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Renesas Electronics Reports Second Quarter 2018 Financial Results

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~Second Quarter Sales Increased Year-on-Year Driven by Stable Demand.
Temporary
Decrease in Gross Margin Due to Optimization of Inventory Levels~

  • Q2 2018: Non-GAAP(1) semiconductor sales of 199.1 billion
    yen, up 2.5% year-on-year. Non-GAAP gross margin of 45.4%, down 0.3
    point year-on-year and Non-GAAP operating profits (margin) of 33.9
    billion yen (16.7%), up 4.9 billion yen (up 2.0 points) year-on-year
  • Outlook for Q3 2018: Non-GAAP semiconductor sales of 172.6 billion
    yen, down 10.2% year-on-year, Non-GAAP gross margin of 43.2%, down 4.5
    points year-on-year and Non-GAAP operating margin of 8.8%, down 9.6
    points year-on-year

Renesas Electronics Corporation (TSE:6723, "Renesas"), a premier
supplier of advanced semiconductor solutions, today reported the
financial results for the second quarter ended June 30, 2018 (April 1,
2018 to June 30, 2018).

"We have been continuously improving our gross and operating margins by
pursuing sales growth and cost efficiency," said Bunsei Kure,
Representative Director, President and CEO, Renesas Electronics
Corporation. "While our second quarter non-GAAP semiconductor sales
increased by 2.5% year-on-year, we have been focusing on restraining our
production volume as part of our improvement measures to achieve optimal
inventory levels and kept our inventory on par with the level of the
previous quarter. This led to our non-GAAP gross margin to be a similar
level on a year-on-year basis. For the third quarter ending September
30, 2018, in light of the inventory situations at our sales channels, we
expect semiconductor sales to decrease year-on-year and also foresee a
drop in gross margin from a year-ago quarter. Although our short-term
financial performance is expected to grow weaker from these improvement
measures for future growth, we will continue our efforts to realize our
mid- to long-term targets."

Quarterly Financial Summary (Billion yen)

 

Non-GAAP Basis

    Q2 FY2018     Q1 FY2018     Q2 FY2017     QoQ     YoY
      (Apr-Jun 2018)     (Jan-Mar 2018)     (Apr-Jun 2017)            
Net Sales     203.5     185.9     198.1     9.50%     2.70%
Semi. Sales     199.1     182     194.3     9.40%     2.50%
Gross Margin     45.40%     48.00%     45.70%     -2.6pts     -0.3pt
Operating Income     33.9     31.4     29     2.5     4.9
Operating Margin     16.70%     16.90%     14.60%     -0.2pt     +2.0pts
EBITDA(2)     56.5     53.5     47.2     3     9.3
 
Japan GAAP Basis Q2 FY2018 Q1 FY2018 Q2 FY2017 QoQ YoY
      (Apr-Jun 2018)     (Jan-Mar 2018)     (Apr-Jun 2017)            
Net Sales     203.5     185.9     197.3     9.50%     3.10%
Semi. Sales     199.1     182     193.5     9.40%     2.90%
Gross Margin     45.20%     47.80%     41.50%     -2.6pts     +3.7pts
Operating Income     23     20.6     9.4     2.4     13.5
Operating Margin     11.30%     11.10%     4.80%    

+0.2pt

    +6.5pts
EBITDA     54.8     52.3     37.8     2.6     17.1
 
(1)  

Non-GAAP Basis: Results excluding non-recurring and certain other
items. Following the completion of the purchase of Intersil in
February 2017, Non-GAAP figures exclude amortization of goodwill,
amortization of purchased intangible assets, costs related to the
Intersil acquisition, stock-based compensation cost, costs related
to the offering, and PPA (purchase price allocation) effects
associated with the acquisition. See page 5 for reconciliation of
Japan GAAP and Non-GAAP.

(2) EBITDA: Sum of operating income, depreciation and amortization, and
amortization of long-term prepaid expenses. Amortization of goodwill
is also included for Japan GAAP-based EBITDA.
 

Quarterly Semiconductor Sales by Application (Billion yen) (3)

Following the completion of the acquisition of Intersil in February
2017, Renesas integrated Intersil into its operations and reformed its
business organization into three business units. To align with this
change, Renesas redefined its semiconductor sales breakdown to:
"Automotive," "Industrial" and "Broad-based," the three application
categories that constitute the main business of the Group, and "Other
semiconductors," that constitute the businesses that do not belong to
the above three application categories.

 
Non-GAAP Basis     Q2 FY2018     Q1 FY2018     Q2 FY2017     QoQ     YoY
     

(Apr-Jun 2018)

   

(Jan-Mar 2018)

   

(Apr-Jun 2017)

           
Automotive (4)     105.8     92.4     104.0     +14.5%     +1.7%
Industrial (5)     51.5     50.9     48.5     +1.2%     +6.2%
Broad-Based (6)     40.8     38.1     40.7     +7.2%     +0.1%
Other Semiconductors     1.0     0.6     1.1     +60.6%     -5.7%
Total     199.1     182.0     194.3     +9.4%     +2.5%
 
(3)  

Semiconductor sales by application: From the fiscal year ending
December 31, 2018, the company partially changed the sales
categories, consisting of "Automotive", "Industrial" and
"Broad-based" by transferring part of sales from "Industrial" to
"Broad-based" among other changes, to accurately represent the
business content. Accordingly, the figures of the fiscal year
ended December 31, 2017 have been retroactively amended to reflect
the new categories of the fiscal year ending December 31, 2018.

(4) Automotive: Renesas mainly supplies microcontrollers (MCUs),
system-on-chip (SoCs), analog semiconductors and power semiconductor
devices for the "Automotive control" and "Automotive information"
categories.
(5)

Industrial: Renesas mainly supplies MCUs and SoCs for "Smart
factory," "Smart home" and "Smart infrastructure" categories.

(6) Broad-based: Renesas mainly supplies "General-purpose MCUs" and
"General-purpose analog semiconductor devices" to a wide variety of
end market solutions.
 

Summary of Second Quarter 2018 Results
(Non-GAAP Basis)

Second quarter consolidated net sales were 203.5 billion yen, up 9.5%
quarter-on-quarter and up 2.7% year-on-year. Second quarter
semiconductor sales were 199.1 billion yen, up 9.4% from the previous
quarter that saw a decline in sales due to channel inventory
adjustments, and up 2.5% year-on-year. Automotive sales increased by
1.7% year-on-year. Industrial sales increased by 6.2% year-on-year,
mainly due to a strong demand in factory automation (FA) and home
appliances. Broad-based sales remained flat year-on-year.

Non-GAAP gross margin in the second quarter was 45.4%, 1.4 points above
the Company's guidance, mainly due to decreased expenses in addition to
increase in sales. On a sequential basis, due to a production decrease,
gross margin decreased by 2.6 points and year-on-year decreased by 0.3
point.

Non-GAAP R&D (7) expenses in the second quarter were 30.5
billion yen, compared to 31.9 billion yen and 33.5 billion yen in the
sequential and year-ago quarter. Second quarter R&D ratio to net sales
was 15.0%.

Non-GAAP SG&A (8) expenses in the second quarter were
28.0 billion yen, compared to 26.0 billion yen and 28.0 billion yen in
the sequential and year-ago quarter. Second quarter SG&A ratio to net
sales was 13.8%.

While Renesas focuses its OPEX (operating expenses such as R&D and SG&A
costs) on R&D expenses for future growth, the Company is continuing its
control of disciplinary SG&A, and aims to sustain long-term financial
targets at around 30% which is the sum of the ratios of R&D- and
SG&A-to-net sales.

Non-GAAP operating income was 33.9 billion yen, equivalent to 16.7% of
operating margin in the second quarter, showing an increase of 2.5
billion yen from the 31.4 billion yen on a sequential basis. However,
Non-GAAP operating margin decreased by 0.2 point from 16.9% in the
previous quarter due to the decrease in gross margin. On a year-on-year
basis, non-GAAP operating income improved by 4.9 billion yen (2.0
points) mainly due to sales increases and cost-containment effects.

Non-GAAP net income attributable to shareholders of parent company in
the second quarter was 30.4 billion yen, and Non-GAAP net income per
share was 18.2 yen.

Net cash provided by operating activities in the second quarter was 47.2
billion yen and net cash used in investing activities was 15.8 billion
yen. These resulted in positive free cash flows of 31.4 billion yen.

Capital expenditures for property, plant, equipment (manufacturing
equipment) and intangible assets, were 5.0 billion yen in the second
quarter. These expenditures are based on the amount of investment
decisions made and does not refer to the cash outlays in the cash flow
statement.

Equity ratio was 52.1% as of June 30, 2018, against 49.8% as of March
31, 2018. Debt/equity ratio (gross) was 0.43 as of June 30, 2018.

(7) R&D: Research & Development

(8) SG&A: Selling, general and administrative expenses

Outlook for Third Quarter 2018

In the third quarter of 2018, Renesas expects semiconductor sales of
172.6 billion yen (down 13.3% quarter-on-quarter, and down 10.2% from
year-ago quarter).

Non-GAAP gross margin for the third quarter of 2018 is expected to be
43.2% (down 2.2 points quarter-on-quarter, and down 4.5 points
year-on-year, mainly due to a sales decline and low operation with
adjustments in production). For the cumulative nine months ending
September 30, 2018, it is expected to be 45.6% (down 0.7 point from
year-ago quarter).

Non-GAAP operating margin is expected to be 8.8% (decrease by 7.8 points
quarter-on-quarter, down 9.6 points from year-ago quarter). For the
cumulative nine months ending September 30, 2018, operating margin is
expected to be 14.3% (down 2.2 points from year-ago quarter due to a
decrease in gross margin and proactive investments in R&D).

The forecasts for the third quarter of the 2018 are calculated at the
rate of 109 yen per USD and 126 yen per Euro.

Capital expenditures are based on the amount of investment decisions
made for property, plant and equipment (manufacturing equipment) and
intangible assets during the nine months ending September 30, 2018, and
they are expected to be 3.0% of net revenue.

References

Refer to Renesas Electronics' earnings report "Renesas Electronics
Reports Financial Results for the Second Quarter Ended June 30, 2018"
for
the consolidated balance sheets, the consolidated statements of income
and the consolidated statements of cash flows.

Refer to the separate sheet for Japan GAAP – non-GAAP reconciliation.

Forward-Looking Statements

The statements in this press release with respect to the plans,
strategies and financial outlook of Renesas Electronics and its
consolidated subsidiaries (collectively "we") are forward-looking
statements involving risks and uncertainties. We caution you in advance
that actual results may differ materially from such forward-looking
statements due to several important factors including, but not limited
to, general economic conditions in our markets, which are primarily
Japan, North America, Asia, and Europe; demand for, and competitive
pricing pressure on, products and services in the marketplace; ability
to continue to win acceptance of products and services in these highly
competitive markets; and fluctuations in currency exchange rates,
particularly between the yen and the U.S. dollar. Among other factors,
downturn of the world economy; deteriorating financial conditions in
world markets, or deterioration in domestic and overseas stock markets,
may cause actual results to differ from the projected results forecast.

About Renesas Electronics Corporation

Renesas Electronics Corporation (TSE:
6723
) delivers trusted embedded design innovation with complete
semiconductor solutions that enable billions of connected, intelligent
devices to enhance the way people work and live—securely and safely. A global
leader in microcontrollers, analog & power and SoC products and
integrated platforms, Renesas provides the expertise, quality, and
comprehensive solutions for a broad range of Automotive, Industrial,
Home Electronics, Office Automation and Information Communication
Technology applications to help shape a limitless future. Learn more at renesas.com.

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