KOKUSAI ELECTRIC CORPORATION Q2 FY2027 earnings call

Financial Performance:

• Second quarter revenue reached a record high of 88.6 billion yen, up 36% year-over-year.
• Adjusted operating income rose 56% year-over-year to 22.5 billion yen.
• First-half revenue increased 40% year-over-year to 164 billion yen, while adjusted operating income grew 57% to 39.8 billion yen.
• Gross profit margin decreased slightly to 41.8% due to product mix changes, but SG&A efficiency improved margins from adjusted operating income onwards.

Operational Highlights:

• Order intake for the second quarter totaled approximately 167 billion yen, exceeding forecasts by over 20 billion yen.
• Strong demand driven by DRAM and Logic Foundry products globally, alongside growth in component sales services.
• Sales to non-China markets saw significant growth, particularly in DRAM equipment (+57% YoY).
• Sales to Chinese manufacturers showed mixed results: NAND equipment sales declined due to investment lulls, but DRAM and Logic Foundry sales increased.
• The proportion of sales to the Chinese domestic market increased to 35% in Q2.
• Free cash flow was strong at 21.6 billion yen in Q2.

Strategic Outlook & Medium-Term Goals:

• CEO Tsukada announced that the company expects to reach its medium-term revenue target of 330 billion yen in FY March 27, two years ahead of schedule.
• The goal is to achieve an adjusted operating profit margin of at least 30% in FY March 28.
• Three key drivers for margin expansion: expanding share of high-value-added products (mini-batch ALD), expanding Total Addressable Market (TAM), and improving production efficiency with operating leverage.
• POR (Process of Record) wins are securing future revenue, especially in next-gen 3D NAND (400+ layers), DRAM (D1D/D0 generations), and Logic/Foundry (GAA and CFET technologies).
• Production capacity utilization is expected to exceed 80% in H2, with plans to add shifts and expand clean rooms to meet demand.
• R&D expenses for FY27 are projected to increase ~10% to ~20 billion yen; CapEx is projected to rise ~70% to ~29 billion yen.

The transcript does not provide a breakdown of financial performance by specific product segments (e.g., ALD, Plasma) in terms of absolute revenue figures or percentage contribution. It only provides consolidated figures: Revenue was 88.6 billion yen for the second quarter and 164 billion yen for the first half. Adjusted Operating Income was 22.5 billion yen for the second quarter and 39.8 billion yen for the first half.

• Full-year earnings forecast for FY March 27 remains unchanged from the first-quarter revision.
• No changes to the dividend forecast (32 yen per share for interim).
• Full-year revenue is expected to increase significantly, driven by global equipment sales, Chinese market recovery in DRAM/Logic, and service revenue growth (+45% YoY).
• Full-year adjusted operating income is projected to rise 81% year-over-year.
• WFE market growth expectations updated: 2026 market estimated slightly above $140 billion; 2027 market expected to grow at least 30% YoY to around $190 billion.
• Company aims to overgrow the WFE market, with FY March 28 revenue expected to grow ~40% YoY.

• Investment lulls among local Chinese NAND manufacturers causing declines in NAND equipment sales.
• Weak demand in non-AI applications (e.g., industrial equipment), though signs of recovery are emerging.
• Production lead time remains long at eight months, potentially constraining ability to respond immediately to surges in demand.
• Need to continuously secure production capacity through capital expenditure and facility expansion to match rapid market growth.

Q: How does management view the sustainability of the current order backlog given the long production lead times and potential supply chain constraints? / A: Management noted that while the lead time is fixed at eight months, they are actively expanding capacity by adding production shifts and enlarging clean rooms across three sites. They expect capacity utilization to rise above 80% in H2 and further next fiscal year, ensuring they can handle the anticipated double-digit WFE market growth without immediate bottlenecks.

Q: What is the strategic rationale behind accelerating the achievement of the 330 billion yen revenue target by two years? / A: The acceleration is driven by stronger-than-expected demand in AI-related high-performance devices (DRAM, Logic, NAND) and successful penetration into new POR positions for next-generation nodes (e.g., 400-layer NAND, GAA logic). This allows Kokusai to capture more value from high-margin mini-batch ALD and plasma treatment equipment earlier than previously modeled.

Q: Can you elaborate on the expected impact of the shift to mini-batch ALD equipment on profitability? / A: The shift from large batch to mini-batch ALD is a key profit driver, particularly in 3D NAND where the share of mini-batch is expected to rise from 50% (200 layers) to 80% (400+ layers). This technology offers higher productivity and value, directly contributing to the goal of achieving a 30% adjusted operating profit margin by FY March 28.

Q: How is the company positioning itself in the Logic and Foundry segment, specifically regarding GAA and CFET technologies? / A: Kokusai is winning POR positions for 2nm GAA devices this fiscal year, with sales expected to exceed 20 billion yen. They are also proposing solutions for 1.4nm GAA and initiating proposals for the later 0.7nm CFET generation. As devices become more complex and 3D, demand for their single-wafer plasma and mini-batch ALD equipment is expected to grow significantly.