Renesas Electronics Corporation Q1 FY2026 earnings call

• Hidetoshi Shibata mentioned earnings results were affected by timing business divestment, overall Q1 results were good, stronger than previous guidance, demand was growing but channel inventory build-up was less than expected. Automotive demand was stronger than expected, Gen 4 SoC R-Car ramping up well. Data center AI and client-side AI growing strongly. Supply was tight due to Taiwan earthquake, but efforts were made to catch up in Q2. • Shuhei Shinkai presented financial snapshot, explained pro forma numbers excluding timing business, discussed revenue, gross margin, operating margin by segment, inventory (in-house and channel), utilization rate, CapEx status, and second quarter forecast including revenue, gross margin, operating margin forecasts and factors affecting them, and highlighted R-Car Gen4 ramping up and Altium ARR progress.

In Q1, non-GAAP revenue was JPY 372.3 billion. Pro forma revenue (excluding timing business) was JPY 369.1 billion, above forecast by 1.4%. Gross margin was 59.2% non-GAAP, and pro forma gross margin was 59.1%, above forecast by 1.1 percentage points. Operating profit was JPY 125.4 billion non-GAAP, and pro forma operating profit was JPY 123.7 billion, above forecast by 2.5 percentage points. Automotive demand was stronger than expected, with Gen 4 SoC R-Car ramping up successfully and previous generation R-Car and micro controllers showing strong growth. Data center AI and client-side AI were growing strongly. Industrial, infrastructure, IoT segments had a 9 percentage point improvement in operating margin Q-on-Q, with 10% revenue increase and operating leverage.

• Second quarter revenue midpoint forecast is JPY 388 billion, pro forma Q-on-Q revenue expected to increase by 5.1%, excluding FX impact by 5.0%. • Gross margin forecast is 57%, pro forma Q-on-Q expected to decrease by 2.1 percentage points due to production absorptions, FX impact, and mix. • Operating margin forecast is 29.0%, pro forma Q-on-Q expected to decrease by 4.5 percentage points due to gross margin deterioration and operating expenses increase. • CapEx decision made for capacity expansion, with investments in AI, data center, digital power for front-end and back-end processes, expected to start contributing from next year onwards.

• Supply constraints remain an issue, including tester shortages and wafer bottlenecks from Taiwan earthquake affecting production. • Currency fluctuations and product mix changes can impact gross margin. • Operating expenses decline factors were onetime or have time differentials, which will affect Q2 results. • Macro uncertainties such as energy costs and automotive consumption changes can impact business performance.

Q: Towards April to June quarter, what are you focused on to address the bottleneck? And what can you do to increase sales more? As for CapEx, when will CapEx start to make contribution? Is it in the second half of the year? What is the pace that you expect to increase supply with and as a result, sales? I believe the digital power mainly are performing strongly. You've also mentioned that automotive performance was also strong. Is there any supply constraints regarding automotive. But conversely, why is demand so strong from automotive segment or automotive segment?

A: As for capacity, contribution from next year, focusing on testers, pulling in wafers, suppliers increasing supply from Q3, automotive demand stronger than expected with Gen4 R-Car, Gen3 R-Car and micro controllers contributing, combination of factors resulting in stronger results.

Q: How do you see the price environment situation? And what are the developments that you expect?

A: Raw material, transportation costs rising, supply constraints, memory price increasing, competitors increasing prices, so may have to adjust price.

Q: Regarding gross margin for the second quarter, how we should think about that. As per Mr. Shinkai's presentation, we have the breakdown. But looking at that, what I struggle to understand was that sales is expected to be flat Q-on-Q. However, you're expecting 2% decrease. How should I think about that? How -- to what extent risks are incorporated? Is there any upside? If you could talk about those things, I would appreciate that. And also for power, gross margins, low mix deterioration is expected as per your presentation, but what is the contribution in terms of OP margin?

A: Gross margin decreasing by 2 percentage points due to production absorption, FX impact, manufacturing cost increase, FX has upside based on current view, mix has product and currency mix impact, power product shipments expected to increase Q-on-Q impacting gross margin, manufacturing costs increase contributing to lower gross margin, OP margin expected to have positive impact.

Q: For the automotive business, you said that it's stronger than your expectation. But on the other hand, for the second half, demand for automotive is still uncertain as what we've heard from the peers. Given the macro environment with what you know so far, what is your expectation for the second half? What is your outlook?

A: Macro uncertainty exists, but outlook is bright, sales outlook relatively optimistic, inventory adjustments needed.

Q: About SG&A, labor cost increase, R&D cost increase were mentioned. And this accounted for close to 2 percentage point increase. But second half onward, what is your outlook? And Q-on-Q, in terms of percentage, is there going to be an increase? Or is it going to be increasing value? If sales also increases, in terms of percentage, will the increase be more milder? How do you foresee the second half?

A: Between Q1 and Q2, expense booking timing issues accounted for 1 percentage point, Q2 operating expense expected to be about JPY 100 billion or more, second half generally expect about JPY 100 billion or so of operating expense.

Q: You have decided to make a large capital expenditure. In comparison to 3 months ago, do you see -- do you have different outlook? Doubling growth in AI was your previous forecast. Does that remain unchanged? Intel announced a strong performance. Non-AI may also be an area to pay attention to. And including non AI area, what is your vision in the medium to long term?

A: Outlook remains more or less unchanged until end of year, strong momentum maintained next year, non-AI growing, expect to capture benefits in memory and power, strong growth in third quarter and next year.

Q: Related to automotive, earlier, Shibata-san said that automotive mix may change. The other day, in Europe, EVs are selling, increasing in volume. And due to the changes in the energy prices, EVs are now gaining traction, particularly the battery-powered EVs are rising. Generally speaking, battery cars and EVs, I believe, the semiconductors are used in large quantities. So for Renesas, the fact that EV is growing, what does it mean? But your company's exposure to EV is not that significant. But with the change in the mix for your company in the medium to long term, is it going to be a tailwind? Or is it going to be a headwind?

A: In comparison to peers, not a tailwind, Power Discrete not sold in large quantities, German competitor has higher micro controller share in EV, short term timing differentials, growth rate muted compared to peers.

Q: Now you made a decision for large investments in capital expenditure, Naka, Saijo and Kofu. I have a question for Kofu factory. So far, we have not seen the introduction of the mass production phase. With this CapEx, I believe that this is mostly for digital power. Now你 have a visibility to the start of operations at Kofu factory. And once the operation starts, I believe, the cost would also increase. So how should we interpret the P&L impact?

A: Visibility to operational start at Kofu, 300 [mm] line change, gradual shift expected, actual production start expected in FY 2028, depreciation will start then, finalized P&L impact to be explained later.

Q: In the second half, I have a question regarding automotive. Shibata-san said that the demand side, including energy cost increase and consumption were mentioned as concerns. But memory purchasing may be also a difficulty for how long inventory will last maybe concerns for Tier 1. In terms of procurement of raw materials, is there going to be impact in the second half of the year to 2027 in terms of impact on the production of automobiles? Do you have any concerns?

A: Concern but not materializing, not expected to have large impact, many taking preemptive measures.

Q: About price increase. About 5 years ago, I believe a surcharge mechanism was adopted. For the incremental cost, the price will be increased so that margin will not deteriorate for Renesas. I believe that type of price increase was implemented. But often times, American companies also say that because of higher wage price increase is on top of the increase in cost and gross margin as a result will be higher in comparison to before the price increase, but which approach would you be adopting? It may be difficult for you to discuss this, but to the extent possible, if you could share your thoughts on this.

A: Difficult to say, would like to do what is best for shareholders and customers, surcharge method difficult to implement, would like clear-cut way to adjust price.

Q: Regarding automotive, you may have long-standing relations with your customers since the days of the former Renesas, you may not be able to increase price so aggressively, but acquired company's -- the business of formerly acquired company have the leeway to aggressively increase price more in IIBU. Can I have such expectation?

A: No distinction made, would like to be sincere with customers and shareholders, focus on being sincere.

Q: Regarding AI and data center applications, you mentioned the digital and power products as products for these applications. You have power and you also have a driver, you have analog, you have MCUs. So this digital power signal chain exists in the company. Are you referring to that? Or what specifically do you mean when you say digital power?

A: Using digital technology to manage and control, unique characteristics, focus on usage solutions.

Q: I think 48-volt DC is currently selling.

A: Yes, cover whole range from grid to core, including 48 volts, expanding towards grid.

Q: I think 800 volts that is currently attracting attention. And you will eventually target that area of business as well?

A: Already have solutions, certain GPU manufacturer publication covers, intend to further expand and innovate.