Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2019 Performance Briefing ]Q&A

Q1. With regard to the delay in new sensor products contributing to sales, how do you foresee sales in the Sensor Application Products segment changing from the first half of the year to the second half? Also, do you foresee an earnings recovery? Please explain your growth strategy for the fiscal year ending March 2020 onward along with the first question.
A1. In the first quarter performance briefing, we explained that we would determine the timing for introducing fingerprint sensors with applications for smartphones in mind. Compared to other technologies, we believe that TDK’s ultrasonic fingerprint recognition technology is superior in terms of performance and other factors, but we have arrived at the conclusion that we will need a little more time to maximize the appeal of our technology’s value while also meeting demand for the latest smartphones. This is the factor causing the biggest difference this fiscal year. Since smartphone manufacturers are avoiding putting buttons or cameras on the outside of devices, fingerprint recognition technology must be incorporated while maintaining designability. Matching the technology with applications takes time, but once it has been approved, we expect that it will lead to significant sales. In order for our technology to be used as a fingerprint sensing solution, we are not just enhancing the sensors themselves—we are also improving the business by developing stronger tie-ups with module and panel manufacturers.
With regard to MEMS sensors, increasing sales of motion sensors, especially the 6-axis family, is an issue.
In the third quarter of this fiscal year, we expect sales in the Sensor Application Products segment to remain more or less stable relative to the second quarter. In the fourth quarter, we will be launching new MEMS sensor products, so we anticipate sales will increase by slightly less than 10 percent in the second half of the year compared to the first half. We do not expect operating income to improve significantly in the second half.
In the fiscal year ending March 2020, we forecast that temperature and pressure sensors will continue to be firm, especially to the automotive market. For magnetic sensors, there will be some adjustment in sales to the ICT market in the second half, but sales to the automotive market will remain healthy. In particular, we are seeing a trend toward these sensors becoming the de facto standard for electric power steering (EPS), which is their most common use, and we forecast that sales will remain strong. We are developing new uses for TMR sensors for the ICT market and forecast that sales of these will remain strong as well. For MEMS motion sensors, we are establishing a solid foundation for the business by increasing the customer base and range of applications and pushing ahead with the development of new products. We are also developing new barometric pressure sensor products.
Q2. You are making progress with increasing the adoption of magnetic sensors for ICT use. What is your forecast in terms of growth and return on capital invested?
Also, the need for solutions for cameras, for which software technology is challenging, could be seen as an opportunity to expand InvenSense’s MEMS sensor business next year. What do you think about this? With regard to fingerprint sensors, I believe you are pursuing business in partnership with processor and display manufacturers. Please tell us how you view this arrangement.
A2. We have adopted an insourcing approach to temperature and pressure sensors and magnetic sensors, which is a crucial point. In addition, we are able to provide added value to our sensor elements by providing more than just a high level of accuracy—we also incorporate into our sensors the capacity to process information that cannot be handled by latter-stage integrated circuits (ICs) alone. We believe that we should handle products that we can provide added value to sensor elements in this way by ourselves and change our approach to capital investment based on whether or not added value will be provided.
For MEMS sensors, especially InvenSense products, there are two main issues. The first is product design. Since how they are designed is a key point, we do not necessarily need a fab. The other key point is how much we can eliminate noise in latter-stage processing and produce an accurate, low-power signal. The MEMS structure will be created on ICs, but we believe we should use external resources rather than creating everything from the IC onward by ourselves. TDK’s competitors in the MEMS sensor field are not sensor manufacturers but IC manufacturers, mainly in the U.S. and Europe. We must seek to differentiate ourselves from IC manufacturers’ sensor concepts by exploring sensor designs based on applications. And, as you indicated, the more challenging the technology required for MEMS sensors is, the more opportunities there are for TDK.
Q3. In TDK’s current sensor portfolio, is there any technology that should be supplemented through M&A? Also, what is the current status of new sensors other than fingerprint sensors?
A3. At present, there are no areas we need to reinforce through M&A.
We have now started working on modules using TMR sensors and have already developed modules using Micronas hall sensors. Since InvenSense also possesses software technology, we are incorporating motion sensor hardware and software into applications such as OIS and EIS, especially for smartphones.
Q4. Given that demand for HDD heads for data centers is softening and the availability of NAND flash technology is increasing, there appears to be some risk for the next fiscal year and beyond. What do you think about this?
A4. We recognize that SSDs will be used for personal computers, online drives, and online servers, and we have considered the possibility that demand for HDD heads will decrease. In the next fiscal year and the following year, we will have a better idea about MAMR and TAMR, and we hope to differentiate ourselves through these two technologies.
Q5. You mentioned an impairment of long-lived assets for ferrite magnets, but does that mean that you will not only reduce amortization but also improve profitability?
A5. We’ve been aware of our ferrite magnets’ weaknesses from the early stages, but there was a time when we did not make sufficient capital investment, including development. Extremely high performance is required of magnets used for automobile motors and the like, but if we were to produce high-performance magnets using the old production equipment we currently own, the yield would not increase much and our earning capacity would be limited.
For neodymium magnets, it is necessary to establish two technologies. One is the technology to make magnets that have the ideal shape for motors. We are now at the point of moving toward mass production of magnets with irregular shapes, such as C-shaped magnets and semi-cylindrical magnets. The other technology is that for making magnets with a magnetic flux orientation that facilitates use in motors. We believe that by improving these technologies, we will be able to enhance the competitiveness of our products and shift toward ferrite magnets with a comparatively high average unit price.
Q6. Sales in the Energy Application Products segment increased in the first half of the fiscal year ending March 2019 by around 29 percent compared to the first half of the fiscal year ended March 2018, but by how much did sales for batteries alone grow? Also, to what extent can this be attributed to different factors such as an increase in volume, the impact of changing material prices, or an improved product mix?
A6. The overall sales increase rate in the Energy Application Products segment and the sales increase rate for batteries alone were at roughly the same level. The majority of the increase is due to an increase in volume. The impact on the unit price due to changes in material prices in the second quarter was not significantly different from the first quarter. We launched some new products in the second quarter, which increased the average unit price somewhat.
Q7. At the end of the first quarter, you explained that you expected sales growth of 9 to 12 percent for batteries in the second quarter. Please tell us how you surpassed this projection despite a significant slowdown in sales of smartphones for the Chinese market.
A7. In the smartphone battery sector, ATL has an extremely high production capacity. Every year, when smartphone manufacturers release new models, batteries with different sizes and capacities are required, and we need to respond to this need within a short timeframe. ATL is a first-tier supplier which is able to simultaneously handle both time to market and time to volume requirements and which has an overwhelming market share of Chinese smartphones. It has an exceptional reputation with regard to both investment in safety and investment in time to volume. I think that the ups and downs of the Chinese smartphone market as a whole have a significant impact on second- and third-tier suppliers, but as a first-tier supplier, ATL is not easily affected.
Q8. Next year and beyond, the number of smartphones is not expected to increase significantly, so how do you plan to increase battery sales?
A8. The smartphone market is saturated, so the key point is how will we expand the sales of batteries for smartphones in emerging nations. In China in particular, we are viewed as a strategic supplier by top-tier customers, and we want to continue reliably meeting their needs in the future. Smartphone batteries are often sold as units alone, but since we have a packaging company at TDK as well, we provide batteries with packaging, and we intend to offer further added value going forward.
Meanwhile, in markets other than the smartphone market, our compact batteries are starting to be used for new applications such as wearable devices and wireless devices. In the next fiscal year and beyond, we intend to actively expand the range of applications in order to leverage the characteristics of our products.
Q9. Smartphone batteries have been increasing in capacity. Do you expect this trend to continue in the coming years?
A9. Increasing the capacity of batteries fundamentally depends on the design of smartphones, so how much the capacity will increase depends on customers’ demands. However, our focus on increasing energy density has not changed, so we are working to ensure that we can continue increasing capacity.
Q10. According to published documents, CATL’s recycling business is performing on track. It seems that you have already reached the stage where you can procure a certain amount of battery materials from recycled materials. Will your stake in this business have an impact on your profits?
A10. In our performance for the fiscal year ended March 2018, we posted an income of around 3 billion yen for stocks of subsidiaries and affiliates, which includes recycling company profits. Since we view the recycling business as related to SDGs and ESG investment, we need to give careful consideration to social responsibility initiatives. We are currently engaged in cutting-edge recycling activities in China, and we believe this will have an impact on other countries as well. Besides batteries, we also need to address material procurement issues for magnets, so we want to ensure a supply of recycled materials.