would like to hear about that. Hidetoshi Shibata: As for the last point that you made mention of, as for the share, this is not a matter of much concern. Of course, as of now, of course, the proportion of Japanese customers is very large, and that's a fact. But not just restricted to the west, but in China, there are many clients that are globally competitive and their business is growing. And, just a little while ago, we have received quite a large design and order. And, hence, depending on the variance of the customer share, will this have an impact on the mid to long-term? That will not be the case. But, of course, in a short-term, say, on a quarter-to-quarter basis, that might be the case. However, for the mid-to-long-term basis, this is not a matter of concern. However, when we look at the short-term demand situation for a certain specified, rather than for a certain segment within industrial overall, demand continues to be weak, and that is how we see the situation. This might have been expected. However, when we look at the channel of partners and together with our partners, we may have overemphasized some bright signs, or we do not want that that to pass by. And, as we took a rather progressive stance, however, that bright signal dimmed as the days went by, and that is the situation. And hence, overall, the, market situation has continued to soften, and that will describe the situation. And subsequently, clients' consumption of inventory has taken time. Under COVID, inventory has piled-up, and of course, we had expected that that would, of course, be consumed, and things will turn for the better. However, right now, we are finding that the demand is weakening and which has also, indicated that consuming inventory has taken more time than earlier expected. And you might, of course, wonder if this has, actually lacked to the future. Perhaps, that could be described as such shifting to the future. Some may have expired, they have been lost. Especially when we look at the market situation in China, it's not really that bright. And hence, we understand that we need to take a cautious approach. And therefore, internally, we have applied, rather a large adjustment. I do hope that this will be a response to your question. Thank you very much. Takero Fujiwara: And as for the second question, you have also pointed out this out at outset for the third quarter guidance. SG&A is quite high on a Q-on-Q basis. Of course, the absolute numbers are really increasing. So, what is your plan? In terms of percentage, also the scale or scope, will this continue in the days ahead? I would like to inquire. Hidetoshi Shibata: Our CFO, Shinkai, will fill in on the details, but we do not expect to expand in terms of percentage. So, this is to increase the topline where the OpEx, has continued in this manner. If the topline does not grow, naturally, we will have to cut down on the OpEx in terms of the percentage. But right now, this is being done for the sake of increasing the topline. And, what is maintained in OpEx will somewhat taper down. And, now to you. Shuhei Shinkai: As for OpEx, basically, will be maintained, because of maintain investment R&D. And on Q-on-Q, currency impact has raised the numbers. And as a result, in terms of ratio, it appears to be very large. However, the impact of the of course, the topline will also drive this number. And therefore, in terms of the number, we expect the numbers to decline. Kazuo Yoshikawa: I'm Yoshikawa from Morgan Stanley Securities. Thank you for taking my question. So, I think at the beginning, they so Altium acquisition is going to end in the third quarter, and of course, it is not reflected in your guidance, I understand that. In terms of Altium, do you have any new updates that you can give us? And my second question is, it is duplication to what has been asked by the previous person. But, the second quarter, SG&A is about 4 billion increase compared to the midpoint of your guidance numbers. So, at the beginning of the presentation besides the current situation that you explained, you have underestimated the impact of the yen besides the key currencies. Is it because it's currency or there are other factors between I think, basically, the 7 billion increase of SG&A. But, is it due to the currency between the third quarter and fourth quarter? Hidetoshi Shibata: Yes. So, I would like to give a quick answer for the quick question, and second question will be answered by Shinkai san. Well, as Shinkai has explained currently next week the transaction has been closed for Altium. And, if things go smoothly, at the August, September, these two months, will be consolidated into our financial results. But that said, in terms of the numbers, it's not a big number. So, it won't move the needle that much. But, in terms of gross margin and whether it'd be operating margin, this will be accretive, to our business. So that's, true. So financially, there will be a positive impact. Not no negative impacts coming from this. So, the in terms of the substance of this acquisition, we will give you an update at in a timely manner. But, based on the discussions, the ARM length that we have initially anticipated, I think it has to be more, trying to do it together. I think that's the direction they're looking at. So, in terms of neutrality, it'll be a 100% secured. But on top of that, in terms of organizational initiatives, we will be more working together. So, I think a more integrated management, will be brief conducted looking at digitalization. I think at the right timing, we'll give you an updates. So, Shinkai san, please talk about the OpEx situation. Shuhei Shinkai: The second quarter, forecast is about increase of 4 billion yen. I guess, the forecast, about 1 billion yen is coming from R&D, the timing difference of R&D spending. Rather than spending, it's the incoming cash difference. The remaining 3 billion yen is half of that is coming from, so the minor currency sensitivity underestimation. And then, meaning half is that because of the weaker yen, R&D spending is become bigger. And for the third quarter, plus 4 billion yen and half is as per currency, half is as per non-currency factors. That's our estimation. In terms of the incoming cash, this is not finalized. We are taking a conservative view and the Transphorm is going to be contributing in the third quarter. So, that's reflected as well. Kazuo Yoshikawa: Thank you. And, Shibata san, you talked about to be able to grow the topline, you are going to use your OpEx. But for example, as an image for the next generation, are you going to increase the R-CAR? Unidentified Analyst: Thank you. McConnell for Nikkei Newspaper. I also have two questions. The first of which is in reference to the acquisition of Altium. Semiconductor market is, of course, a weak and it comes at that timing. Once again, your expectations or any comments you that you might have. And as acquisition is completed, ultimately, will the situation improve more than what is visible today? And the second question is about China, is stepping up the investment into mature segments into mature notes, And, as we look at the future for a Renesas in the mid-to-long-term, is it going to be a risk? I would like to hear your thoughts. Hidetoshi Shibata: I do not have much to add from what we have discussed today. Whereas for Altium, as we have mentioned, in terms of a financial impact its basically negligible. As whether it's plus or minus, it will work to the positive. But, the scale is limited. It is, very negligible to that extent that you have to study very hard to find where that is. We hope to be able to accelerate our movement towards digital. And, of course, the momentum is building on both sides. The transaction has not yet been come to a close, and hence it is still early too early to say. And, therefore, I would like to refrain from speaking further. But after July, at the best timing, we will be able to update you, and you'll be convinced that more than before, we are working on integration with for the introduction of a digital platform. And you will be able to see that we are working in that direction. There'll be signs that will be visible, so please stay tuned. As for China, there is also not anything more to add. As of now, the Silicon IGBT will have the largest impact. From last year, the impact has already become visible. And hence, we're looking at the revenue of IGBT in China. And, as for the outlook ahead, as to reiterate, we believe that it is very difficult. And that is what we have said from the end of last year and conduct the operations. Nothing really has changed, and we believe that we're still in a very tough situation, a part discrete, what is going to happen to SiC and immature note, Micron (NASDAQ:MU), Analog. What is going to happen might be the question of your thoughts. As for Micron and also Analog, for the mid-to-long-term, that we are expecting a large impact. But, we believe that it is going to take time. And hence, we still have some time ahead. We will pursue digitalization so that we will be able to shift towards upstream in the value chain, and that is, of course, one of, of course, the motivation of the, or the theme of the acquisition. As for SiC, it's very hard to say as for now because the situation is a mixed bag. Some will say that China SiC device quality is already up to par. Other will say that they're still not there yet. A mixed view would be the right way of us referring to the situation, but the market overall will grow. And, we are also ready to participate in that market. And of course, as a solution, it's important. And hence, we will commit. But as we have mentioned, to continue to invest our resources in order to really scale the size of the business, that is not the way forward. Of course, we hope to build our presence, but it will be a part of the total solution in our portfolio. So, nothing has changed. That is all. Unidentified Analyst: Thank you very much. Operator: Thank you very much. Next, from Daiwa Securities, Okawa san, please. Please unmute yourself and ask your question. Junji Okawa: Thank you very much, for your presentation. I'm Okawa. I would like to two questions about the automotive sector. So, I would have said that, you have reduced your outlook in terms of demand. In terms of, is it about the sales volume or due to the component makers, common manufacturers? Is this change in how they hold the inventory? Can you give us more detail? The second question is that, you have outlook in terms of the demand. But in terms of your sales, on quarter-on-quarter basis, I think can we expect the quarter-on-quarter sales is going to increase? So, in our consolidated basis, the topline decline seems to be large into the quarter-on-quarter, sales. So, what is your outlook of your automotive business? Hidetoshi Shibata: So, for our automotive business, in terms of the sales, we are trying to take a more conservative view. So, rather than trying to grow aggressively, we want to observe the market situation closely and control the inventory. Specifically, in the third quarter, we are going to reduce our outlook. In the fourth quarter, it's still early to say. So, whether we're going to take a more aggressive outlook, I think we're taking a more cautious stance. So, the reason behind this is that as you had just pointed out. So there are two, factors that are playing. One, is that the third-party, says that the worldwide unit outlook has been downgraded. We have had that type of information. So, if that is the situation even the Tier-1 customers, I think, basically, we'll have to be more cautious in terms of holding the inventory, and I think that's natural. And, I think in terms of trend, I do not think that it has we have seen a major change in the trend. But, there are some customers that they are controlling the inventory to a level for very minor products or the minor customers. So, I feel that maybe if you just reduce the inventory too much, maybe if the demand goes up and there will be lacking this component. So, we do want to continue to confirm with the customers whether their inventory level is too low or not. But I think, basically from the customer point of view, I think there has some internal pressure to reduce the inventory, and they want to control the working capital. And I think, that's a strong trend out there in the market. So, for the automotive business, so rather than us controlling the inventory, so I think, basically, I think the trend is that the inventory is going to increase gradually. But, rather than trying to aggressively increase inventory like before, I think our sense is that we were looking at, we'll look at the situation closely and be cautious, rather than aggressively swinging from the positive and negative. We are decelerating and that's the automotive for industrial. I think, basically, as we're going from the positive to negative in a major manner. So, I think that's the difference of the perspective that we have of these two markets. Junji Okawa: Thank you very much. Operator: Thank you very much. The time to close is around near. The last question, [Semi Portal, Suda san] (ph). Unidentified Analyst: [Semicon Portal, Suda] (ph) is my name. Thank you very much. I have two questions. The first is in reference to in a growth market, one, a components AI. And in AI, you have two, Edge AI, is one. I believe you acquired some company in that particular segment. And what has happened? And as our data center, Generative-AI, for example, the NVIDIA (NASDAQ:NVDA) chip, if we will look at their situation, not just so much to NVM, but HBM or there are also other, microprocessors that are around that. I'm sure that could be a potential target. What is the current situation for data centers? Acquire if a car IDT and the clock products I think would be viable for the data center. So, what are the circumstances for you? What steps are you taking? As for Generative-AI? In terms of value, we are expecting growth. However, in terms of volume, the unit price is very high. In terms of volume, it will not really that grow. Possibly, it might actually be lowered. And, what is implementation on our side? The volume time in terms of system is not going to grow, but the Generative-AI? Hidetoshi Shibata: Now, how can we capture the demand for generative-AI from our business? I think that's your question. For what is particular to generative-AI would be, GPM and HBM. For HBM, the increase will not really have a great advantage to us. This is not really positive, but the [GBA] (ph) growing and also considering the timing power we will also be in able to enjoy a tailwind in our power devices. Because the confidentiality, we are constrained from speaking further but the number of customers is limited in that space with a single platform due to various factors. Platform A, could go ahead, and Platform B, could be delayed or the reverse. And, that's what we're seeing right now. So, as to which platform and with whom we are aligned, in the short-term shift the situation. And as of now, we're looking at the combination. And, are we seeing a great tailwind in our favor? That's not the case, but we are seeing solid growth. In the fourth quarter, we have of course, reflections. And hence, I would like to refrain from make any domestic comments. But, as we look at the numbers within the company, fourth quarter and beyond, we can expect to see a good recovery, especially around GPU power products. As for the timing and also for the microprocessors, of course, that's an advantage. But with generative-AI, it's we do not expect to see a spike, and that is how we are seeing the situation. For HAI, this is something of that is coming in. The HAI in its truest form as to whether it's going to really grow substantial. It's about, of course, it's indispensable. It's sort of like similar to how we've viewed connectivity. It will gradually grow. And, we need to take necessary, of course, steps to prepare ahead thoroughly. At [SRPC-AI] (ph), in the short-term, there are specific set makers an application processor, vendors that are not really visible in the market yet. But, when they, their presence is there from [GDT5] (ph), there'll be a push up, and, there'll be a positive impact. And, so generative-AI, in short-term, there'll be ups and downs. By the fourth quarter, end of the year, we are hoping to see a growth, especially around power. So, that's one thing. And, before and after with client PC, there's also tailwind while the not directly felt, the impact will be indirectly felt. As for Edge AI, we need to take a mid-to-long term, stance. It's very difficult to capture specifically, but, I'm sure we believe that it will come to become, indispensable. Unidentified Analyst: Thank you very much. That is very clear. And as for a second question, if you look at the Q2 performance, the overseas ratio, for instance, in terms of geography, Japan, United States, Europe, Asia, China, if you divide it by geography, roughly speaking, what is your breakdown by geography? Hidetoshi Shibata: So overseas, of course, it is increasing. So, roughly speaking, less than 80% is about, overseas sales. Japan is about around 20%. Remaining would be, well, U.S. is stable about 10% plus. Europe, same as Japan, it's a soft market, maybe 50%, Europe going down to about around 15%. And China, which is relatively strong, going up to 30%, and others. That'll be the breakdown. But China, because they are strong and excuse me, China and the U.S., they are relatively strong. Japan and Europe is weak. And as a result, the overseas ratio has all in all increased a bit. Unidentified Analyst: Understood. Thank you very much. Operator: Thank you very much. With this, we would like to end the Q&A session. Lastly, Shibata san, would you like to say a word? Hidetoshi Shibata: So, I think, this guidance of the third quarter about this earnings report, I think I may, everybody is disappointed, and this is the reflection I have. But, we will try to start-up once again upon the fourth quarter onwards. Specifically, the fiscal year, we would like to maintain a speed of growth. In terms of R&D, we will, put in efforts to invest there. And, even if we have to control our topline, we will adjust the inventory in the short-term. So, the third quarter, fourth quarter, we don't know how this is going to trend, but I hope that we'll be able to satisfy you in terms of our performance and continue to satisfy you. And, that is the reason why we have changed our tracks, at the current timing. Thank you very much for attending despite busy schedule. I thank you for your continued support. Operator: With this, we'd like to end the Renesas Electronics Corporation Second Quarter 2024 Earnings Call. Thank you very much for your participation.