Mid/Long-Term Management Policy

July 28, 2022

In FY2018, Advantest formulated a 10-year mid- to long-term management policy (FY2018-FY2027), its “Grand Design,” which defines the commitments and strategies needed for Advantest to continue to be a company that embodies its corporate purpose & mission of “Enabling Leading-edge Technologies.” Since then, Advantest has strived to enhance its corporate value under the policy.

In FY2021, the Grand Design was updated in response to the improvement of Advantest's business performance and changes in the company’s environment, because the first mid-term management plan (FY2018–FY2020) (MTP1) had been successfully completed, and three years had passed since the formulation of the Grand Design. At the same time, Advantest formulated its second mid-term management plan (FY2021-FY2023) (MTP2), which was announced in May 2021, to ensure achievement of the Grand Design’s goals. The entire company is working as one to achieve these targets.

1. Grand Design (10 years) FY2018 - FY2027

< Vision Statement >

Adding Customer Value in an Evolving Semiconductor Value Chain

< Strategy >

Advantest is expanding its business domains beyond the development and sales of semiconductor volume production test systems to also include adjacent markets such as semiconductor design / evaluation processes and product / system level test processes, which are performed before and after semiconductor volume production processes, with the aim of expanding and growing corporate value.

To achieve the above, Advantest will engage with five strategic issues:
reinforce core businesses, invest strategically; seek operational excellence; explore value to reach a higher level; pioneer new business fields; and further promote ESG initiatives.

Semiconductor Value Chain

< Mid/Long-Term Management Goals >

¥400B in annual sales

Advantest originally set annual sales of ¥300 billion to ¥400 billion as the ultimate goal of the Grand Design, and then in FY2021, revised the Long-Term Management Goal to “the early achievement of annual sales of ¥400 billion” thanks to the favorable progress of its business performance spurred by the progress of digital revolution and market share expansion. However, Advantest achieved the goal in FY2021, ahead of the originally intended FY2027, amid the sustained expansion of the semiconductor tester market, etc.

From this point on, while leveraging the achievement as momentum, we will further enhance our corporate value through promoting individual strategies under continuous changes in environment which Advantest assumed in the Grand Design such as sustained expansion in demand for semiconductor.

2. Summary of First Mid-Term Management Plan (MTP1, FY2018-FY2020)

< Status of Targeted Management Metrics >

  FY2018-FY2020 average
Conservative case
FY2018-FY2020 average
Base scenario
FY2018-FY2020 (Results)
Sales ¥230.0B ¥250.0B ¥290.4B
Operating Margin 15% 17% 22%
Return on Equity (ROE) 15% 18% 29%
Earnings per share (EPS) ¥135 ¥170 ¥309

Amid the expansion of the semiconductor market and the semiconductor tester market spurred by the progress of the digital revolution, Advantest's market share expanded faster than expected (overall market share in 2017 was about 36%, while average overall market share from 2018 to 2020 was about 50%), and businesses acquired through M&A made rapid contributions to business performance. As a result, all metrics exceeded the targets set under the base scenario of MTP1.

3. Outline of Second Mid-Term Management Plan (MTP2, FY2021-FY2023) (Revised July 2022)

* On July 28, 2022, Advantest has revised MTP2 as follows.

< Management Metrics & Financial Targets >

Under MTP2, Advantest will promote efforts to strengthen its business for further growth, expand growth investment as well as shareholder returns, and strive to increase corporate value. Given this framework, the management metrics that are emphasized in MTP2 are sales, operating margin, net income, return on equity attributable to owners of the parent (ROE), and earnings per share (EPS). Advantest will endeavor to grow all these numbers. In order to evaluate the progress of the plan from a mid/long-term perspective, the company will use three-year averages to minimize the impact of single-year performance fluctuations.

The semiconductor and semiconductor-related markets have been trending strongly up to this point, far exceeding our assumptions at the time of MTP2 formulation, and in addition, our initiatives for seeking further business growth have steadily progressed. However, with the risk of recession increasing in the global economy, weaker demand for final products and softening of the semiconductor market are expected in the future. We recognize that this has implications for the semiconductor tester market, and a certain amount of future slowdown needs to be taken into account, particularly regarding consumer electronics-related demand.

On the other hand, the diversification of semiconductor applications in recent years has created a higher support level in the semiconductor test equipment market. Additionally, the ongoing trend of greater difficulties around testing high-end devices, the strong motivation of major chipmakers to invest in advanced technologies, the future sales outlook for Advantest’s products, and foreign exchange rate trends all contribute to the possibility that our sales will not decline significantly during the MTP2 period. Based on the assumption that the current slowdown in the global economy will remain within moderate bounds, we are forecasting sales of ¥550 billion for FY2022, an increase of 31.9% over the previous fiscal year, as disclosed today. For FY2023, we currently expect year-on-year sales growth to be in the range of approximately -15% to +10%.

Given Advantest’s results for FY2021 and future business outlook mentioned above, the company has revised each target for MTP2 as follows.

*1:
The exchange rates used in the previous announcement were 1 USD = 105 JPY and 1 euro = 130 JPY.
*2:
The revised targets use exchange rates for FY2022 2Q-4Q and FY2023: 1 USD = 130 JPY and 1 euro = 140 JPY
(actual rates in FY2021 were 1 USD = 112 JPY and 1 euro = 130 JPY, FY2022 1Q rates were 1 USD = 124 JPY and 1 euro = 134 JPY).
  FY2021-FY2023 average
Previously Announced Targets*1
(As of May 2021)
Revised Targets*2
(As of July 2022)
Sales ¥350-380B ¥480-520B
Operating Margin 23-25% 27-30%
Net Income ¥62-70B ¥98-120B
Return on Equity (ROE) 20% or more 30% - 35%
Earnings per share (EPS) ¥320-370 ¥510-630

< Key Measures for Success >

Supported by broad-based demand drivers such as the ongoing digital transformation and carbon-neutral policies, the semiconductor market is expected to grow over the mid/long-term despite short-term demand fluctuations. In addition, increases in semiconductor complexity and integration, which have driven the expansion of the semiconductor tester market in recent years, are expected to actively progress in the future. Against this background, customers hold ever higher expectations for Advantest to deliver total test solutions that cover the entire semiconductor value chain.

Thus, Advantest will seek growth in each of its businesses while basically continuing the following policies, which were set forth last year.

Company-Wide
  • Amidst long-term growth expectations in the semiconductor market, we will strengthen our growth foundation by strengthening supply chain management, DX / AI investment, capital investment, and human resources investment in order to secure our growth potential and reinforce robustness of our business.
  • Respond quickly to technological evolution by strengthening partnerships with leading customers in the semiconductor value chain.
Semiconductor and Component Test System Segment
  • Capture the expanding demand for test equipment for SoC semiconductors, including HPC (high performance computing) devices, a sector which is expected to grow robustly over the mid/long-term, by leveraging the strengths of the new V93000 EXA Scale.
  • Establish a leading position in test for millimeter-wave related devices, a sector that will commence full-scale growth during the MTP2 period.
  • Capture demand in emerging sectors such as power semiconductors and silicon photonics devices.
  • Maintain a strong business foundation for DRAM and non-volatile memory device test.
Mechatronics System Segment
  • Expand sales opportunities by providing test cell environments that deliver better test quality.
Services, Support and Others Segment
  • As demand for system level testing (SLT) increases, win more customers in mobile, HPC, automotive, memory / storage, etc. In addition, actively promote expansion of recurring sales of consumables.
  • Invest to refine our business model in the data analytics field and further develop infrastructure for this business.

< Cost / Profit Structure >

To create corporate value over the long-term in a sustainable manner, Advantest will further strengthen its R&D investments, secure needed human resources and enhance human resource development, and reinforce its parts procurement capabilities, which are foundational to increasing added value and maintaining sustainable competitiveness.

It must be borne in mind that factors such as new COVID-19 strains, prolonged shortages of components such as semiconductors, geopolitical risks, ongoing inflation, and falling consumption all contribute to considerable uncertainty regarding the future of the global economy and Advantest’s business environment. The company will strive to achieve the above targets by flexibly responding to changes in the external environment, such as implementing cost controls as necessary.

< Capital Policy >

Advantest’s capital policy under MTP2 prioritizes business investments for growth while flexibly utilizing liabilities (debt) from a balance sheet management perspective that considers both capital efficiency and cost of capital. Furthermore, the Company’s policy is to maintain financial soundness and establish an appropriate capital structure to strengthen the foundations of its business and create sustainable corporate value. As a measure of financial soundness, the Company seeks a shareholders' equity ratio of 50% or more, and sets ROE as an indicator of capital efficiency.

< Growth Investments & Shareholder Return Outlook >

As profits are now expected to grow more than the company anticipated at the time of MTP2 formulation, Advantest has revised its outlook for growth investments and shareholder returns as follows.
Firstly, the company’s capital allocation policy aims to use the cumulative operating cash flow of ¥280 -360 billion expected during the MTP2 period as a primary source of funds, and allocate it appropriately to growth investments and shareholder returns after periodic reviews of cash on hand levels. Regarding resource allocation for growth investment, we will increase capital investment related to R&D and production beyond what was initially planned, in response to expectations for long-term semiconductor market expansion and further semiconductor performance gains. The company currently expects to spend a cumulative total of ¥70 billion on capital investments and ¥100 billion on strategic investments such as M&A over the MTP2 period.

Regarding shareholder returns, Advantest will maintain its existing returns policy, assuming that its business environment remains stable during the MTP2 period. Specifically, the company will maintain stable dividends with a minimum semi-annual dividend of ¥50 per share and a minimum annual dividend of ¥100 per share, while simultaneously aiming for a total annual return ratio (*) of 50% or more. Advantest will also seek to enhance shareholder returns and improve capital efficiency through dividends and share repurchases.

(*) Total return ratio: (Dividend + share repurchase) / consolidated net income

Updated July 28, 2022