Renesas Electronics Corporation Q1 FY2026 earnings call

• Hidetoshi Shibata mentioned earnings had effect of timing business divestment, overall Q1 results were good, stronger than previous guidance, demand growing, needed to build channel inventory more, automotive demand stronger than expected with R-Car and micro controllers performing well, data center AI and client-side AI growing strongly despite Taiwan earthquake impact on supply. • Shuhei Shinkai presented Q1 results, explained timing business exclusion for apple-to-apple comparison, showed financial snapshot, discussed pro forma numbers, Q-on-Q results, inventory situation, utilization rate and CapEx status, second quarter forecast including revenue, gross margin, operating margin forecasts and related factors like FX impact, mix, manufacturing expenses, operating expenses, and highlighted R-Car Gen4 ramping up and Altium ARR update.

In Q1, non-GAAP revenue was JPY 372.3 billion. 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 both growing strongly. Timing business was divested in February, and for apple-to-apple comparison, excluding timing business, revenue was JPY 369.1 billion, above forecast by 1.4%, gross margin was 59.1%, above forecast by 1.1 percentage points, operating profit was JPY 123.7 billion, above forecast by 2.5 percentage points. Channel inventory for first quarter increased Q-on-Q, with automotive sell-in and sell-through having upside but not achieving expected channel inventory expansion, while industrial, infrastructure, IoT had slight buildup mostly for data centers. Utilization rate in Q1 was around 55%, up about 6 points from previous quarter, and CapEx included JPY 94 billion investment decision with 80% for capacity expansion in AI, data center, digital power applications at Kofu, Naka, Saijo factories.

• Second quarter forecast: revenue midpoint JPY 388 billion, gross margin 57.0%, operating margin 29.0%, exchange rate assumptions JPY 156 to dollar and JPY 180 to euro. • Pro forma basis Q-on-Q revenue expected to increase by 5.1%, excluding FX impact by 5.0%. • Gross margin forecasted to be minus 2.1 percentage points Q-on-Q due to production absorptions, FX impact, mix, and manufacturing costs increase. • Operating profit margin expected to be minus 4.5 percentage points Q-on-Q due to gross margin deterioration and operating expenses increase. • Outlook for sales relatively optimistic going forward despite macro uncertainties, with intention to build up channel inventory and expand capacity.

• Macro uncertainties affecting automobile consumption, including energy price changes and their impact on EV and gasoline car sales. • Supply constraints in terms of testers and wafers, with potential delays in resolving bottlenecks. • Fluctuations in product mix and currency mix affecting gross margin and financial results. • Manufacturing cost increase including energy costs and their impact on gross margin. • Uncertainties regarding raw material procurement and its potential impact on automobile production. • Difficulty in implementing surcharge mechanisms for price adjustments.

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 the capacity of Renesas itself, realistically, contribution from next year, looking at testers and wafer efforts to address bottlenecks, expecting capacity to increase gradually, suppliers to increase supply Q3 and beyond, automotive performance stronger than expected due to Gen4 R-Car, previous gen R-Car and micro controllers, combination of factors leading to 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 likely to have to adjust price at some point.

Q: Regarding gross margin for the second quarter, how we should think about that? How to what extent risks are incorporated? Is there any upside? If you could talk about those things. And 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 shipments expected to increase Q-on-Q impacting gross margin, manufacturing costs including utility, labor, repairs contributing to lower gross margin, OP margin expected to have positive impact.

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, timing issues account for 1 percentage point, Q2 operating expense expected to be about JPY 100 billion or more, second half generally expect 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: Until end of this year outlook remains more or less unchanged, strong momentum expected next year onward, non-AI growing and expected to continue, need to expand capacity to capture momentum, expect 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 share in EV micro controllers, expect results of measures to be realized going forward but short term has timing differentials.

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 you 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: P&L impact explained by Shinkai, Kofu operation start expected in FY 2028, depreciation starts then, finalized amount to be determined after other processes and investments.

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: Concerns exist but not materializing to large impact, many taking preemptive measures, so not expecting too huge an impact.

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?

A: Difficult to say, would like to do what is best for shareholders and customers, surcharge mechanism 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: Former Renesas and other businesses not distinguished, in short term radical price changes not desired, would like to be sincere vis-a-vis customers and shareholders.

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: In principle, using digital technology to manage and control, unique characteristics with control and design environment, providing attractive solutions in usage.

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

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

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

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