Renesas Electronics Aktie

Thank you very much for taking your precious time to attend Renesas Electronics Fiscal 2026 Third Quarter Earnings Call. We thank you very much indeed.

[Operator Instructions]. Mr. Shinkai, please turn your video on.

Today's session is attended by our CFO. Mr. Shuhei Shinkai, as well as other staff members of the company. After a few words from Mr. Shinkai, we would like to provide you with the explanation of the third quarter results, which will be followed by a Q&A session. We expect to finish the entire session in about 60 minutes.

The materials to be used for today's presentation is already posted on the IR side of our corporate homepage. Mr. Shinkai, please turn your microphone on and begin your presentation.

I am Shinkai, CFO of the company. Good morning to you. From this time around, the earnings call update method was reviewed, in June of this year at the Capital Market Day. Our mid to long-term business direction and strategies, as well as the aspirational financial targets, were presented to you in a comprehensive manner. The progress of those mid to long-term things will be explained during the full year of earnings call, also at the Capital Market Days from Mr. Shibata. The recent or the quarterly performance of the company will be explained mainly by myself. Please be aware of that. Now if I could begin the presentation using the presentation slides. But before that, in the third quarter of this year, I would like to just briefly talk about the highlights of the third quarter results, as well as the outlook for the fourth quarter.

The third quarter actuals with the industrial and infrastructure sales came in higher than the projected numbers. On the actual apple-to-apple basis without the impact of ForEx, it was a 1.18% increase compared to the plan. As for the third quarter, on the 1st of July, the Timing Business was transferred. We completed that transfer, so the GAAP-based operating profit, we recognize the proceeds from the sales of JPY 450.3 billion. For the third quarter, on a Q-on-Q basis, excluding the foreign exchange impact on an apple-to-apple basis, 4.2% Q-on-Q increase was recorded. The details was driven by the growth of automotive, SoCs, and also the R-Car Gen 4 took off, started off, and also the MCU 28-nanometers adoption spread. So that was also a factor, and also industrial infrastructure continued to be strong. The fourth quarter outlook.

So if I try to summarize for the full year of 2026 on a year-on-year basis, 26.4% revenue increase is expected for the landing. There is also foreign exchange favorability, but on a year-on-year basis, a 20% increase is expected for the full year. For the mid to long-term aspirational targets, towards these goals, we will continue to grow and we are also tackling to increase the production capability. The in-house production will be expanded through capital expenditures. In the third quarter, fourth quarter, we will continue to make those capital investments. Now I would like to go into the explanation using the presentation slides. If you can go to page 3, this is a disclaimer here. As I said at the outset, on the 1st of July, the Timing Business was transferred, so those were excluded from the non-GAAP numbers.

The GAAP-based third quarter numbers recognizes the proceeds from the transfer of the Timing Business, the gains from the sale. The fourth page. The third quarter actuals are presented here. If you look at the shaded part on the left, those are the third quarter. So if you can look at that. For the revenue, JPY 435.2 billion in gross margin 59.4%, operating profit JPY 150.5 billion. Operating margin 34.6%. EBITDA JPY 173.4 billion. And profit attributable to the owners are parent JPY 125 billion. Foreign exchange, JPY 161 to the dollar, JPY 185 to the euro. As always, the Timing Business, excluding all that, the year-on-year comparison excluding Timing Business is presented on the right-hand side of the screen.

For the third quarter, there was one-off accounting related factor, so excluding that, we wanted to show this apple to apple as much as possible so that we can explain the real strength. So, excluding the foreign exchange and the one-off factor, if you look at the second column there, that's already presented. So, it's the one that says that excluding the foreign exchange and also the foreign exchange impact and also the one-off factor. The ship and debit transaction related adjustments are this one-off factor, the ship and debit. We have made a quotation for the provisions, and then based on the actual sales to the customers, we have settled that. So we have changed the methodology for the quotation. So that's the reason why we have decided to make this adjustment one-off here.

The number was quite significant, so that's the reason why we have decided to exclude this as a one-off factor. And so it's just a technical adjustment. If you can look at the next page, this is the comparison vis-a-vis the plan. The third quarter revenue gross margin and also the OP margin, I would like to explain them one by one, versus the plan. If you look at the column versus the plan, revenue was plus 1.2%. However, on a like-for-like basis was higher. So it came in higher on apple-to-apple basis, higher than the plan. But because of the foreign exchange impact and also the one-off factor, those are factors that canceled out each other. The actual demand, 1.8% incremental revenue. If you look at the actual demand, automotive compared to plan was slightly higher. Infrastructure, IoT, industrial, and IoT was higher.

Therefore, the vast majority came from the contribution of IIoT. There were 3 major factors here. Data center actual demand increased, consumers, and the back-end supply improved. Therefore, we were able to have an increase in collection. As for the mass market in the industrial sector, AI and semiconductor-related demand increased. Those were the 3 major factors behind this upside compared to the plan. As for the gross margin compared to the plan, 1.9 percentage point increase compared to the plan. Weaker yen mix improvement and the cost reduction for production were the major factors. Weaker yen 20%, mix improvement 50%, and the cost reduction 30%. Those are the contribution towards this improvement versus the plan.

As far as the mix improvement is concerned, the data center and the supply improvement, that was the factor behind the revenue improvement. Likewise here, the digital power DPU improvement was a contributor for the mix improvement. When it comes to the production cost reduction, the write-down and write-off of inventory did not occur as much as what we had planned. That resulted in lower than expected expenses. For the OP or operating margin, compared to the plan, 2.1% higher compared to the plan. The gross margin. The upside factors for the gross margin was the same here for the OP margin. There were increase in expenses, but the increase in the revenue, so those canceled out each other more or less.

The decline was the decline of expenses due to the freezing or the review of the hiring plan, and AI infrastructure investment inside the company, and the increase of the SDI-related provisions offset those favorabilities. The actual landing numbers came in more or less in line with the plan. If you look at the right-hand side on a quarter-on-quarter basis, gross margin was more or less in line with the projection. For the operating margin on a quarter-on-quarter basis, we anticipated an expense increase, and we landed according to the plan. By segment, IIoT on a quarter-on-quarter basis, there has been a significant increase, as you can see here. When it comes to the gross margin, foreign exchange and mix was also a factor. For the operating profit, the scale increase was the major driver behind the good performance.

If you look at the next page, this is the quarterly performance of the revenue. Overall, year-on-year, 30.2% increase. On a quarter-on-quarter, 7.4% increase. The numbers on the brackets are the actual apple-to-apple, excluding a one-off factor and a foreign exchange, 22.3% increase year-on-year, and 8.6% increase quarter-on-quarter. The next page. Inventory. Left-hand side is the DOI and quarter-on-quarter third quarter work in progress and completed is increasing, and die bank increased, and production increased too, and work in progress also increased. These are the major factors. Fourth quarter-on-quarter, there is increase to be expected. Die bank and production capacity fulfillment by which work in progress will be increased.

Fourth quarter has inventory increases to be expected. In addition, on the right-hand side, sales channel inventory shows third quarter Q-on-Q for inventory increases, and auto and industry has been increasing in inventory. On the other hand, for automobile, more than the assumption, the sales through is increasing. For fulfillment, it is not so large, but it has been increasing as a trend. Fourth quarter channel inventory fulfillment is to be continued. For auto, as mentioned at the beginning, 28nm MCU and R-Car mainly will be fulfilled, so that demand fulfillment preparation will be made. For industry infrastructure, data center is still at low level in inventory levels, but in actual amount, it will be increased, and we will work on that. Next page, please. For CapEx and utilization, current processes, wafer. Third quarter is as assumed.

Kawashiri plant earthquake impact, wafer input had been delayed, but impact is very small, and it is 59%. As a result, the fourth quarter expects some increases. On the right-hand side, there is a CapEx situation shown. Third quarter has MCU and local government power to be increased in production and in-house factory utilization increases and R&D investments that have been in-house, which is JPY 111.2 billion to be fixed. Increases in production is 80% of overall. For MCU domestic Naka plant and for power, mainly for the back-end process for Malaysia factories to be handled for increase in production and domestic Saijo factory where production will be increased, and the back-end process and interim processes is where it will handle those processes. The third quarter continues for AI infrastructure back-end processes mostly, and in-house factory capacity increases will be worked on. Next page. Fourth quarter and full year forecast.

For the fourth quarter, on the left-hand side, there is a shaded portion to be referred to. Revenue and profit, JPY 454 billion for revenue and ratio 58.0%, 32.0% for OP and ForEx, dollar is JPY 157 and euro is JPY 178 expected. Respectively, the contents will be explained. Revenue JPY 454 billion is shown at the center. Year-on-year on the right-hand side is 29.4%. Q-on-Q is 4.3% of increases expected. Q-on-Q 4.3% will be explained where yen appreciation factors and third quarter one-off factor may be included. But excluding that, it will be around 4.2% of increase to be expected in revenue as written at the revenue, excluding ForEx and one-off impact. This 4.2% Q-on-Q increase for the revenue for data center and industrial increases are mostly the portions for automobile 28nm MCU deployments and Japan Gen4 deployments are the main drivers for the growth.

Gross margin 58% is Q-on-Q 1.4 points in decrease to be expected. Yen appreciation and mix and production expense increases are included. More than 50% is mix factor, and the remainder is ForEx and production expense increases. For the production expense in CapEx, as has been explained, gradually there is more investment into production increases, so investment-related expenses in the fourth quarter is increasing. Year-end maintenance is also necessary, so repair works expenses will concentrate at the end of the year. 32.0% of operating margin, 2.6% reduction occurs in the fourth quarter.

OpEx increase is expected, and there are about 3 factors to this. One is the office upgrading and infrastructure, internal IT and AI infrastructure to be prepared for, and investments for that are necessary, and R&D investments. There are some seasonal factors where it concentrates towards the end of the year, and other portions are also included. Q-on-Q operating expenses is increasing thereby. At the bottom, there is the sensitivity of ForEx. Fourth quarter ForEx sensitivity has it where JPY 1, $1 to yen fluctuation and impact to operating profit is shown. In dollar case, it's JPY 2.2 billion and operating profit JPY 1.1 billion. In euro in sales, EUR 0.2 billion and operating profit impact is EUR 0.1 billion. So $100 and EUR 120 means the performance forecast 32.0% is 26.2%. In addition, for the appendix, please jump over to page 17. Operating profit, the third from the top, JPY 563 billion is shown.

As mentioned at the outset, Timing Business transfer proceed is booked here, equal to JPY 430 billion. That is the conclusion of the slide explanation. Thank you.

[Operator Instructions]. Takayama-san, please begin. Please unmute yourself and begin your question.

My first question is the revenue for data centers and also digital power that is a portion of that. In the third quarter, and also for the fourth quarter, can you give us the outlook for the fourth quarter? Also, as you ramp up your production inside the company, what is the output that can be expected for the first quarter of next fiscal year? How further can you increase your production? I would like to confirm these points. Then when it comes to the profit margin, in the third quarter, because IIoT profit margin has been increasing. So, I am sure the data center performance is improving, but other than memory interface, the digital power is also, I believe, is improving. Can you explain those trends, if you could? Also related to data center, agentic AI impact, if you see any impact from that, if you can comment on that point as well. That is my first question.

All right. Agentic AI impact. It is not possible for us to quantify that yet. However, the industrial and also the mass market business of ours is indirectly affected by that in the form of revenue increase. That is how we see it. We need to further analyze and study this impact. Also, digital power and all memory interface trends. In the third quarter to the fourth quarter, we are expecting a growth quarter on quarter. Data center, overall, at the whole company level in the third quarter, 21% was a contribution to our total sales. In the fourth quarter, its contribution will rise further from the 21% level to a higher level.

Therefore, this will be one driver of our growth. As far as CapEx is concerned, digital power front end and also digital power middle end and also the back end, for those needs, we are going to make investments. The memory interface front end, currently from foundry, we are securing these from the foundries, but we are going to increase the capacity for test at the back end. That is our plan. Therefore, CapEx impact on revenue growth, in that regard, digital power contribution will likely be higher in terms, and also its scale will be larger. Its impact scale will be larger. In a phased manner, the supply will increase gradually. One of the major steps will be next year, first quarter. At the size of those capacity increase investment output will come in in full strength from the first quarter next year.

Therefore, we expect that we will have a boost to our revenues. Digital power, if you single out that portion only, production increase investment and also the foundry capacity increase investment, including all these things in 2026 compared to fiscal 2026, double to 2.5x at the run rate production increase is expected from next fiscal year, first quarter. That is the contribution that we foresee right now. As far as the mix is concerned, memory interface, digital power, the customer architecture platform, those are quite diverse. Therefore the cost configuration and also gross margin breakdown is quite different from customer to customer, from platform to platform. Just like market share, this changes quite dynamically. That will be the major factor behind the change of the mix.

As a general trend, gradually, as the product matures, the yield will also improve, and also, depending on the maturity of the production, the gross margin will also improve. In the near term, it will be affected by the mix, and that may seem to be significant.

A supplementary question regarding the data center breakdown. You mentioned a breakdown on a Q-on-Q growth, third quarter versus the fourth quarter. What is your projection for that? That is going to result in increasing in the first quarter on a run rate basis. Is that what you see? Is that correct?

Third quarter, fourth quarter comparison. If I give you some numbers, we are expecting an increase. Approximately 10-some percent, mid-teen percent is the growth that we are expecting. We can fairly say that if you consider the comparison between third quarter to fourth quarter, mid-teen level of increase is what we project. Also from fiscal '27 onwards, especially because we are going to increase the capacity mainly for digital power with increased production capacity. So we are expecting a significant increase, a growth from '27 onwards. Third quarter, fourth quarter, Q-on-Q increase of mid-teen level, and the first quarter you will be able to expect a higher growth rate because of the increased capacity. The capacity of the overall data centers, digital power is the area where we are going to increase the capacity and that will account for, let us say, less than 50% of the total. So, digital power will increase due to the capacity increase, but for others, it will grow at a normalized level.

If you can understand it that way, that would be good.

The second large question is about SiTime. JPY 450 billion of proceeds is expected. For its use, 3 months or 6 months ago, treasury stocks or some kinds of investments were mentioned. We would like to know what are your thoughts about this from a more wider perspective. I suppose performance, expense, and valuation, and stock prices are rather difficult to link together. What are the factors by which improvements and evaluation increases can be gained, including the treasury stocks to be acquired? What is the intent of the company?

For SiTime, proceeds was booked, but half is cash and half is in stocks that we acquired. The stock portion is not cashed yet. On the other hand, the cash portion has been acquired. For its use, capital allocation framework, basically accordingly is applied in order so that it can be used. CapEx and deleverage and also the investments towards growth areas would be considered. Presently, as mentioned within this slide, our in-house capacity will be increased so that CapEx will be reinforced for that sake, is our thought.

Other than that, growth area investment possibilities will be searched for continuously, and we will prioritize and determine what is most important, and accordingly, whether we will require treasury stocks or not will be determined. At this moment, CapEx is what we prioritize more. For valuation, always Capital Market Day timing is where we talk about our metrics, and it is as in line with that metrics. Organic growth through which sales growth may be gained and scale expansion to be materialized is one point, and valuation gap will be filled in and further reinforced. Then there will be payout out of that to be worked on, and business itself will have the mixes to be changed through digitalization.

Composition of the businesses will be changed. Those are the plans we have. That's all for the answer.

So is there some kind of delay in the payout for them? Because for the cash, there is ample amounts, and there is some kind of additional portion to be considered. Investments, is it so heavy next year or after the year has ended?

Maybe you can think in more neutral terms to use them in other ways. It is the latter policy. What kind of items for investments we have, as in balance with the annual budget, we will consider. In addition to that, if it's M&A, there are opportunities for various projects that may be arising, and we will look at them carefully. At appropriate timings, we will decide what is best. One timing is at the year-end, and that may be one of the milestones.

Now we are going to move on to BofA Securities. Hirakawa-san, please unmute yourself and begin your question.

My name is Hirakawa. I have a question relating to automotive semiconductors. On a year-over-year basis, 19% increase, so you are seeing signs of recovery. Two questions here. One is that in this, what is the actual demand recovery? If you divide that with the inventory elimination, what is the contribution of these 2 factors for the increased performance? As far as the demand recovery is concerned, you said R-Car Gen 4 and 28-nanometer. I think you talked about the possibility of share gain, share improvement. So the market improvement and also the share gains. If you look at your own opportunities for business expansion, can you just sort out what is the contribution of these 2 factors for your performance improvement?

If you can also talk about the sustainability of this performance, that would be appreciated.

The automotive year-over-year increase of 19%, how we analyze that? That I think was the question, right? The foreign exchange, the weaker yen favorability is also included in this number. If you exclude that, on a year-over-year basis, 13.3% increase in revenue was the result for the third quarter. The inventory in the channel, I said that we have been building up the channel inventory, but when you look at the sell-through, only half of that level is the sell-through. The actual demand has been improving, and that accounted for the half of the 13.3% increase and the remaining half is due to the increase of inventory. The sell-through improvement, which translates into the actual demand improvement, the driver behind this was the, as I said earlier, the 28-nanometer MCU, especially in China. China's OEM is adopting this more broadly. That is one factor.

Also SoC, the new Gen4. Recently, I think this is primarily expanding among the Japanese customers. From the third quarter to the fourth quarter, those are all increasing. 28-nanometer MCU, mainly among the Chinese customers, we are expanding our sales, and that is also projected going forward. Also the R-Car Gen 4, beyond Japanese customers, the adoption by other regions customers are expected going forward. Overall, the legacy decline is muting the growth to some extent.

To some extent, there has been offset factor from that. But still, our unique growth drivers are the MCU as well of the 28-nanometer and Gen4 R-Car. So that is the 2 major distinctive driver for us.

Follow up on that, the 28-nanometer MCU expanded adoption by the Chinese OEMs. Is this only one company or multiple companies?

Multiple companies.

Multiple companies. Okay. Got it. My second question, this relates to all segments of your business. Currently, backlog and the lead time, the product lead time for each sub-segment. Can you talk about the current status of your lead time, if there is any difference between different segments? Also, in 2027 or towards early 2027, given the market, the situation, and how is the order fairing? If you can give us some guidance towards 2027 up to, let us say, half years into 2027.

The backlog for each of the segments, basically, it is performing very favorably. Internally, the data center related and also others, we classify into these 2 different categories and look at the general trends. But also for these other segments, we continue to see strong backlog demand, the backlog coming in quite strongly, and also for the data center backlog. I am sorry -- the lead time for data centers is also getting longer, and therefore the backlog cover until the first half of next fiscal year is already there. So that is the current status. On an ongoing basis, until the first half of next year, we have a coverage with a backlog already.

Okay. That applies to non-data center related. For automotive and IoT, you believe the current market conditions will continue into the first half of next fiscal year?

To be more precise, the data center, the lead time is getting longer, so we have a first half coverage already. Other than that, the situation is mixed. But backlog, generally speaking, is building up favorably, even for other segments. That is what I wanted to say.

Next, UBS Securities, Yasui-san, please.

UBS, Yasui is my name. There are 2 from myself. The unit price increases is first question. Around from this March, each competitor has started to increase prices, as you said. When would the effects arise? I think it should be around July or thereabout. Is there an effect of the unit price and also the gross margin increases should be expected? Is there such an effect for unit prices?

We have been looking at them very carefully, and basically the cost increases in supply chain and others has been considered in order to work for that.

What about the third quarter, what is the question to that?

It is not so much, but slightly, unit prices have been revisited, and that in the third quarter has been impacting. On the other hand, gross profit margin to be improved significantly is not the level of impact that has been reached.

It depends on the levels. 0.5%, for example, of contribution, is that the level of contribution that was achieved?

Not to that level. Please understand that it's not to that level.

There are various products. It's not for all.

On the other hand, what is lacking should be rising in unit prices. What is the product that is easier to raise the unit prices?

Generally speaking, mass market products have unit prices that are quite easy to increase. On the other hand, there are cost increases to be added on from that perspective. According to products, exposure or cost structure may change according to how easy it is to see that the costs are increased. All in all, on average basis, mass market products are easier to revise the prices.

The second question is about data center. Digital power, considering the capacity is 2 to 2.5x to be expected for next year.

Memory interface or CPU having a major strength is what I've heard about. Capacity considered, what is the sense of level? In data center, mass markets are growing, and I'm not sure of its definition. What is the sense of scale of the data center's mass market? What kind of products are included in that? Can you give some insight? Digital power, 2 to 2.5x is the run rate production capacity. It's not that it will contribute cleanly next year, it will start up in order. That is one point I needed to revise and comment on. For data center or memory interface, it is where the front-end process can be considered, and capacity for that to be expanded and acquired is where presently we are working on. What if we have the capacity? It's reversed to that.

The actuality is about the capacity to be more considered and the mass market. For example, for data center, air conditioning, direct application is not grasped in many areas which are in the mass market. That in AI, data center, semiconductor production equipment, is where they will be applied into. That is what we assume. This has to be reviewed more deeply, and I would like to explain more details when things are more clear. Intuitively, industrial is where mass markets are included in. Is that the case? That is so.

Moving on to the next question, Daiwa Securities, [ Oka-san ], please begin.

My name is Oka from Daiwa. I also have 2 questions. Some is overlapping. Regarding the gross margin, I would like to reconfirm. The third quarter gross margin has improved significantly. Memory interface was good, but digital power was not favorable in the past. This is affected by the mix already, but is it also improving? In the fourth quarter, listening to your story, the industrial and data center is also likely to increase, and the mix may improve, I think, according to what you said, and also because of the unit price improvement. So the profit margin for the fourth quarter, what is your outlook with the additional contribution may coming in, but is that really going to decline this much? So if you can give us your view for the third quarter, fourth quarter, that would be appreciated.

Well, the third quarter, digital power, first of all, if it increases, the gross margin coming down, not really. What we call digital power includes many diverse sub-product lines, or the different sets of products are included under there. Therefore, depending on how these products are, the results are different, because digital power comprises of new products as well as old products and things on many different platforms. So it is a mixture of them. So depending on the change of the mix, the numbers could change dynamically. So digital power overall is not going to push down the gross margin necessarily. So that is one comment that I wanted to add in the beginning. Then, now the third quarter compared to the forecast, gross margin improved compared to the plan. This was due mainly to the digital power and memory interface. Those were the drivers behind this performance.

Amid digital power, there are many different elements there. Some with the higher gross margin increased, and that was a driver, and also digital and memory interface also had a contribution because its gross margin is also better. Towards the fourth quarter, on a Q-on-Q basis, gross margin 1.4 percentage point decrease is expected. But the mix accounts for, let us say, 50% or more of that decline. Because within digital power, many mix will change in itself. So, this time around, this will have a negative impact on the gross margin. So that is the difference between the third quarter and the fourth quarter. Now, more than half of the element was the mix factor, but the remaining half will be, as I mentioned earlier, this will be coming from the investment for production capacity.

We are going to increase our costs, and also the maintenance towards the year-end would also be done so that expenses are also included there. So although these are one-off things that will have an impact to deteriorate the gross margin. That is all. Thank you. Thank you. So within digital power, the gross margin, some have a lower gross margin. Is there any room for improvement for these? Are you contemplating any measures to improve the gross margin of those products? As I said a little bit earlier, this is a new product, so therefore the yield is generally lower. Because of these reasons, gross margin are low with some of the products. So for those, as the product continues to mature, we can expect an improvement.

On the other hand, the production mix, depending on the site of production, maybe we are using some also our foundries, there is a difference there. So at those cost increases by the site of production, those will have an impact to both deteriorate or improve the margin. That is how we see it.

My second question is about the memory interface and the digital power. Compared to 3 months ago, can you give us an update of the demand situation? You talked about the run rate 2 or 2.5x. It is quite a large difference. Also memory interface, the CAGR 2% increase was your original projection, but I think you are already achieving some upside to that. So can you give us a mid to long-term direction? On the fourth quarter, I heard that you are going to elaborate on this in the fourth quarter or the Capital Market Day, but can you give us an answer for that?

Compared to 3 months ago, I would say that on a continual basis, we continue to hold a very bullish outlook. That is the reason why we are going to increase the capacity for production so that we can respond to this increased demand. That is our priority that we are tackling right now. Most recently, the backlog. This is not a midterm thing, but the backlog is increasing in a very steadfast fashion. So that is another reason we are taking this view. Compared to 3 months ago, we continue to see a very strong outlook. The growth rate, is it rising because of the prices or demand?

I would say, rather the visibility into the next platform and how much we can contribute to them. So the visibility vis-a-vis the program is getting higher. That is the situation.

Next, Nikkei BP, Nakanishi-san, please unmute and pose your question.

Can you hear me?

Yes.

Nikkei BP, Nakanishi is my name. The market perspective and data center especially is the area of question that I have. Next year, there will be direct current 800 volt in the market to be launched. Towards that, the development situation, and when will it be where it will contribute towards the performance?

800 volt is the version we are very much proactive in working on. Firstly, in our device is GaN, gallium nitride to be applied for the 800 volt solution. Major customers architecture candidate structure is including that in order to secure the projects we are proceeding with our activities. For the technology lineup or capability, [ 800 volt, 42 volt or 12 volt, 800 volt to 6 volt ] respectively. As of this October trade show, the minimum size version has been exhibited. There are various lineups to be supplied so that it can be applied within the architecture. It is not that we have had them applied and that sales is set up yet, but it is a very important area, so we would like to focus on it so that we can secure the business cases. That is the situation for the 800 volt version.

With the customers at this moment, is there some kind of dialogue and some kind of considerations? I suppose the application is not yet established, but in the market when it is launched, and if it is applied, then some contribution or in timeframe-wise perspective, what do you expect is the progress?

In our mid to long-term plan, 2030 or 2035, being this and that level for sales plan or target are set. This 800 volt DC solution in 2030 and 2035 is in our minds, and I am sure it will contribute greatly within that timeframe. To add on to this, with this 800 volt and others next year

The perspective of the market is what I would like to know about. For data center, the capacity level has been mentioned. When will this continue? In 2027, the demand may fluctuate to a certain level, or EV compared, a stronger situation may be continuing. Can you comment on this?

For data center, you mean? For the data center, it will continue, that demand is strong and sales channel and inventory would become continuously thin. As previously, there is a lot of accumulation of the background, and in 2027, there would be expected major increases. In the second half of 2027, is that trend to continue? Towards the second half of '27, or rather, it will continue to be strong.

Since we are running out of time, the next question will be the last question for today. Morgan Stanley, Yoshikawa-san, please begin your question after unmuting yourself.

Morgan Stanley. My name is Yoshikawa. I have 2 points. It was already asked earlier regarding your capital allocation plan. For CapEx, you are going to increase the allocation to CapEx. I think that was the nuance that you have given to us. The quarterly disclosure numbers are based on decisions, so it is very difficult for us to foresee. Next year or the 2 years from now, on a payment basis versus a sales number, 55%, I think, was the projection on your capital allocation plan. What kind of upside should we expect?

The CapEx amongst capital allocation, on average, it is going to be 5% of the revenue as the midterm average. So in reality, it changes year by year. Right now, what is already decided at this point of time, altogether for this fiscal year, more than JPY 200 billion of CapEx was planned for this fiscal year. So this is mainly linked with the investment when we make for the equipment or facility. So cash out is done at that point of time. So, there is a one year or 2 year lapse vis-a-vis the plan. So the cash out timing from that perspective, the cash out is expected to be done from next fiscal year onwards. So that is our current projection. So for the near term, 5%, there are some years where we will spend more than 5% of revenue, but if you even them out or take an average, 5% of revenue is the medium-term model, and I think the actual numbers will converge with that level.

All right. Understood. Then if that's the case, the revenue is growing in itself. So the investment is going to be a downside pressure on your free cash flow. For your leverage already at this quarter, your target level of net debt to EBITDA, 1x or lower is already achieved at this quarter. So, I'm not just saying that the return is the absolute good, but your target of shareholder return phased increase and more than 30% of free cash flow, I think you're well positioned to achieve that. It will balance well with other growth investments. What's your view on that?

Yes. As you rightly pointed out, at the right timing, at an adequate timing, we would like to discern the best priority and make a decision. I think that's what we should do. As it was asked earlier, one good milestone is the end of the fiscal year.

My second question, sorry, is about your SG&A. Up until the first half of this year, when you average out, JPY 100 billion per quarter was the total amount for the combined amount of our R&D and SG&A. Now, at the second half of the year, if I also take into consideration your guidance, JPY 110 billion per quarter was the run rate, I think. Is currently the run rate, I think. You mentioned that you have to make office investments and also some items, you raised some items for expenditures. Is this level going to be your new normal, or is this just a one-time thing? Is this inflated due to one-off costs?

As we previously mentioned that the SG&A OpEx run rate will be JPY 100 billion plus per quarter. This year, if you take an average for this year, that's going to be the level for per quarter. As Mr. Yoshikawa, as you mentioned, for the second half, JPY 110 billion per quarter is the average amount. When we talked about the financial model as far as OpEx is concerned, especially primarily R&D expenses, for the growth of the company for the future, we have to make proper investments. That is the policy that we are adhering to. So of course, this is about a balance with the revenue growth rate, but the OpEx investment size is not going to be considered a one-off thing. We would like to make continuous investments. That is our view.

The session will be concluded here. Lastly, there will be remarks from Mr. Shinkai.

Ladies and gentlemen, thank you very much for today. The third quarter and fourth quarter mainly had been explained. Recently, there is a very healthy situation that is continuing for automobile. Production volumes are very strong, but we have our independent strength. 28-nanometer MCU and Gen4 R-Car are starting up, and the strong situation will be continued accordingly. Infrastructure and industrial is also expected. Going forward, growth will be continued, and for that sake, R&D and CapEx and other factors will be continued as we mentioned today. We would like to conclude at this point. Thank you very much for your participation. Thank you and goodbye.

With that, Renesas Electronics' 2026 third quarter financial report will be closed. Thank you very much for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

Hello, everyone. Thank you so much for joining us today. If you listen to this session in English [Operator Instructions] [Interpreted] Good afternoon, ladies and gentlemen. Thank you very much for joining us despite your busy schedule for the Renesas Electronics Second Quarter 2026 Earnings Call. With regards to the starting time of this earnings call, I would like to deeply apologize for making the change in short notice. We have simultaneous interpretation channel available. Please interpretation icon bottom screen to choose the language of your choice. And so please could I have the speakers on the videos, please.

In today's earnings call, we have our CEO, Mr. Hidetoshi Shibata as well as our CFO, Mr. Shuhei Shinkai as well as our other staff attending this earnings call. First, we will have our CEO, Mr. Shibata, give you an opening remark, and then Mr. Shinkai will be explaining about the second quarter earnings, and that will be followed by Q&A. And we're planning to spend a total of 60 minutes for the earnings call. And the materials that are used in this earnings call are the same as the materials posted on our web page, IR site. Mr. Shibata, please turn on your mic.

[Interpreted] Hello. My name is Shibata. So as Mr. Sato mentioned earlier, very sorry about changing of the time on a short notice. And in regards to the earthquake, we've had to make some internal confirmation work. So very sorry, we had to change the time for this earnings call. And as for this earthquake, of course, there are some things that are not yet known. And -- but overall speaking, the impact to our earnings should be limited. And as for the Nishiki factory, the back-end factory, the full production has been resumed and the impact seems to be limited. And as for the Kawashiri, the front-end factory, this accounts for about 13% of the company-wide sales.

And already the wafer testing has been resumed and in operation. And now for the pure water and water leakage, repairs and confirmation has been going on, and there has been some damages to the facilities, which we are trying to repair and resume. And we expect the production to resume on August 5. But as for the die bank and the inventory, fortunately speaking, we have secured those beforehand. So we think that these impacts on our performance should be limited.

And as for the Kyushu area, OSAT partner has been impacted by the earthquake as well. And as of today, their outlook, we think it is going to be limited on the business as well. So all in all, the impact of the earthquake should be limited to our results. However, on the other hand, when it comes to our customers' situation, there are some cases that supply chain has been suspended. So we need to be very carefully monitoring them in the future. So that is about the earthquake. And in terms of the human safety and injuries, it is limited and it's nothing serious. And at the same time, as for the Takasaki site, the 6-inch, the power plant that is for the front end and also for the power analog R&D site is also at this site. And so from now on, we will take our time and gradually suspend and close our operations, which has been already announced. And please refer to that information. And looking back the second quarter versus our guidance for automotive and IoT, both has been very strong, and we have exceeded our expectation.

And as for automobiles overall, there has been quite a strong demand, especially in Japan. The Gen4, our car has been going very well. And -- and from the first quarter, there has been some increase compared to the first quarter. And some of the customers, in some cases, the inventory were too decreased and then they have to increase it. And as for IoT versus guidance, overall, it is exceeding.

And for industrial, that is about data center and in China has been very strong, and it's exceeding the guidance. And for infrastructure, up until now, the GPU customers have been a significant customer group. But when it comes to ASIC demand, it is also strong and which is exceeding our expectation. And as for the IoT area, there are some issues of memory shortage in some areas. But as for our customers, the memory shortage issue has been absorbed to a certain extent. And we have strong sales for those customers who have secured the memory beforehand.

And for the first quarter, like it was mentioned earlier, the impact of the earthquake to our business itself should be limited. But for the supply chain and the automobile, especially, we need to carefully monitor moving forward. And so those are the unknown parts. But in terms of the automobile, overall speaking, versus last year, we are doing very well. In sequential, the end demand, we expect to be quite flat. And as for IoT, we expect things to be quite strong continuously, especially industrial and also in the infrastructure area. The strength from the second quarter should be continuing.

And on the other hand, as for IoT, like I indicated earlier, the memory price hike and the memory shortage impact has been seen to a certain extent. And overall, we expect a slight increase. And like I mentioned earlier, for our main customers, I wouldn't say they were not impacted, but there are some customers who have been able to absorb their impact and which we would like to sell strongly. So that's why we expect a slight increase. And so from the second quarter to third quarter, we expect the strong demand to continue. And so that is our current situation and the outlook for the third quarter. That is my view. And from now on, we will move on to our presentation and the details of the numbers from the CFO, Shinkai-san. Shinkai-san, go ahead, please.

[Interpreted] My name is Shinkai. I'm the CFO, and I will be explaining based on the presentation material. Next page, please. Next page, please. Well, this is the disclaimer, and please refer to number for the timing business. The transfer of the business was closed on July 1, 2026. And so with regards to the reporting segment for timing of business used to be categorized for auto and IoT, but it has been changed to others. And we are retroactively making changes for the comparison year up to 2025. And this is -- next is the overview of the earnings call.

Please refer to the bottom blue column fourth from the left. Revenue is JPY 45.3 billion and gross margin is 58.1% and OP margin is JPY 132.7 billion and OP margin is 32.7%. EBITDA is JPY 154.3 billion. Profit attributable to owners of parent is JPY 113.3 billion and FX is JPY 159 to dollar and JPY 185 to the euro. And please refer to the shade 4 columns to the right for a cumulative results. And excluding the timing impact, the apple-to-apple basis comparison year-on-year as well as Q-on-Q is shown on the light blue column on the right-hand side. And on the next page, I would like to explain on the comparison against guidance as well as Q-on-Q.

Next page, please. First, regarding the Q4 result against the expectation, which is shown on the right-hand side, I will explain. In terms of revenue, it was 4.5% against the forecast median, and it was an upside of 4.5%. And more than half was due to FX and the others were contribution from the increase in demand for automotive and IoT. And that was mentioned from the comments from Shibata-san, the auto and the end market demand was very strong. And also for IoT, in addition to data center, the industry IoT and the mass market were better than our expectation. And with regards to gross margin, which is the second line compared to the guidance, it was increased by 1.1 points and the factor was due to depreciation of the yen and also mix improvement and improvement accounted 1/3 each.

And in terms of the manufacturing cost, there's an increase in labor cost and fuel cost and also maintenance cost increase were in line with the expectation, but inventory valuation that was considered more conservatively was contributing positive. And for OP, it was 32.7%. And compared to the median, it was plus 3.7 points. And so there was a significant upside. Revenue and gross profit margin improvement in addition to that, there is a decline in OpEx compared to the assumption and that accounts for more than half in terms of the amount of more than JPY 7 billion plus OpEx reduction.

And there are 3 major factors. One is about 30% is regarding the investment that we're considering where the execution was pushed out or for example, like the hiring has been delayed or the arrangement with the partners has been delayed or the plan itself were revised and we might have pushed it to the next period. And because of that, the expenses are expected to be postponed. And around 20% or a little bit less than 20% are the ERP integration schedule was revised and was shifted to next year onwards. The company that was acquired, the ERP of the company were planned to be integrated and we're planning to execute that in the second quarter. But because of considering the recent supply situation, we realized that this is not the appropriate timing. So we have postponed that to next fiscal year onwards. And the cost related to that was expected to happen this quarter, but it did not occur.

And the rest is the timing delay of projects and also between Q1 and Q2, we were expecting some seasonal factors that were conservatively considered, but they're not happening. And next is the Q-on-Q result. In terms of revenue, it was plus 9.8% -- and gross margin on a Q-on-Q basis was minus 1.0 points. And this is because of OpEx increase like fuel cost and labor cost increase and maintenance cost increase were the reasons for the decline. And OP margin on a Q-on-Q basis was 0.8 point decline.

And the major factors are the increase in operating cost. Compared to the expectation, the OpEx were much lower. But on a Q-on-Q basis, it has gone up and half of that were the onetime cost increase in the first quarter, and there's a rebound from that and more than half are the increase in equipment, mostly the labor cost increase reflecting the bonus from Q1.

And on the right-hand side, you see the segment results. There's not much to highlight, but the OP margin of auto has gone down 0.9 points on a Q-on-Q basis. And that was the rebound increase from the first quarter, and that has impacted the auto business. Next page, please.

Next is the revenue trend on a Q-on-Q basis. I have explained this in the disclaimer. And for the timing business in -- from the first quarter of '26, it's been categorized into others, which is shown in white, and you see the dotted line, but anything beyond Q1 is explained in the same definition. And in the second quarter, the results are shown on the right-hand side at the top. And in total on a year-on-year basis, it's a 24.8% increase. And on a Q-on-Q basis, it's an increase of 8.8% and the segment breakdown is shown at the bottom. So please refer to what's written on the bottom.

Next page, please. The next is about inventory. On the left-hand side, you see the in-house inventory in the second quarter. On the Q-on-Q basis, work in progress products has increased mainly on a Q-on-Q basis. And with the production capacity increase, the input has increased and also because of the seasonality of mobile, we have been working on more products and therefore there's more work in process. And for DOI because of the sales increase, the DOI has gone down.

And for third quarter outlook, on a Q-on-Q basis, we're expecting inventory to increase, and we will continue to increase capacity. And because of that, the input will increase and also die bank will be enhanced. And based on that policy, we're planning to increase inventory. And on the right-hand side, you see the channel inventory. In the second quarter, on a Q-on-Q basis, the absolute channel inventory amount has increased, but WOI because sell-through has increased a lot, WOI has declined. And for auto and IoT, we are planning to increase inventory because of the demand, but we have not been able to increase our inventory in the second half -- second quarter. And in the third quarter, we will continue to increase inventory. But on the other hand, for WOI because the sell-through size will go up. So we're expecting WOI to decline.

And on a second half basis, auto because of increase in demand, we will continue enhancing our inventory. And for IIoT, it will be the same. In general, we are planning to enhance inventory, but that's mainly around the data center segment, the sell-through demand continues to be strong. So WOI will look like it's going down. On a segment basis, there is some difference in color.

Next page, please. Next is related to utilization and CapEx. On the left-hand side, you see the utilization rate. In the second quarter, the actuals were 58% and the input utilization has gone up compared to the forecast. And in the third quarter, we are expecting this to increase slightly. And for CapEx, as you see here, in the third quarter -- sorry, in the second quarter, R&D investment were the main CapEx. Next page, please.

And for the third quarter forecast, as you can see on the left-hand side of the -- please refer to the dark blue center of the table, the revenue median, JPY 430 billion. The gross profit margin, 57.5% operating margin, 32.5%. And exchange rate assumption is JPY 159 to the dollar and JPY 184 to the euro. And for each of the items, let me give you the background. For the revenue median, JPY 430 billion year-on-year is up 28.7%, and it's up 6.1% Q-on-Q.

As Shibata-san mentioned in the beginning, for automobile and the industrial infrastructure and IoT are expected to grow. And for automobile with China, mainly the new product, we expect to increase the 28 MCU and also Japan, the channel inventory should be building up in Europe -- excuse me, the industrial infrastructure with the data center growth, we expect increase. And also now the gross margin, 57.5%. So that is down 0.6% Q-on-Q. And as for -- with the -- there are some improvements from the increased utilization, but with the margin expected to decline Q-on-Q due to rising manufacturing costs.

And as for the manufacturing cost, that is for the energy cost, maintenance cost, an increase from the summertime. And also, as for the OP margin, 32.5% Q-on-Q minus 0.2% slight decrease we expect. Q-on-Q, the OpEx should be increasing slightly. So as I mentioned about the second quarter results, those things that were not able to be used will also be shifted to the third quarter. And so as for the FX sensitivity, you can see here with the JPY 1 fluctuation, there is impact JPY 1 fluctuation of JPY 2 billion to the revenue and JPY 0.9 billion to the OP in the U.S. dollar and JPY 0.2 billion revenue and JPY 0.1 billion OP to the euro. And so for the Q3 forecast, based on the constant currency rate, the USD JPY 100 and the euro, JPY 120, operating profit margin will be 27%. And please look at Page 17, the GAAP overview, financial results of the GAAP. And so in the second quarter, the net profit was JPY 149.2 billion because the financial income from Wolfspeed related financial assets was recorded. And so that is a positive impact.

And also, as for the timing, business transfer gain, what is not included in the second half, but it will be in the third quarter, excuse me, not in the second quarter, but it will be included in the third quarter. And this is about the update on the Takasaki site. And next page, please. So the impact of the Kumamoto earthquake on operations. This is the slide that's about the earthquake and that concludes my presentation.

[Interpreted] We would now like to move on to the Q&A session. Shibata-san, please turn our video on. [Operator Instructions] Now at first from Nekki BP, Kojima.

[Interpreted] This is Kojima from Nekki BP. Can you hear me?

[Interpreted] Yes, we can hear you.

[Interpreted] I would like to express my deepest condolences for the impact from the earthquake. And I would like to ask you the impact of the earthquake. This time, the impact on the performance is going to be limited is what you have explained. But the impact of the earthquake itself compared to 10 years ago, is it fair for us to believe that the impact was smaller than 10 years ago? And the second is that I'm sure you're taking different countermeasures. But the restart of the operation seems to be pretty fast. But is there any effective countermeasure you have taken?

[Interpreted] There are many things that are still under confirmation. But as of now, compared to 10 years ago, the impact from the earthquake is smaller. In the first place, the size of the shake in the factory, I talk about the level of the shake at the factory, I believe, was much smaller than the earthquake 10 years ago as a fact. And obviously, we had an experience from the earthquake 10 years ago, and we had been gradually taking countermeasures against the earthquake. And we -- in some cases, we have been placing the equipment on top of the anti-seismic facilities. And in some cases, we had BCP inventory that we used to call a little while ago. And by taking those different countermeasures, the itself was smaller. And with the combination of those countermeasures, we are able to restart the operations earlier than before, and that is our assumption at this point.

[Interpreted] Next, from Daiwa Securities, Mr. Okawa.

[Interpreted] This is Okawa from Daiwa Securities. I have 2 questions. One is that for the third quarter, the gross margin plan I want to ask about -- there are some energy costs you mentioned. And so when it comes to utilization and the revenue should be strong. So maybe I'm thinking that gross margin could be higher with a higher utilization. Like you have been mentioning about the data center complexity and that's limiting the earnings increase, we know. So how do you view the gross margin moving forward?

[Interpreted] Yes. Shinkai-san can answer that.

[Interpreted] As for the third quarter, gross margin Q-on-Q, 0.6% decrease is what I mentioned. And when I break this down, the improvement from the utilization increase is 50 basis points plus and the increased production cost is 100 basis points minus and net-net wise, 0.6 percentage points. So the impact from the FX is not so much. And as for the mix is almost quite flat, plus/minus 0. And as a result, as you can see, the impact of the mix is not really likely. And moving forward, the outlook, when it comes to utilization, like I mentioned, for the third quarter and the fourth quarter, gradually will increase, and we will expect some contributions from those. And as for the manufacturing costs, -- so because there are some crude oil costs that will be linked to it and that -- there's not much certainty about that. And I think after summer, we will be peaking out.

[Interpreted] My second question is about the data center-related business. So this time, for ASIC, you said has significantly increased compared to plan. Is it about the share or the supply? I think last time in the call, you said that might be a bottleneck. And is it that the they turned out to be fine? And in the next -- well, digital power and memory, how do you compare them for the memory data center? Well, for the second quarter and the third quarter as well, for -- as you can see from the major MPU earnings, the MPU has been very strong. And as a result, our memory interface as well has been growing quite strongly and continuously. And when it comes to digital power as well is both strong. And as for digital power and memory interface, the difference could be that the customer base, the spread of the customer base. For power, we have the ASIC customers, the several and GPU customers as well. And we have multiple customers as such. And for each of them, for each of their products and depending on their generation, the share could be changing quite a lot.

[Interpreted] So I think I will be repeating myself from before. As of now, I think we are in a very good position. I'm confident about that. And in order to maintain our good position, we have to do a very strong execution that is very important. So if we can do that, I think we will be able to maintain our high share.

And for the second quarter, what was very good is that because I think based on our assumption. I think as of now, we have demand for the customers that we have been supplying quite exclusively have been very strong, and they are coming to us for their business, and that's why things have been very strong. And when it comes to supply, the WOI numbers, you can see in those numbers as well that the -- we are seeing continuous tightness. And everywhere you look, everything seems very tight. And it's not like we had a breakthrough around that, but we have been trying to gradually increase supply. And from here on until to the end of the year and next year, the step function type of increase is something we are working on right now.

And if that could happen, I think we will be able to increase revenue based on the supply capability increase. And so as of now, the incremental supply capacity increase is what we are working on and responding to the situation.

[Interpreted] So let me move on to Takaki-san from Sankei Newspaper.

[Interpreted] This is Takaki from Sankei Newspaper. Can you hear me?

[Interpreted] Yes, we can hear you.

[Interpreted] With regards to the earthquake, I'd like to understand how you're going to communicate the information from the CEO, you mentioned that the impact on the performance has been explained and you have changed the timing of the earnings call to confirm the status. But with regards to communicating the information, I'd like to understand how you think of the importance of communicating information. And I believe this is important there were other major plays like the Great East Japan earthquake and also you had experienced the earthquake in Kumamoto 10 years ago. And is there anything you were extra careful in communicating the information? This time, there was nothing particular that ever since I assumed the CEO position, I have been trying to be most transparent about communicating the information. I think there's confusion in the line, I can move onto -- can you mute yourself please.

[Interpreted] So therefore, we try to disclose as much information as possible. And of course, the situation can change. But at this point, for whatever information that we are aware of at this point, we have disclosed as much as we can at this point. That's all.

[Interpreted] One more question is that this time, the impact on the business performance is limited and also the damage was relatively limited too. But for the semi industry, the impact that's giving on the economy in general is increasing. And with regards to the overall recovery of the economy in Kumamoto, what is your intention or what is your idea around promoting the recovery in Kumamoto as a region?

[Interpreted] Well, as soon as possible, we want to bring the utilization back to full utilization. And of course, we need to do some catch-up production as well. And with that, we would like to try and recover the damage and hope to make our contribution as we can. And of course, the economy is important, too, but most important is ensuring the safety of the lives of the people. And we are not an industry that has a strong foundation. I mean compared to the other industries, there's a limit to what we can do. But even with that, we will do whatever we can and try and contribute as much as possible to have the situation recover.

[Interpreted] Next question from Mizuho Securities, Mr. Yamamoto.

[Interpreted] This is Yamamoto from Mizuho Securities. Do you hear me?

[Interpreted] Yes, we can.

[Interpreted] So I have a question about the semiconductor chip price. So the peers have been hiking their price, and we hear news like that. And as for Renesas for the automotive, IoT and micro and analog, maybe by usage or by product or you can tell us what's your view and what's happening with the pricing? Any comments you can give us about the pricing in the current situation?

[Interpreted] Yes. Yes, I understand the I understand what you're asking because I have to respect one side and also the other side as well when I answer. So from July 1, some of the products, we have revised the pricing. And as a result, for the second half of this year, we will see the effect of that price hiking. So I don't think it's not like a significant price hike that become a new headline or anything like that. It's not like we have done so across the board or anything like that. We have done the price hike for those that we really had to and made our adjustments as such.

And so -- so from third quarter earnings onwards, I think we will see the effect of those initiatives. Okay. So from the third quarter, all of a sudden, the GM goes up or it's not like that then I see. And so because from the before, you have adopted the surcharge system for passing on the cost hike to the price. And with the tight demand and supply situation, maybe you have not really hiked your price from the past and that conventional system is still in place? Yes, that's right.

[Interpreted] Next, from [indiscernible] Mashta-san.

[Interpreted] This is Mashta from [indiscernible] doing my PhD research. Can you hear me?

[Interpreted] Yes, I can hear you.

[Interpreted] In Takasaki, you since announced the gradual close down of the Takasaki factory in Guma Prefecture, I'd like to understand from Shibata-san, the CEO, in terms of the reason why you have decided to close down the Takasaki factory. And according to the material, you mentioned that the basic policy is to maintain employment. So I'd like to also understand your thinking about employment.

[Interpreted] Well, as we have announced already, this is basically in line with what we have announced. Takasaki factory is a 6-inch factory. And ever since the operation started, it's been more than 50 years. And the semiconductor factories, of course, it depends on the companies, but ourselves as well as many semi manufacturers are not producing the production equipments themselves. I mean, right now, the SPEs who are enjoying very strong performance are selling the equipment to us, and we're purchasing from them to conduct the production.

And unfortunately, 6-inch is a very old manufacturing process. And as the industry in total, the 6-inch manufacturing is shrinking. And taking that into account, the maintenance from our suppliers and also the supply of the parts are becoming more difficult. And in those lines, if they continue the manufacturing, if there's any problem with the manufacturing line that would impact the suppliers right away and also it would impact the quality right away. And to our customers, we would be giving a significant impact. And until now, we have been doing our best to do the maintenance ourselves. But at this point, that is becoming very difficult. And so we have decided to discontinue the production of 6-inch. And or 8-inch plus where we can still expect the support from the SPEs, we will are going to migrate the production and migrate into those products. And employment is going to be maintained. And for the factory, basically will be maintained.

And for R&D, we are planning to increase the resources and we are considering to continue the operation locally. And in case of R&D, there are many heavy instruments for experiment, and it cannot be installed in ordinary office spaces. And so we are looking at the different location. And so factories, the employees we are expecting for them to demonstrate their capabilities in the other locations, and we will start communicating that to those employees. But on the other hand, this applies to our factories as well as to the overall manufacturing industry, there are strong needs for human resources. I mean it's different to before. I mean, the employees had more options to choose from. That is what we're seeing now.

And so if they were to relocate and have to move to a different location, they might -- a lot of employees would prefer to work for another company. And for those type of people, we will work to support them to change jobs more smoothly. And of course, ensuring employment is a very important thing. But at this point, the sensitivity at this point at least compared to the time I joined this company has changed. I mean, right now, it's easier for the employers employees to look for jobs. That is the situation now.

[Interpreted] With regards -- I have one more question. With regards to the Takasaki factory, I think it's a very familiar business in Takasaki and the residents and the partners have been very familiar with the factory. And Shibata-san if you have any comments to the people who are in the surrounding neighborhood, please share them.

[Interpreted] Well, once again, for more than 50 years, we have been working with the local people and the factory has been flourishing along with the local people. And so to the people as well as the local administration, I would like to thank you deeply for your support. And at the same time, because of the reasons I had illustrated before, physically, it's becoming very difficult to continue the operation. And I hope you -- we would get your understanding of the reason why we are closing the factory because the factory is physically difficult to continue the operation. But for the value-added R&D efforts, we will continue the operation and we will put in the efforts to try and enhance the R&D. And through those efforts, we would like to contribute to the local society, and we look forward to gaining your support so that we can work on the design and development of value-added semi, and we would like to develop R&D with your support. And so I look forward to your continued support.

[Interpreted] Next question, Nishigata-san from NHK. Nishigata-san, we can't hear you.

[Interpreted] This is Nishigata from NHK, do you hear me?

[Interpreted] Yes.

[Interpreted] So from Kawashiri plant, I want to ask you. You said that you will resume production from August 5. Is that going to be a full -- well, how long do you think you need to reach full operation resumption?

[Interpreted] Yes. Now we don't have a sure information about that. So since resumption of our operation, maybe I think it will take 3 weeks or so. And of course, each, each day at a time, we will try to front-load and advance the full operation resumption so that we can report to you and let you know that everything is back in normal. So as of now, we are expecting about 3 weeks to go back to full operation. That is our target as of now.

[Interpreted] From Nekki Newspaper, [ Otio ]-san.

[Interpreted] This is Otio from Nekki Newspaper. Since beginning, you were saying that you're trying to clarify the impact, but you have a lot of confusion in the auto industry and supply chain and throughout the region, there's a lot of confusion, and this is caused by regions other than semi. But with the closing of your semi factories, is there any case where your semi products are going to be short in the customer side? Is there any concern? Or because you're restarting the operation within 1 week, from our perspective, is it difficult to see that the auto production is going to be confused.

[Interpreted] Well, yes, I believe the impact right now is going to be limited.

[Interpreted] Next, from Daiwa Securities, Mr. Okawa.

[Interpreted] Sorry, this is my second time to ask. I have 2 questions. One is about the demand environment for automobiles. Overseas semiconductor manufacturers, there are some restocking manufacturers and -- or maybe there are some peers with content increase, they are working on. How is your view on that?

[Interpreted] Well, yes. I think both could work. It could be either case. In case of our business, the Gen4, our car and SoC we have and the 28-nano Micron as well. I don't know if we can call it content increase, but they are the products that can drive new growth, so which we can expect a continuous growth. And for instance, let's say that, that is the X axis. And now I'm talking about the Y-axis would be the customers' regions. as of now, looking at the situation, relatively speaking, of course, there are some ups and downs depending on the quarters. But as a trend, there are some trends -- the stable growth trend can be seen in Japan and China.

And on the other hand, there are some uncertainty in Europe, relatively speaking, and the U.S. I don't have a sense that it's going to grow so much, but I don't think it's going to go down either. So it's quite stable, I think. And so in that sense, there are some different characteristics in each region. And so there are different product groups in each region we can expect and also there are some product growth that can drive our business that could determine our growth in the future.

And as of now, compared to last year, I think we can see strong growth in a moderate pace. continuously. That is our view. And in another words, it's not like we can expect a strong growth on and on, but it's -- but we don't expect a cyclical decrease either. So it could be strong, but a slight growth and in a stable manner with some ups and downs, that is the growth trend that we expect in the future as of now.

[Interpreted] My second question is about SG&A. What's your view? So with the system introduction, you have postponed the ERP release. And so R&D has been shifted. And so because I think you said like 6 months ago that you will be more active about that. But with the production very active right now, so is it like the SG&A going to increase gradually? Or are you going to be trying to stop the growth of it at some point in time?

[Interpreted] Well, actively speaking, mainly, we will be using more SG&A for R&D, of course. We will be using those expense for the environment of the employee workplace. -- and mainly R&D would be the target for the SG&A. And we don't expect the SG&A to increase continuously. I hope you don't misunderstand about that. And in terms of the ERP integration pushout, because we wanted to risk any risk that could arise. So like I mentioned in the earlier Q&A session, so especially for data center, in a very tight situation, execution is the key. And if ERP should impact supply in some cases, that's something we really want to avoid. And that's why we decided to postpone in the very short notice.

And as Shinkai-san mentioned, those things that were expected to be used turned out to be not used. I think... When it comes to R&D, long-term future growth, so there are some capitalized investments and expense investment. So rather than being very cautious about making investments, I think we want to build a very solid ground right now. And that's how we allocate our budget. My point is that if our budget is very tight, so we don't want to really keep on saving money or anything like that. We are allocating budget to be able to step on our accelerator as well. So it's just that it is less than we expected initially. So this trend, I think, will continuously -- I think it's possible that it's going -- this trend will likely continue.

I think it's not good to really beat the expectation either. So the financial outlook based on the guidance, I think we want to try to limit the volatility so that we do some haircuts in order to do so. So that's the range of the change. We want to make in a moderate manner as much as possible. So once we -- at the end of the third quarter, I don't know if we will be able to tell you the same thing, but we might need to increase more, but we try to limit the volatility range, that would be my comment.

[Interpreted] Thank you very much. We have received some questions because we're getting close to the end time. So we would like to close the Q&A session. We will have Shibata-san making a closing remark.

[Interpreted] Yes, I think I will be repeating myself, but when it comes to data center, it will be the main thing that is the data center and the AI. When it comes to underlying demand, the demand itself likely to continue very strongly. And as for consumers and IoT space, there are some mixed situation, but mainly around our main customers, I think we will be able to continue the strength in the business. And also with automobiles, like I mentioned earlier, at least by the end of this year, I think things will continue to be quite moderate and positive trend likely to continue.

And also, for this outlook, I hope will materialize. We need to recover from the earthquake and also the supply chain around the data center execution is very important. And at the same time, for the mid- to the long-term investment as well as the post-earthquake and the Takasaki related support for the stakeholders will be provided so that we will be able to report to you on that in the next earnings call. So we will kindly request for your continuous support. Thank you very much for your time today.

[Interpreted] Thank you. We would like to conclude the second quarter FY 2026 Renesas Electronics earnings call.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

[Interpreted] Good morning, everyone. Thank you very much, everyone, for taking precious time to attend Renesas Electronics Capital Markets Day 2026. We thank you very much indeed. I'll be your MC for today, Vice President, Head of -- my name is Sato, Vice President and Head of Investor Relations.

This is today's agenda. Altogether, we expect a 3.5-hour meeting, and we expect to finish the meeting at 12:30 Japan Standard Time. Those of you at the venue after the session we are expecting to have a breakout session with the speakers. Please take part if your time allows. The materials to be used for today's meeting is already posted on the IR site of our home page. Those of you participating online, we have a Q&A session. Please also be aware that the recorded video of this session will be posted on the homepage later on.

In the Q&A session, we would like to prioritize the questions from the people at the venue because of the limited time available. Now first of all, we would like to invite the President and CEO of the company, Hidetoshi Shibata. Mr. Shibata, the floor is yours.

Good morning, everyone. There was an earthquake today, and thank you very much for attending this meeting. The weather was bad. So taking -- thank you very much for taking your time.

There was an earthquake, and we have a factory in Yamagata, the nearby prefecture at the site of the earthquake. No problems. And we have been able -- we make sure that the operations can be conducted smoothly in this tight supply-demand situation.

Capital Market Day has been conducted over the years online. This time around, I think we are having this in-person meeting for the first time in 6 years. Why have we decided to do this? Of course, there are many benefits to online meetings. But as you can see at the back of the room, there are some exhibitions. So I thought that all the things that we are going to explain today will be difficult to understand only by verbal explanation. So we wanted to show you some exhibits of our products. So that's one of the purposes of having this in-person meeting. And I'm sure that you have a lot of exposure to myself and Shinkai-san, but we now have the all the global leadership here.

So I just wanted you to have a direct conversation with them so that you can have a Q&A session with them individually. The details of the presentations and the numbers are very important. But more importantly, what's driving those numbers? And when you model your analysis in the future, if you can have an idea, what are our priorities when you drive the model, I think it makes it easier for you to make your analysis. So please actively take advantage of this session so that you can deepen your conversation with our ELT members.

All right. So I'm just a precursor to the following session. So I'll try to be as brief as possible. But usually, I believe Renesas as a company is not really good at making appeals. So I just wanted to summarize the last 7 years after I took office as CEO. So in the last 7 years, I decided to break them into 3 different periods. One is the corner that says 3x. I'll give you some additional explanation after this, but we strived and delivered this 3x. Now we are at the middle section. And also, we are at the overlapping section of the middle section and the far right, 25% that you see in the middle. Last year, with the analysts and investors, I think this caused a lot of disruptions because we had a range -- we set a range for the operating model.

And the far right is the same thing as we have been communicating as before, top 3, revenue market share, that's also important, but the most important for us is that amongst our customers and from the prospective users, we have to be 1 of the top 3 when it comes to embedded. We have to be the top 3 share of their mind when they speak about embedded. So that was the aspiration that we shared with you last year in 2025.

Now 3x. What is this 3x now? So this is what I mean by 3x. This is the performance from 2019 and compared to 2025, it's 2.1x. That is as of the revenue for 2025. And the guidance for the full year, we don't provide that for this fiscal year, but -- so 2.1x means this -- the first quarter results and the guidance for the second quarter, a simple sum of that and double that. And with that, it's 2.1x. The Micron results, yesterday, I think was encouraging, and the demand so far this year has been quite favorable. So if there's not any disruptions, I think we are well positioned to attain these numbers this year. So 15-something numbers that I have given to you is still conservative in my personal view.

The numbers to be covered in Shinkai-san's session later will be more analytical, it's a more apple-to-apple numbers. So the numbers that he was going to give is different from mine. So I'm just giving you the numbers that I piled up based on facts. 3x is the same one. First quarter, second quarter numbers, if you add them and double them altogether, this will be the number. So in 7 years, this means a 7x increase from 2019.

I think -- so that's the reason why I have decided to use this 3x number because this is the most evident track record that we have achieved, and market cap in parallel compared to 2022, we will -- we have an aspiration to increase by 6x. But compared with 2019 as of Friday last week, it was already 8.7x. This 2019 is the year that I took office as CEO. And I think this is a so, so good number. It's not so bad. Of course, we can aspire for high numbers, but I think this is so, so good.

There are bad times and good times, of course, but throughout this period, in the 7 years, this is the progress that we have achieved. And for all of you, I just want you to remember these numbers and when we take actions, if there's anything surprising, I want you to consider that we have done and achieved certain results and this time around, we should be safe. So that's the reason why I prepared this slide.

Now the middle 25%, this is the catch-up part. So what are we going to do here? What's going to happen with the ROI? And when are we going to finish this effort? So it's difficult to give you a proper explanation. We have to devise a good explanation, but it's very difficult for me to come up with a good idea as to what would be the good explanation. So I just decided to present with you that this is what we are trying to do, what we have been doing so that we can reassure you. So that's the reason why I prepared this slide.

The first element here, I talk about this once in a while. So beyond hardware, Qualcomm has announced its ambition to acquire Modular. But hardware alone is not sufficient. AI and software performance, these cannot be delivered by hardware alone. So how can we maximize the power of hardware and deliver the maximum value on the part of the users. So it's about how to utilize those hardware. And for that purpose, UX, UX has -- covers a broad area in terms of its meaning. But UX, we are undertaking many good efforts, and Ivo is here. So I want you to talk with him if you have the opportunity. And with AI, the UX importance is going to be increasing significantly exponentially. So we would like to double down on the UX efforts going forward.

And Altium, the acquisition that we made 2 years ago. We also hear a lot of questions regarding the progress of Altium acquisition. Shinkai-san will talk about that after this in his session. Now we are making this pivot from a product company to a platform company. So we are tracking some numbers in order to track the progress. So these will be explained by Shinkai-san later. And Renesas 365, Lim is here. He is the person who has devised this initiative from scratch. And there's a demo afterwards.

So I hope that you'll take a look at it. So once you see it, I hope that you'll be able to have an idea what we are talking about, what this is about, what Renesas 365 is about. 365 demo itself, that makes me very proud, but the robot hand that you see at the back, this is connected with 365. I want you to see that and see the potential, what can be enabled with this in the future. If you can [ construct ] that imagination, that will be very good for me. It may take time. But so far, I think things are progressing quite favorably. I hope that you'll share the same understanding. If that's the case, that will be very pleasant for me.

Now the middle one, the foundational technology. Well, these are the things that we are going to do. These are matters of fact, but we are going to accelerate these efforts, be it software or be it the IT infrastructure or ERP integration, those were the main themes that for our internal company because we have made a series of acquisitions. But now we have to roll out the AI infrastructure for us to utilize ourselves. So we are particular about the equipment, and of course, the methodology for building semiconductors, producing semiconductors.

Previously, we were relying on our own efforts. But rather than that, we would like to utilize technology and be more smooth in this manufacturing processes because this will have direct repercussions on our competitiveness. So these are the areas that we are making investments. It's not that we are going to spend JPY 80 billion altogether at one time. So JPY 10 [ billion ] JPY 12 [ billion ] we would like to accelerate investment in a phased approach. That will be given -- that will be explained by Shinkai-san in his part, so that you can see the overall picture.

And lastly, the organization capability. This is something that we have to work on from here onwards. We have to reinforce the capability of our organization. This is a must. So the collaboration environment, the leadership development and also the organizations to work organically. We have to revise the mechanism, the structure and make necessary investments. Those are the things that we have been communicating to you so far. And this year, San Jose office, we made a sizable investment about JPY 15 billion, and we remodeled the office completely. So the office is very easy to use now. Quite comfortable.

The next is the Kokubunji Musashi R&D site. We would like to modernize that facility, make it easier for the residents to use so that we can stimulate the innovation and the imagination of the engineers.

And now from here, I would like to talk about the future. So this is only a prelude. My speech is only a prelude and the details will follow by each leader in their respective presentation after this. So I just want to give you an introduction. First of all, in the next several years, our growth will be driven predominantly by AI and IT infrastructure. In 3, 4 years from now, if things go smoothly, 40% of our total revenues will perhaps come from AI and infrastructure-related businesses according to our analysis. AI enabler, these are the devices and solutions that will enable AI. So we are going to provide the devices and solutions for that. That's the first engine of our growth. Then we will go to the second rocket.

So this is the physical AI a buzzword recently. And this -- in our case, this includes software-defined vehicles, but physical AI will be the second stage of our rocket, and then this will boost the growth from 2030 onwards. And -- so first one was the AI enablement. The second one is the AI deployment. This is -- we are going to deploy AI in areas close to our everyday life, and that will be driving the second stage of our growth.

And the third piece is about 2035, digitalization vision that we have set the target for 2035. This remains unchanged from before. But one thing that is changing in this space is the role played by AI. Previously, utilizing AI, we said that human works will be made easier. From that perspective, we thought about how to utilize AI, but given the enormous speed of evolution of AI agents rather than that previous concept, we believe that AI agent will take -- replace the human work quite considerably. So we made that change of consideration.

So we are not just simply using AI in a right way to -- and provide them for human beings, rather, AI will be the user of our digital. So we've made this change in the way of thinking. So we would like to use AI as a companion, as a complement. So with that mindset, we are going to further enrich our platform going forward.

Now the first and third -- second and third rocket that I just explained for each of them, what are the opportunities and what are the approaches to be taken by Renesas? I will just give you a prelude and the details will be provided and explained by the respective sessions after myself.

So that is how I plan to continue my story today. AI infrastructure up until now -- up until the previous earnings, we have been centering around power delivery. We have been seeing power, power, power. And right at that point, Intel's earnings results came out and marketing at -- market started to shift, and our engagement with the customers also started to shift. We're not just talking about GPU and power anymore. It's not as simple as that. We need to become a heterogeneous. We are faced with a complex environment in which parameters are growing rapidly. Even in such models, how can we decrease the latency and compute? Regardless of the power involved, how can we swiftly deliver computational results? That is the major shift.

And MPU-related devices are on the rise in terms of demand.

And the flip side of this coin is that the broad control or workload optimization and the power consumption optimization becomes economically important because the model itself is growing, unless we take care of this aspect, the model will not function. Control plane is something that we started to hear a lot about. The demand for this is growing rapidly. That is how we see the current market.

All in all, in the coming 5 years, the semiconductor market as a whole could grow fivefold. That is how I see it. Based on third-party research results, which we have analyzed and customer forecasts are also included in our analysis. We have been triangulating the various types of information and came up with our own estimate. And we came to the conclusion that this could reach fivefold, very honestly speaking. Towards this end, this fivefold growth power delivery should grow even further, MPU and MPU-related products, including the memory interface, started to grow rather late. So it has a potential to grow even further. That is why I have put plus-plus here.

Control plane also expected to grow. But compared to the overall semiconductor, maybe this is going to be a slower growth. But all in all, the applications to which we provide our solutions, all these related segments should grow by fivefold more or less. So the opportunity in the 3, 4 or 5 years will become fivefold in our assumption. And where do we stand? Regarding power and memory interface, I think we have a relatively strong foothold. Leveraging this, we will get into other areas.

In terms of technology, I think it's in the corridor, but we have our modules put on exhibition. As of last year, when I talked about module, people would go like why module, why Renesas? I think that was the reaction. But now we have a solid product. So please take a look. And discover that we were able to live up to our own words.

Now moving on, we have a positioning. We have our ways of winning and utilizing this, how are we going to utilize the opportunity for growth, not just market potential or opportunity, but how is growth going to look like for Renesas is written on the right hand side. Fortunately, we have a lot of embedded devices. So control demand is going to be increasing, and that is going to be favorable for us. As a simple example, we have a configurable mixed-signal device and other MCUs that are traditional lineup of product. And AI workload power optimization related SSD and others are included as well.

So on the left, I talked about fivefold growth. In that future, control-related technology will be needed, and that is where we want to provide our products into. And at the bottom, we are talking about grid to core. From the grid level, we are getting closer to the left end. We used to be on the board core power but we are moving more towards racks.

Going forward, energy storage and solid-state transformers because of the discrete elements and battery management elements, there are many strong competitors. So it's not that we can just make a lump sum investment for IGBT and update our technology. That's not the kind of approach we are looking at now. Control device, analog device will be necessary. So this peripheral segments and moving towards the grid more than now is what we are thinking about.

Regarding physical AI, similar story. Market will grow significantly. This will be covered by Vivek on SDV and Ivo and Pete will talk about robotics. 2035 seems like a long way ahead. So 15-fold increase might not mean much at this point. But the overall direction is that in the 5 years to come, I think automotive industry would be the growth driver. But beyond that, robots will come into the picture in full scale. In this world, especially in automotive segment, MCU, although there are some fluctuations, we are among the top 3 in the market. And this, I have been repeatedly saying that from the low end to 2,000 TOPS high-end compute, this end-to-end scalability is offered only by us.

We were only targeting the automotive industry, but now we are going to shift to robots and humanoids. That is going to be the direction in which we will grow. Our car demo is made available at the back of this venue. What can you do with Renesas device, especially ADAS and infotainment? Well, this level of high-performance delivery can be done by Renesas products is something that I expect you to react in. And the customers and the users are reacting very strongly. And until last week, our teams were in Germany negotiating a significant deal. Here, in terms of our growth direction, this is where we want to gain market share.

Regarding MCU, there was an opposite trend in the previous several years, not just us. That one company would grow significantly and others would lag behind. That has been the situation. Unfortunately, automotive industry changes only slowly. So this trend will not become a significant shift starting from next year or so. But we have a plan ahead as Renesas. So rest assured, we are not concerned. I'm not sure if it's going to be 2027 or 2028, but our preparation should bear fruit at some point. So it's just a matter of time.

And intelligence at the edge. As I have mentioned earlier, we need to complement AI agent's performance as a companion and partner. On the left-hand side, you know very well, but AI is evolving in a rapid speed, as you can see in this chart. Yes, it's a speedy development, the transformer came about in 2017. And in the world of embedded products, applications using transformers are increasingly being developed right now. It's not like LLM in the Internet world. It has taken 10 years.

So in the physical world, deployment of embedded takes time. [ OpenCode ] is currently on the rise and the world model should eventually emerge. But whether that's going to be deployed on robots and humanoids, this should take more time. I think that's a realistic view. Let's assume that 5 years from the introduction of ChatGPT in 2022, will that be the point in which this will actually be deployed? I don't think so. I think it's going to be 2030 onwards, realistically speaking, that we will see the world shift in that direction. So we are planning ahead.

And utilizing the platform, we are going to have a wide range of portfolio. And digital set is something that can make full use of AI. We will be focusing our resources in this area. Unless we do that, when AI comes to a platform and plays around, that is all good. But AI can only work on probability. So it can say something that is probable. But from the user's perspective, validation is necessary. If we have a solid digital threat, we can allow AI to make deterministic proposals. So those are usable proposals, and I see a huge gap here. We need to invest in a meaningful way so that we are well prepared.

And next, how are we going to win in this area? AI infrastructure, physical AI, intelligence at the edge. We have 3 slides covering those topics. AI infrastructure in this segment, we're positioned well. We're not going to do something drastically new. I think we should be strengthening what we already have. We have been enabling ramp-up of customers in relatively good speed. Some customer says it's a combination of American speed and Japanese quality. So we pride ourselves in the speed of deployment.

Regarding technology, I talked about module earlier. But going forward, we have interconnect technology fostered through memory interface. And using control plane, we can achieve connectivity within the racks. That is where we intend to win. And on the far right, digital and UX. In the corridor, you will be able to see the actual emulators of ours. Please take a look. Using these, we -- our users before assembling their products, power and thermal simulation can be done. So time to market of our customers can be shortened rapidly or significantly. It might look slightly different, but outside of the silicon, we see opportunity and bottleneck. You will be able to feel that for yourself.

Regarding physical AI, this is something that should happen in a longer term. Near-term targets will be explained by Vivek. This is not something we are capable of doing now, but something we intend to go into. We will be investing in the foundation, enhancing our competitiveness in this area. That is the key topic for us. And one key phrase you should be looking at is the combination or the advanced design of hardware and software. AI models are advancing and hardware processes also. So some hardwares do not have the necessary performance. And Modular has been acquired by Qualcomm because of this. And we are taking our own approach.

Our hardware performance will show true value through our customers' usage. That is something that we would like to show. Intelligence at the edge, this is something that we expect to happen down the road. So many things are in the future. But on the left, I'm talking about content that we will enrich. And our platform, although being vertical, will be open horizontally. Our competitors and passive users can actively use our platform. It's not just us. But going forward, utilizing this platform, the market itself can democratize or free platforms. That is something that we want to realize.

To sum up, a big topic for our growth is AI. AI will appear in the 3-stage rocket that we envision, not just 5 years down the road, but in 10 years' time and beyond, this is going to lead the way in terms of growth. So this is going to be the backbone. In addition, I talked about control in terms of AI infrastructure, but SDV, physical AI, Ivo and Pete will talk about this later. But in the world of physical AI, we have a lot of ingredients to realize this. So many of our solutions will be offered so that we can have some plus growth.

And lastly, in 10 years' time, we want to utilize our digital platform so that AI-friendly environment will be created by our platform. Our purpose remains the same. With the introduction of AI and physical AI becoming more real than ever, we want to make our lives easier, and that can be realized in this world.

With that, I would like to wrap up my part, and I will hand it over to Shinkai-san. He is going to talk about more solid numbers.

[Interpreted] Thank you very much. Now we want to invite Shuhei Shinkai, the Senior Vice President and CFO.

[Interpreted] Good morning. This is Shinkai, CFO. So in my finance part, this is the regular format. And so towards 2025 aspiration, we want to talk about the progress and also the model. So recap on the past. This is the normal regular format. Since the past, so you can see the trend of our numbers, just like we usually go on a constant currency basis, looking at JPY 100 to $1, JPY 120 to EUR 1. In 2025, revenue for the full year declined year-on-year. But as you know, for the quarter basis, the revenue hit -- already hit the bottom. In 2024, Q4 was the bottom. In '25, Q1 onwards including forecast for 6 quarters in a row, we continue to post positive numbers. And that is the current situation.

So in 2026, for the full year, we expect to see a full-scale steady result to come. And income statement for 2025. The second from the top, gross margin, the revenue year-on-year declined. The gross margin stayed solid. So as expected in the model, we ended up achieving 55%. But our operating margin at the very bottom, the model showed 25% to 30%, but we ended up being at 24%. As you can see at the right bottom for the operating margin, when we explained by updating the model, we mentioned adjustment to make a change to the model.

The purpose of this change was that currently, we are looking through the plateau condition within intention. When we will make the solid investment for the future growth, that's what we want to have at this point along this adjustment happen. And R&D and SG&A is something that we did to make this adjustment versus foundational investment.

It was important, but we weren't really addressing enough and we were behind, but we decided to go ahead and make more investment in these areas. And also -- this is what we are seeing and in the past, it said catching up, but this is what we are starting to see.

And the R&D is 19% within a scope of model, so we were going through the selection and forecast process for R&D since 2024, and we saw the lower baseline. In SG&A, we will take actions to lower the baseline as part of improving productivity. So this is expected to improve. The operating margin improvement is expected. And this would be the driver. So what is this foundational investment?

And so I think we went through -- briefly went through the items, but now I'm showing more numbers.

So 2025 is compared to 2022, 3 years ago. In 2022, not just top line, but operating margin was also highest in '22. I'm sure there is a difference in definition, but this is the perspective that we took to show. So we call this as foundational investment, the investment into the businesses comparing '22 and '25, the yen amount increased by 1.5x, ratio was 11% to 14%. So we increased the percentage. So what's included in this investment. As you can see on the right-hand side, the common IP platform, software, R&D development.

And so -- and the design document to be improved to improve efficiency of designing and in enterprise infrastructure, including AI and employee well-being improvement, so investment into office. So R&D, SG&A, so many different areas where we are investing right now. And we're trying to also promote future growth of the business.

So as we move forward with this investment, what is the revenue breakdown we expect to get and the size we hope to get to. In 2035, this is the revenue portfolio we are looking at. The midterm is around 5 years ahead, and long term is like 10 years ahead in 2035 or something like that. And the left-hand side is the size. And which segment that we expect to see the growth. And so AI infrastructure will be the main driver and physical AI, SDV and lastly, intelligence and Edge. Those are the 3 areas. Those are the 3 steps to see the growth.

And looking at the height of the bar, in 2025, we look at that as one. In midterm, we want to double first. In long term, we want to triple this '25 number. I know it's quite ambitious, but this is what we are looking at to see top line growth.

So we breakdown by segment on the right-hand side. Our reporting segment, automotive, industrial, infra, IoT and also software and digitalization, we also want to grow this. This is not current segment, but we want to grow this. And 35% for automotive, infrastructure, Infra, IoT, 50%; and software and digitalization, 15%. Since the breakdown we are trying to accomplish in our revenue. I also touched on this in the valuation in the past. Software and digitalization sales percentage within sales by growing this to a certain level. The overall corporate valuation to be increased -- valuation to be increased, and so we can increase our overall corporate value. So that's how we have calculated this portfolio.

Next, on the margin. And left is the gross margin right-hand side OP margin and time line is starting from '25 and midterm roughly around 5 years is shown on this slide. So overall, the gross margin will be 55% -- is around 55% it's almost flat. Operating margin, 25% to 30% range to be -- so expanding in this range.

Starting with the gross margin. On the left, in-house capacity expansion through the investment, so that increases depreciation. Also, we see a very tight supply. So there is a component, cost increase is expected. But the price increase mix improvement to offset the negative impact, utilization improvement to offset the negative impact to end up being flat in total.

Operating margin. The foundational investment, as I mentioned earlier. So looking at earnings, and we need to make the right balance to control the investment, but we'll continue to make investments and just like a component cost increases under the current situation, we expect to see the cost increases in many different elements in utilizing technologies, including AI to improve the productivity to offset the cost increases, then top line growth to enjoy operating leverage .

So in this model, it's not taking place by time line. This is more like actual section of view regardless of the time. So we're not talking about going down and going up by the sequentially. So looking at the '26 operating margin level, the scale portion will be seen. But then also investment is taking place. So that's what we see for '26. So depending on the time we see, so this movement could happen differently from what you see on the screen. So we're not talking about the margin, it will be coming down from now onwards. So depending on our top line growth and earnings growth, we will control the spending amount.

Talking about capital allocation. The overall framework hasn't changed. So CapEx, deleverage dividend and strategic investment, this will be the order of our capital allocation. Recently on the CapEx, as I mentioned, we are increasing CapEx to reinforce our in-house capability. So embedded area where we want to focus more on the mature node technology will be utilized. The capacity for this is quite tight globally. So we want to have an in-house capacity in reinforcement.

And the leverage portion, so there's a dollar bond, which comes to maturity. So we redeemed them so we can accelerate deleverage. So divestitures, the timing business allocation process. So we're making good progress so far. So we are accomplishing the conditions needed for the closing. So we're expecting to come to closing in the near future. So the proceeds coming from this transfer will be utilized for the gross investment, but also at the same time, the return to shareholders.

This timing transfer, the use of proceeds. We don't try to decide as quickly. We want to take some time to think with the cautious. So capital, cash and need to be secured under the current environment to stay flexible. I think that is one way to go, I'm sure different players trying to raise the funds so that they can increase the balance sheet. And so well, of course, we remain the same policy. But when deciding -- making decision to start spending, we may -- we want to shift the timing. So we are not making decision too fast or not immediately.

Regarding Altium. I know this is a quite busy slide, somewhat busy. So in 2024, we completed the acquisition for '25 beyond for 3 years, these are the stages we're looking at reform, pivot and perform. And those are the 3 years that we have segmented here. And we are in pivot phase. Desktop application product over to SaaS product -- platform. So we are shifting and changing the offerings. And by the end of this year, we should be through with the shift, this transition to be completed. And then from next year onward, we will go into perform stage by increasing volume, and we will convert them into values. So that is what we are preparing right now.

So what are the actual numbers and KPIs we're looking at, which are shown at the bottom half. Starting with the left bottom. For the past 1 year, looking at the progress of the past year, ARR, this is the KPI linked to the revenue. So it's growing at 8% per annum right now. Like compared to historical numbers, the sales growth, ARR growth has slowed down. But as you see at the bottom, MAU, monthly active user has been growing by 24%. Intentionally, we shifted our marketing methodology to grow the scale.

So first, we focus on growth -- the scale to grow, and this is the result of that such effort. And in the pivot section where we are in right now, so the theme is to expand the scale. And as a KPI to accomplish this, we're looking at CRR, customer retention rate, and maintaining existing business, also conversion rate. This is a shift to the new platform and new platform customer expansion of new customers. So those are what we are looking at to move on this pivotal phase. And when this is completed, then next the expanded volume to be converted into value.

So in this triangle, we will improve -- increase the maturity level of the pyramid while ensuring the scale, but moving up the pyramid by utilizing the upper platform, so we can raise the unit price. So we can convert the scale into value, and that is expected to come in next year onward in a perform phase.

And the final goal is set over here. This is -- there's no change since from the last year, mid- to long term, looking at $1 billion to $1.5 billion.

And here's a summary. This is the sixfold breakdown image that we always show, the size, 2x and valuation 3x. So just like Shibata's slide, we are taking a stock number -- stock price from the end of the week. So we're talking about 6x. We still have a big upside from there. So what do we need to do is summarize on the right-hand side. So this is -- these are pretty much the same as what we explained last year. So we are basically executing what we explained last year, and we'll continue to do so.

In a section, back to basics. So we will invest in foundational area to ensure the future growth. In valuation gap fill, portfolio is reviewed and capital allocation to be implemented in a disciplined manner and software and digitalization to increase the valuation, improve the valuation and expand furthermore by making investments. And so we can fill in this 6x table chart.

And lastly, one more comment. The model results and constant currency basis are shown on the same slide here just for your reference. So this concludes my presentation.

Thank you. Now we'd like to move on to the next session. We would like to invite Vice President and CSO, Stephen Limoges, to make the presentation. Steve, the floor is yours.

Good morning. My name is Stephen Limoges, and I'm the Chief Sales Officer for Renesas. Today, I will present Renesas sales strategy and discuss our plans to accelerate growth within our existing customer base and the mass market for future growth. For the last few years, Renesas has been consistent with our high-level sales strategy. Our strategy is to go deeper and drive more revenue out of our existing customer base. Also to go broader and expand into a new customer base. While the high-level strategy stays the same, we've made some key strategic shifts to accelerate our growth faster than the market.

First, we increased our penetration into the fastest growing markets by investing in our direct resources in secular growth markets. As Shibata-san mentioned, these are AI infrastructure and compute, physical AI and software-defined vehicles. Second, we centralized the scale -- sorry, Second, we diversify our revenue through dedicated mass market deployment focused on new customer acquisition. Finally, we centralize to scale, deploying highly technical, centralized support using Renesas' AI tools to respond to customer needs quickly anywhere in the globe in 24 hours.

I'd like to add a little more depth into what broader and deeper means to the sales team. Deeper means our sales teams are intensely focused on gaining share within our known revenue-generating customers. Our mentality is how to continuously increase our relationship within these customers and our sales metrics are aligned with this focus. Design and manufacturing is global, and we are leveraging Renesas' scale and global sales footprint to gain share in our largest customers. And having a constant curiosity and ambition to find and create more opportunities to maximize Renesas' success on every customer product.

For broader. This is Renesas' next frontier for growth, gaining access to the thousands of customers we currently do not interact with. It's about increasing Renesas' mindshare by leveraging our extensive distribution relationships and partnerships to amplify our solutions in all major markets and searching for the next big customer or end equipment, which will drive future growth for Renesas. The most valuable resource in sales is our people. How and where they are deployed is a key factor in driving growth. In 2026, the keyword is focus. All customers have access to Renesas. However, our sales teams will focus their proactive engagement on 2 areas: growth accounts and mass market.

The teams will operate separately within each region, focusing on gaining share growth accounts, which are revenue-generating accounts within our secular growth markets and dedicated mass market teams in all major regions focusing on new customer acquisition and cultivating those markets to find the next generation of growth accounts for Renesas. The new deployment will increase our time spent without drastically increasing our resources in markets providing explosive growth for Renesas.

So what differentiates Renesas in the market is a high level of customer intimacy as well as the proven track record of manufacturing expertise. The feedback that I get directly from customers is Renesas is a technology leader and a partner who helps them innovate and accelerate their time to market. Using our differentiation to outgrow the market, it requires focus, investing our resources in the fastest-growing segments and partnering with industry-leading customers. It also requires some patience as the technology adoption and speed of these markets varies widely. This is why we'd like to visualize the revenue contributions of our secular growth markets as 3-stage rockets.

By heavily investing in the 3-stage rocket, we are accelerating and diversifying our revenue to grow faster than the market. And beginning in 2026 with our AI infrastructure leadership, we will achieve this consistently throughout the mid and long term. Our growth expectations include significant mass market acceleration. In the mass market, margins are healthy. The next generation of engineers are being developed, and the next big revenue-generating customers are born.

In 2026, we have already implemented an ecosystem to accelerate our mass market growth. We will be achieving this through 5 pillars. Dedicated mass market teams solely focus on developing large semiconductor markets, leveraging our distribution and e-commerce partners to gain access to every customer in those regions. Industry-leading technical support, customers want efficient experiences with fast, thorough technical answers. We're going to deploy our Renesas AI ATHENA support tool to our sales teams and our distribution partners. This will enhance our ability to scale quickly and maintain our technical support leadership.

And finally, finding who is next. Many customers who are large revenue drivers for Renesas had small beginnings. Our teams will search the market and place bets to see the long-term growth for Renesas. So what is ATHENA? If we want to go broad, we must evolve our support strategy to scale and support the entire market quickly and efficiently. Athena is helping us to achieve the scale. It is a super augmented AI design and technical support tool that is enabling support for all customers in a fraction of the amount of time it has taken in the past.

Much like well-known AI tools, the answer to your question is right at your fingertips in seconds. But what differentiates ATHENA is its ability to use all Renesas internal resources, fine-tuned, internally tested and quality control to be fast and accurate, deployed to both Renesas sales, our distribution partners and in the future our growth customers. The tool improves scale significantly, accelerating customer support and new acquisition.

As I mentioned previously, our mass market strategy hinges on our dedicated sales team and our extensive distribution network, both center around people making connections with customers. Proper guidance and focus is needed to know where to invest and place those bets. This is where our Renesas user experience journey is utilized to generate and most importantly, qualify customer leads. Customer activity, which might begin at a sample, a download, a tool use or a new design on Renesas 365, generate intelligent leads, not just leads, intelligent leads growing our sales funnel and guiding our sales teams to focus their engagement on the next big revenue drivers for Renesas.

The good news is our sales strategy is already yielding results in new customer acquisition. For the first half of 2026, our new customer acquisition results are tracking to 8% growth overall with consistent results across all regions. Our long-term goal is to double the number of new customers using Renesas.

In closing, we're going to go deeper into our existing customer base. We're going to go broader by developing an expanded customer base. We will sharpen our focus and deploy to secular growth markets and the mass market. And we'll broaden our customer base through a targeted new customer acquisition strategy.

With that, I'll close my presentation. I sincerely thank you all, and I appreciate your time. Thank you.

[Interpreted] Thank you very much. We will hear from Vivek Bhan, Senior Vice President and General Manager of High Performance Computing to talk about software-defined vehicles. The floor is yours.

Good morning and good afternoon. I'm Vivek Bhan, Senior Vice President and General Manager of the High Performance Computing business at Renesas. Today, I will walk you through Renesas' strategic direction for software-defined vehicles. I will also outline how our compute and power portfolio are positioning us for sustained growth and long-term value delivery for our customers. The automotive industry is fundamentally shifting from static machines to dynamic upgradable technology platforms. As vehicles become software-defined, new features will be continuously enhanced also driving architectures that lead to an increase in semiconductor content per vehicle.

Hopefully, through this presentation, we will explain how Renesas delivers the brains, the distributed thinking and the power nervous system of the software-defined vehicle of the future, thereby positioning us to address system-level challenges and customer pain points that will define the SDV era. SDV architectures are expected to dominate new vehicle sales with projections showing that over 75% of the new cars built on SDV principles by 2035. Every major global automaker is now increasing the investments in SDV programs. While it increases value through software, silicon also becomes very mission-critical, driving a step change in compute, power management and overall semiconductor content per vehicle potentially more than doubling over time.

OEMs are very interested to expand beyond closed proprietary SDV ecosystems and are actively seeking partners to reduce risk and preserve control. This is a clear opportunity for Renesas to emerge as a top-tier SDV supplier, offering an open, collaborative and flexible platform with the key OEM partners. Today, together, SDV and AI are transforming vehicles into intelligent, continuously evolving platforms. AI-enabled software-defined vehicles increase volume and complexity of automotive software from ADAS Level 2 to Level 4 transition stacks to GenAI integration with LLMs and VLMs to over-over-the-air updates along with complex supporting tool chains and frameworks.

Cornerstone of AI-enabled SDV are high-performance computing hardware, which is addressed by R-Car SoC portfolio and multiple zonal controllers, which are addressed through Renesas MCU portfolio, all combined with our advanced power solutions. Renesas platform vision are also extendable beyond automotive into adjacent markets, such as robotics, physical AI as market adopts those technologies in those new areas.

Let me start by outlining the products Renesas offers in the SDV market space. We are uniquely positioned. In automotive, we are differentiated MCU to SoC portfolio powered by advanced chiplets and leading edge process technologies. We offer scalable, heterogeneous compute that has neural processors, graphic processors, compute engines and industry leadership in real-time performance, latency, safety and power efficiency, delivered all through Renesas open access SDV platform to enable software reuse, portability and a common architecture for our customers.

In addition to compute, we offer a wide range of analog and power products targeted for better automotive system performance. SDV is accelerating revenue growth from today into the mid- to long term. The foundational forces behind the growth are E/E architecture centralization, structurally increasing silicon and software content per vehicle, ADAS, L2/L3 adoption, driving step function demand for scalable, high-performance safety-certified compute platforms. The platformization or transition from component sales to software-enabled platforms expands value capture and life cycle scalability.

Finally, partnering with ecosystems enables us to deliver optimized solutions and accelerate customer adoption. Specifically, we as Renesas are focusing on a select group of OEMs that are seeking differentiation, building deep platform level partnerships while working very closely with those OEMs. OEMs also are moving at different speeds and adopting different architecture models. Some are quickly moving to heavily centralized designs. And while others are adopting hybrid and zonal approaches.

This diversity is exactly where Renesas differentiates and is positioned well to offer and address full range of OEM compute strategies, offering scalability and flexibility rather than forcing a single architecture. OEMs want choice and control and Renesas enables both. We bring one of the industry's broadest MCU portfolios, spanning low-end to high-end real-time control, zonal control as well as cross over MCUs with both proprietary as well as standard cores.

Our scalable SoC portfolio extends from dozens of TOPS to thousands of TOPS and is further enhanced through chiplet architecture, addressing the growing needs for AI-enabled high-performance central compute with built-in functional safety, security and power efficiency. We complement all this with core software framework tools and development ecosystem. All this enables faster development, validation and deployment for our OEMs going forward. Taken together, Renesas' MCU to SoC continuum, is well aligned to serving AI-enabled SDV evolution.

Let me briefly zoom into our R-Car SoC business and what it talks about our SDV activities. We are seeing strong traction across OEMs, Tier 1s and the software ecosystem. Today, R-Car Gen4 is already in production, and Gen5 is gaining momentum across next-generation SDV programs with announced design-ins and multiple active RFQs. On the Tier 1 side, we have over a dozen active engagements, including proof-of-concept and platform collaborations. We now have more than 15 active software and technology partners. This collaboration shortens integration cycles and reduces deployment risk for our customers.

We are also, as Renesas, further aligning to how OEMs are actually adopting SDV architectures. This positions Renesas not just as an SoC supplier but as a long-term SDV platform partner with OEMs seeking this differentiation. OEMs are adopting different architectures. I've mentioned that from central compute to zonal, and we are uniquely positioned to offer a true MCU to SoC road map, combined with power on an architecturally open platform, which is not a black box. With our approach, OEMs have flexibility, control an optimal embedded performance across the whole fleet of vehicles they make.

While other competitors focus on a limited range of compute sockets, or some other competitors are very closed and have a very rigid ecosystem to work with, Renesas participates across multiple vehicle segments through a flexible partnership and realizable differentiation for our customers.

Let me also talk about the transformation pivot that we are making happen at Renesas. Today, vehicle silicon cycles are lengthy from early engagement to start of production. Auto SDVs are pushing for an integrated hardware software story. They want end-to-end systems, which can be better realized with SoC supplier building foundational investments that Shibata-san also talked about to enable this SDV acceleration. Through this pivot that we are executing on, Renesas wants to further accelerate time to production and number of products that we can release into the market. We want to enable our customers to have a faster time to market, and they'll be able to upgrade their solution over the years.

Let me also touch briefly on how AI is evolving inside the vehicle and why this is strategically important for the Renesas transformation. Automotive AI beyond raw TOPS is around how AI evolves safely and predictably over a long vehicle life cycle. The systems are no longer just single functions like perception, but also a combination of multiple specialized AI agents that all have to be orchestrated together to work correctly in a vehicle. This is why AI-enabled SDV must go beyond raw compute. It requires heterogeneous architectures, which Renesas offers, integrating compute processing, graphics processing, AI processing, all working together while delivering automotive-grade safety and real-time performance.

Our R-Car scalable architecture is designed to integrate the AI evolution, combining heterogeneous compute, offering built-in safety, enable virtualization of different systems and deliver it at efficient power so that OEMs can continuously evolve these AI capabilities without having to redesign their platform over a longer life cycle. This Renesas journey continues the transformation of the company from a semiconductor supplier into a true system solution provider.

SDV requires guaranteed performance with built-in rails. Customers need predictability, and they need trust as software takes on more safety critical functions. Customers want portability. They want reuse, they want faster development cycles. They want to have longer product cycles, while also moving towards these AI compute architectures. Renesas, through this journey is moving to a vertical integration from hardware with new differentiated IP to core software and tools to eventually application stacks and ultimately system solutions. This will be the heart of our platform transformation.

Our vision as Renesas is to deliver integrated platforms that reduce customer complexity, accelerate deployment and derisk system adoption. In doing so, Renesas moves up the value stack, capturing differentiation better for the market. Renesas' focus is to scale SDV and AI growth with predictability and discipline through better foundations within the company. As automotive systems become more complex, it is about delivering repeatable, high-quality platforms both across SoCs and MCUs. We are building foundations that span architecture, organization, validation, hardware, software and system solutions.

Early performance modeling, system emulation, automated verification are all part of these foundations. We want to build more differentiated in-house IP to ensure consistency, scale and capital efficiency. These results will be measurable over time. We will see early defect discovery, faster regression cycles and improvements in development efficiency while enabling maximum reuse across programs. Step changes to build this foundation is what will allow Renesas to grow faster in the future with higher confidence as SDV adoption accelerates.

Further talking about the foundations behind how we scale Renesas for SDV growth. We are building capabilities continuously spread over time, focus on fundamentals, global talent, strong domain leadership, disciplined foundry strategy and an early system-level modeling and emulation to shift risk left. We expand that with Level 2 moving into system-driven validation, use case-based KPIs, automated verification, AI-assisted tools and ecosystem-based reference designs. Our next level, Level 3, is where value scales, ownership of critical software stacks, system validation with CI/CD and differentiated in-house IP running on our hardware. These foundations that we are investing in will help Renesas build technology leadership and execution into a durable long-term value creation.

Let me also talk about our MCU road map. Our strategy on MCUs is to broaden the portfolio with full scalable compute running through various core options, deepening our ecosystem and translate that into accelerating market gains over the next 5, 6 years. We are extending our general purpose leadership from midrange down into low end and forward into next-generation families. We are expanding our Arm-based lineup in addition to our proprietary offerings. We are building MCUs that are purpose-built for EV and SDV zone, eventually evolving to a fully zone and SDV optimized generation of those products.

For IP, we are getting ready for the RISC-V adoption in the future. The result of these activities that we are executing on will provide us a full vehicle coverage for automotive and eventually taking those products and technologies and IP into adjacent areas like robotics. New product launches have started to generate design in acceleration. Eventually, that will turn into OEM production in the later years, followed by revenue ramp. Over the next 5 years, MCU portfolio should see a wide range of products and families being introduced into the market, followed by customer adoption as well as customer ramp sometime later.

I will also quickly touch on EVs, where we are growing today and positioned to win tomorrow. We are expanding our EV portfolio across the full system, integrating BMS, inverters, DC/DC, onboard chargers with our R-Car U5X family and RH850 U2X family. They're already driving the industry shift to 28-nanometer. And some of these products are already adopted by top OEMs worldwide enduring some of the leading players in China.

Looking ahead, our next-generation EV platform will enable further scalable X-in-1 integration with about 50% more faster control optimized to unlock power technologies that will be integrated through these faster cores, faster ADCs and a next-gen AI/ML accelerator. And we are executing early through deep local system partnerships to enable our products into quick adoption by our customers.

Let me summarize by -- and close by summarizing the Renesas story, which is about offering a compelling road map that is built on market realities and decisive strategic execution. First, software-defined vehicles adoption is accelerating around centralized compute, software and AI. Renesas' journey is directly aligned to the market trends and is focused on addressing the system needs of the future. Secondly, we are expanding from a leading semiconductor supplier to a true vertical partner for our OEMs. By moving towards fully integrated systems, combining hardware, software tools and know-how, we deepen and strengthen our customer relationships and increase long-term value captured for us and for our customers.

Third, we will work and increase our SDV investments across software tools, stacks and expertise over the coming years. This strengthens our automotive journey and also positions Renesas to expand into adjacent growth markets such as physical AI, robotics and intelligent systems over time. Taken together, Renesas is uniquely positioned at the intersection of compute, power and software enabling the SDV transition from end to end. This is how we are building a sustainable growth engine for the next decade. By aligning with secular trends, expanding our role in customer systems and executing with discipline.

Thank you for your time and your continued interest in Renesas.

[Interpreted] After this, we would like to move on to the Q&A session. We have to prepare the stage. So please give us a few minutes. Thank you.

In the Q&A session, the Q&A session will be participated by Shibata-san, Shinkai-San, Stephen and Vivek. Speakers, please come up to the stage. Now we'd like to move on to the Q&A session. [Operator Instructions] We would now like to receive the questions from analysts and investors. We would like to first receive questions from the floor at the venue. UBS, Mr. Yasui, please.

[Interpreted] My name is Yasui from UBS Securities. My first question, this time around, I think you have highlighted the AI, in particular, in this Capital Market Day presentation. I think you are convinced that this growth in the AI market is quite stable. So are there anything that you have not presented last year? You have felt your aspirations. The previously timing, PMIC and those interface has been the case. But are there any new applications that will be broadening going forward? That's my first question.

[Interpreted] Well, I think I can give you more details somewhere -- sometime later. But in my presentation, I talked about the control plane and the interconnect-related. In these areas product definition and product design or development has -- is already in progress. I'm not very sure if this is going to be significant, but I think quite a good pace of growth will be driven by these product lines. And something new, we're not going to begin something totally that we have not touched. Rather, we would like to accelerate the efforts that we have been undertaking so far or be more -- give more resource to them. That I think will be the basic activities that we are going to focus this year.

AI, it's a common threat. But I think hardware was quite splendid already. But as I mentioned during my part, but the performance of the hardware is not delivered. In order to deliver those performance time and labor more than anticipated is needed in order to deliver the performance of hardware. So we wanted to address that. And that effort is going to be more sizable compared to before. I'm sorry that I'm going back and forth, but AI is going to be utilized in order to realize AI. That is the situation that is happening today.

So according to our activities, AI model will have to be mapped with the hardware in order to do the computation. And previously, these were manual work. But human coded software were needed in order to do this. But this can be replaced by AI, and this is what we are working on right now. And the preliminary result shows a very promising outcome. So this is an area that we would like to further enrich going forward. So we will, of course, work on the hardware. But maybe this is too exaggerated, but I think the software proportion is going to become much larger compared to before, especially in our R&D efforts. That's what I'm thinking about.

[Interpreted] My second question to the 3 of you, you talked about the potential for growth. Last fiscal year, you mentioned that the Chinese market is going to be important, and that will have a downside pressure on the margin because you're going to make investments in China. So China, I think, physical AI included, I think this is -- China is a central market for AI. And mass market, I think, as an approach is quite reasonable in order to deliver synergies.

So at last, I think you are going to -- you are achieving an expansion in customer acquisitions. So including AI compared to last year, what is the potential you're looking at for the mass market expansion? If you can just give us a hint.

[Interpreted] Well, the mass market overall is Stephen's part and also after this in Gaurang's part, we would like to talk about the mass market expansion potential. Compared to last year, Stephen, who can talk about the mass market. And of course, for the China market opportunity, we would like to talk about that during this Q&A session. Maybe later in Gaurang session, I think you can talk -- you can listen to him, present them or you can ask a question directly to him, maybe. But Stephen, can you go ahead with...

Investments in the mass market in China, there's quite a few end markets that are always developing in China, right? Industrial has been growing in China, new customers popping up to serve the market consistently in the last couple of years. Now on the AI infrastructure side, you have many new players in every region, but also in China. And so our expectation is that we will start to penetrate these customers and catch them very early so that we can grow with them. okay? China is behind the U.S., maybe by a couple of years in AI. The good news is, is that the products that we're developing for the leading customers now will serve that market very, very well. So it's just a matter of making sure that our teams are focused on developing the AI infrastructure market.

[Interpreted] Next, Takayama-san from Goldman Sachs.

[Interpreted] This is Takayama from Goldman Sachs. I have a question for Shibata-san and also Shinkai-san. So 2 questions in total. First, when listening to your presentation today, Shibata-san had a tone of confidence. It is not just about the current demand being strong, but the competitiveness and positioning in years to come, I think you have confidence in them. First of all, whether this is an accurate understanding or not is a part of my question. And when it comes to software-defined vehicles and infrastructure, focusing more on control and CPU and [ MPU ] in addition to your strong position there, you are well prepared, I guess.

And you are ready to deploy. That is why you think that your competitiveness and positioning will be better going forward. So I just wanted to know if my understanding of your confidence was correct or not. And when creating value, you need to be able to deliver. So supply -- path to supply is key. You mentioned this previously in the call, but you need to quick -- move quickly, especially for automotive. But when it comes to your supply capacity, have you overcome your bottleneck? So some updates there would be appreciated.

[Interpreted] When it comes to power of supply, if needed, Steve will supplement. But this is a challenging task. In our case -- and Zaher will explain this later today. But fortunately, we are fab light or maybe hybrid is a better term right now. But our own production capacity, combined with our partners' capacity is something that we are working with. Of course, it goes without saying that our production capacity is for ourselves to use. So there is a limitation. But OSAT and foundries, they have more partners. So they tend to have more accommodation capability in terms of capacity. If we want to expand in a short period of time, we need to pay more. But that could mean that if we pay, we can launch in a speedy manner.

So when you see a short-term demand increase, this hybrid is more suitable. But down the road, we need to enhance our own in-house capacity, as Shinkai-san mentioned. So we won't increase just in a single year and then decrease but we will enhance CapEx that we have enough in-house capability. That is regarding your question on our power to supply.

And regarding my confidence, the fact that our confidence is building up is supported by our clear visibility on our future. If I were to try to explain this more thoroughly, we have the first stage of rocket and the third stage of rocket. But for the third, we do have a lot of tools. And if we continue on this path, we will see a bright future. So the confidence comes with the fact that we can go as planned in this direction.

But for stage #2, physical AI. This is something that we need to focus more on because we have strong competitors. As Vivek mentioned, against our existing strengths, we need to build up more to compete. Whether I have the confidence that we have a winning strategy? That is not the case yet. But I now have a clear vision on what needs to be done. In that sense, maybe I am being optimistic overall. That is how I feel. But Steve can talk about the supply factor, maybe more specifically.

Sure. I think first stage rocket on the infrastructure side is the most critical right now and the most aggressive growth. I do want to point out that with the investments that we've already made in the hybrid model. You can see in our results, the significant growth of our AI revenue, and that comes through hard work, investment and strategic partnerships and that will continue. While we may not catch up to the unprecedented demand in infrastructure until 2027, we will continually increase and our output will be significantly more.

And like Shibata-san mentioned, our ability to use a hybrid model will help us to hold our suppliers accountable so that we can sustain an aggressive cost structure to ship into the market as well. So with our plans, I am confident that in the next year, we will catch up the demand.

[Interpreted] Another question for Shinkai-san. So you have a broader definition of AI this time around. When listening to your presentation, I had thought about how much in numeric terms are you going to see a growth? Time-wise, you talked about fivefold but maybe you are looking into more growth. And I just want to know how is your company structured towards that growth. And regarding the ForEx, if it becomes JPY 150 per dollar, then there is going to be about 5-point difference. But now you've reached JPY 160 per dollar. So what kind of range should we foresee going forward?

[Interpreted] So regarding the AI revenue definition, we previously focused on digital power and the memory interface or core AI. That was the focus and the timing business. We reviewed this, and we have a new definition, which is wider or broader, AI plus data center. So GPU and CPU, digital power and memory interface. So it's a wider definition of coverage. And regarding the timing business, which was divested, this will be excluded. That's the overall definition change.

And regarding our growth rate, each companies have their own ways of looking at this. But as I showed you in my slides, in the diagram, that was based on the understanding that the market in 5 years' time will grow at about 40%. Towards that end, we will grow even faster than the market. So some plus is based on that understanding.

And second point, ForEx, you have rightfully understood our assumption, the sensitivity range is as you spelled out. So it would have an impact on the operating margin. Mike, please.

[Interpreted] I don't have the numbers off the top of my head, but probably twofold, 1.5x more or 2x more in the current situation.

[Interpreted] Now moving on to the next question, BofA, Hirakawa-san.

[Interpreted] Hirakawa from BofA Securities. My first question. Regarding R-Car recently, RAV4 adopted this and other OEMs, you have a pipeline for them. So I think the business is quite favorable. And today, you talk about the business model, you have MCU and SoC. So that is the strength of your business model including a time-to-market advantage.

So once again, I would like to ask this question. In RAV4, when you were adopted, Renesas R-Car what was the functional benefit from the viewpoint of customer that became the reason for them to adopt? Is it the superior power consumption? What is the strength from the customer viewpoint regarding R-Car? And regarding the chart, the R-Car revenue in 2025 in the start year, the revenue, how much was it as a result of R-Car ? That's my first question.

[Interpreted] Vivek, can you answer the question?

So I think you had 2 questions or more. I'll answer it. So thank you for asking the question. So as far as our car benefits are concerned, Gen 4 and Gen 5, as we go from one generation to the next, we try to add more and more benefits to our features and performance. But at a high level, where we differentiate is power consumption, right, number one. Number two is because we are an MCU supplier also, we have intrinsic information and knowledge about real-time performance, low latency performance. We are able to take those concepts and also implement that on the SoC side. So power consumption, one, low latency, better real-time performance and then executing to the specifications, other specifications the customer are asking for. All these come together to why a customer would adopt our product for Gen4.

On Gen 5, it is a broader product for centralized compute for SDVs. It has a significant amount of compute capabilities on CPUs, on AI processing, NPUs, on graphic processing. It is done in 3 nanometer. So it's designed to integrate a lot of features in a smaller monolithic die as well as provide low power consumption in terms of when you look at frames per watt and AI TOPS per watt, we can get to lower performance. As I mentioned, we don't need in our SoCs an external MCU, safety MCU because we know how to do safety islands. We bring it into our SoC itself. So that allows us to do many things, how we get a workload and distribute it to our application processor versus our real-time processor because it's done within the same chip. So we're able to show a lot of different improvements in performance and educate the customers on what we can do by having that kind of integration.

We also have IP in the next generation, what is called Freedom from Interference, which allows ASIL-B islands, ASIL-D islands, different type of safety and security levels to be integrated without them interfering with each other. That becomes important in the future of SDVs because you will see a lot of ADAS, IVI coming together. And their safety, security, real-time performance is not the same, but we are able to handle that with the architectures we are bringing out to address some of these trends that are coming into the market. So those are high level -- I hope I answered your question.

So on the revenue side, we just started with RAV4. So revenue is small in the first year in -- but it will grow as more and more adoption happens in the subsequent years. We also expect in the next 3 quarters, Gen4 to be adopted outside Japan with another leading OEM. So that would also help increase the revenue. So we are building more OEMs behind Gen4, but revenue is small in tens of millions in the first year, but it grows over time.

My follow-up question for the second part. Yes, the reason I asked that question is that I'd like to have a sense how big the sales in 2030. So if the [ JPY 1 million, JPY 5 million ] that makes a lot of difference.

So 2030 specifically is your question. We will see continuous ramp of Gen4. We started now and it will grow as more vehicles adopt it and more OEMs adopt it. But also, we expect the beginning of our Gen5 launch also to happen around 2030. That doesn't mean we will ramp very quickly, but we'll have customers, and then they will ramp in the subsequent years with more and more volume. So we see a transition from Gen3. Gen3 is actually getting used more than we expected. Gen 4 is ramping up and by '30 Gen 5 will start kicking in, but it will also take time to ramp up.

[Interpreted] Any other questions? Yamasaki-san from Nomura Securities.

[Interpreted] Yamasaki from Nomura. I have 2 questions. First is regarding gross margin target. You saw a chart and talked about product mix and price. Those are the 2 upside factors you explained. Regardless of the exact figures, I just want to understand your way of thinking. What kind of product mix shift would result in a margin increase? And regarding your pricing strategy. So if there is a tight supply situation that is factored in or foundry cost is going to go up, are you going to pass that through or maybe change of product mix will directly lead to your price increase. So what is your take?

[Interpreted] So Shinkai-san will talk about the product mix. And then regarding the pricing strategy, Steve will take that. And if supplementary explanation is needed, I will jump in. So, Shinkai-san, please.

[Interpreted] Regarding gross margin bridge, it has been an illustrative chart and mix and price has been dealt with together. But regarding product mix, analog products will be at the core. Segment-wise, physical AI intelligence at the edge. These are the segments covered. These are expected to grow, and the product mix will improve as a result. In other words, within the infrastructure, digital power, automotive will be a less and comparatively speaking and physical AI and Others will be higher. So data center related infrastructure will be high, but power-related segments will be low. That is how I think about the situation.

[indiscernible] I would call -- I would take a look at the market. And almost every semiconductor company is experiencing increases in raw materials, all the way through fab and assembly and test. And you see many semiconductor companies who have increased price 1 or 2 times in the last year. Renesas will do the same in some areas, but we're going to do it strategically, okay? And what I say that is, we will work with our customers to make sure that we don't lose share and that we continue to grow.

And we do it in areas where maybe there are older legacy products that become a bit more expensive. But also make sure that we are balancing where we increase price to be competitive with our competitors as well. So it's not as simple as just increasing pricing because of cost. So we evaluate all those factors. But at the end of the day, that is absolutely something that we will do and continue to evaluate moving forward.

[Interpreted] In the short term, because of the demand and supply balance, this could trigger the price adjustment. And in terms of cost, similarly, we need to make adjustments. But when it comes to figures, mass market and the digital alike ASP needs to go up. This is the mainstream or this is the most effective way. Large sockets and large customers in the vertical. These deals can go up and down. This is the tendency. So trend-wise, we will improve our mix, ASP and margin. That can be done by changing our engagement model with our customers, deal with more customers that means in terms of engagement. I think that is the way to go. This will take time. And Shinkai-san chart reflected this kind of mindset.

[Interpreted] Second point. This is regarding the core of MCU. So your own IP to arm and the risk highway, you are expanding. So how are you going to use core by application -- or what kind of mindset is behind the changing way of usage for core? And Arm is entering into CPU market. How do you see this move?

Okay. Vivek?

Again, thank you for your question. I think your question about how do we deploy our cores because we will have multiple cores into the market. So a great question. We have been very thoughtful about our core strategy. We had proprietary cores based on RH850 that were highly power efficient, had great latency and real-time performance. And a lot of our customers have developed software and systems around them, and they want to continue using the RH850 core. For those customers and where we see RH850 benefits in performance, we will continue to expand that family.

Having said that, there is a decent group of OEMs and customers coming up, they want to stay with standard cores and not adopt proprietary cores, partly because of multi-sourcing also. If you have Arm-based cores and they want to have at least 2 leading suppliers and use Arm cores, unify their software capability to integrate with these suppliers, those customers prefer standard cores, and that's why we are introducing strongly our Arm-based families across the scale of products.

So the other important thing is when you introduce a family, you have to make sure customers get a range of products, not just a high-end product or just a middle end, they are expecting to have a full-scale portfolio to adopt. So core strategy is one, making sure it is a scalable strategy so that a customer adopting a certain core proprietary or standard has a full set of solutions in play. And then RISC-V is being monitored and opportunistically looked at. There are different market sentiments and interests right now. But we do believe at a certain time, it will have a role to play in this whole MCU architecture, of course, and we'll be very well prepared to address that also.

[Interpreted] So regarding CPU chip manufacturing for by Arm, what is your take on that, the development by Arm?

So it is well-known that Arm who used to be our IP supplier is also making products and some subsystems that may eventually compete with their customers today. That is what it looks like is happening. We are not seeing a significant element of that in the automotive side. It doesn't mean that it may not happen, but they are focusing on non-auto applications. Maybe eventually, they will look at auto also, but we don't see a lot of that activity happening today.

Number two is in the automotive space, besides the ARM cores, there is a lot of what is called routing latency requirements that are coming in zonal. There's a lot of reliability and temperature requirements that are coming in auto. The safety requirements are also increasing. So the solution is just not the core itself, but your capability to deliver reliably functional safety, right temperature, routers and AI performance latency to the edge. So we need to continue to make sure we differentiate on those levels and competition will also try to proceed and arm could be 1 of the competitors in the future. But in auto, we don't see them as active today.

[Interpreted] We are receiving other questions, but we have already overrun the expected time to finish. So with this we would like to finish the Q&A session at this juncture. We will take an 8-minute break, and we will resume the session at 11:00. Thank you.

[Break]

[Interpreted]

So we are starting the session. The first presentation is Mr. Gaurang Shah, the Vice President and General Manager of Embedded Processing. And also the Vice President of R&D and Digital Industry Software and Digitization; Leigh Gawne from Altium will give us a demonstration.

Thank you for joining. My name is Gaurang Shah, General Manager of Embedded Processing at Renesas. So today, I'll walk you through our digitalization journey. Fundamentally, the way we are changing the way we go to the market and unlock the next phase of revenue growth. The embedded market is at an inflection point. Demand is accelerating with edge AI and connected devices, but the traditional field support model doesn't scale. This clearly creates an opportunity and whoever scales the engagement digitally and with the least friction will win.

Our response to this challenge is a platform-driven model that expands reach and deepens engagement with our customers. The goal is 4x the customers and 3x the revenue for the business by 2035, powered by platform economics and recurring growth. So as I go through the presentation, please keep in mind what Shibata-san mentioned in his presentation, beyond hardware and how do we grow into mass market. So this is the scale. This is the embedded processing business and the scale and balance behind our business. We operate across three silicon pillars: microcontrollers, microprocessors and connectivity. Our MCUs are clearly tiered. RL78 Family is for cost-sensitive application with 16-bit, RX for industrial and real-time control. RA, our new fastest-growing platform is driving edge AI.

On the next compute class, our RZ microprocessors extend us into the higher compute zone for applications like vision and robotics. And our connectivity portfolio enables complete integrated connected solutions. Underneath the silicon platforms, we differentiate with deep application-level technology. Artificial intelligence, machine learning, motor drive, HMI, safety, security and energy efficiency are driving very strong design wins. The result is a very well-balanced business across products and end markets.

It gives us the resilience and the multiple growth vectors and really forms the foundation for our platform strategy. So what are the market forces that are really making this the right time for launching a platform? There are four trends that make it the right moment. First, edge and physical AI. It's driving local compute and expanding our addressable market into robotics, humanoids and autonomous platforms. Second, post-COVID, governments are mandating localization of semiconductor ecosystem. That localization drives regional ecosystems that requires faster innovation. And that's the new growth vector for us. Third, rising regulation. Safety and security are no longer an optional requirement. They are mandatory, where we need to add those components and those technologies to our core compute platform.

Fourth, edge AI is increasing system complexity. As systems become more intelligent, integration becomes harder and products become more software-centric. All four of these forces collide into one massive bottleneck, rising developer complexity or user complexity. The company that simplifies development experience will win market share, and that's exactly what Renesas 365 delivers. So I'm going to walk you through the developer's pain point. And when you have a user trying to design with an embedded system, what are some of the pain points?

This slide shows where the value is lost today and how Renesas 365 unlocks it. The first phase is ideation. This is where the engineer comes or the user comes, looks at the data sheets, and that process is extremely manual today. The tools, the data sheets, the reference designs are all on disconnected systems. And the user is trying to make that decision using incomplete information with gaps, and that can create missed design wins. And the next is the development is extremely slow. Engineers are spending a lot of time in low-value tasks, such as trying to figure out how to use low-level software stack onto our devices.

This delays products and delays revenues. The last bit is after the product, the value stops. We sell the product, we deliver it to the customer, and that's where the journey ends. The products ship and disconnect and there is very little ongoing engagement or lifecycle management or recurring revenue. The core problem through these three development cycles is there is no continuous digital connection across the life cycle. Renesas 365 fixes this. It connects every step from idea to deployment, driving faster growth, higher productivity and recurring revenue.

So what is Renesas 365? It's a turning point in how we make money in embedded systems. Today, the tool market is large, about $15 billion, but super fragmented. No company owns the full workflow, and that's our opportunity to capture platform-level value. And we do that across three steps. We first AI-assisted ideation. We make that manual process work with AI, where project starts and it makes the user's journey a lot easier at the beginning and helps us win more designs. The next is model-based realization. It speeds up development, improves efficiency and increases customer lock-in. The last bit, which is untapped, is cloud-based realization or life cycle management. It enables ongoing services and recurring revenue.

What makes this powerful is throughout these three steps, there is a digital thread. It connects every step from idea to deployment. And once customers build, validate and deploy on the platform, switching becomes very hard, moving us from one-time chip sale to a recurring platform revenue. That's the idea behind 365. So now let me walk you through the first phase of the first pillar of Renesas 365. And it's the main driver for customer acquisition and customer growth. Today, the design starts manually. If the developer doesn't know our products or doesn't know the product family, the wrong product family gets chosen or we don't get considered at all.

And that's a massive lost opportunity for us. We changed that. Developers describe what they need in the electronic system designer, which is at the heart of Renesas 365. And the platform quickly generates a validated design using relevant Renesas products. Instead of choosing from hundreds of products, it narrows it down. This makes it much easier for a developer to start with us and grow with us over time. Two things make it sticky. It's a multi-domain view across hardware and software. And it's a digital context that carries the decision forward. The result, we drive towards our vision of 4x the customers with much greater efficiency.

This is the heart of Renesas 365. It's model-based realization, and this is where the strongest lock-in for our customers happens. We turn the design intent into a working system much faster at scale and with a lot higher efficiency. Today, the workflows are very fragmented across hardware, software and tools. 365 brings this together into one platform. The user defines the intent of the system and the platform automates lots of key decisions, reducing manual work and speeding development. There are 2 key points. This is the strongest lock-in. Validated design choices are built over time and makes it very difficult for users and customers to switch out of our system.

And it's a very scalable model. We don't have to scale people to be able to gain more customers, and that's what enables mass market. So we can grow our customer base without needing to scale FAEs or marketers, and that's a very big plus. So this is already alive in our RA product family. It was launched at Embedded World in March 2026, and it will be expanding across the product portfolio. The last bit or the last pillar, which is the cloud-based utilization, and this is where higher-margin recurring revenue comes from. In the past, our relationship ended when the product shipped. Now it continues across the full life cycle.

Capabilities like OTA update, fleet management, security and traceability are becoming essential driven by connected devices and regulation. Customers will get today these services from third-party vendors or other companies. But since we have the digital context throughout the journey of the customer, we can deliver these services with a lot more efficiency, and that's what we intend to do as their partner. The impact is very clear as a result of this. It's recurring revenue from the installed customer base. It's a much stronger customer lock-in throughout the journey.

And it's -- we also collect real-world data from our customers so that we can improve our next products. This execution is also underway. We've already launched OTA solutions on the RA platform, and we'll be expanding across all of the platforms and the devices that I talked about. So now we've covered the strategy, what is Renesas 365 and what the platform enables. Now let's turn our attention to execution. The next section shows how we scale 365 through our road map, through our go-to-market and through our organization, through the organization at Renesas, the power of the organization that we have. As you go through it, please focus on three questions. Is the road map credible? Is the go-to-market targeted for growth?

And are we built to execute? So let's first talk about the evolution of the road map. Today, we already offer a strong developer platform. AI-assisted design, model-based workflows and cloud development is already in play on our RA platform. We are already in the market, and we are getting early traction. Next, we want to move up with pre-built validated subsystems and blocks. This makes the digitalization beyond component to a subsystem level. And that makes it much easier from selling components to enabling subsystems. Long term, this is our long-term vision. We want to build an open ecosystem.

Partners, third parties, maybe even competitors who can add IP and solutions to our platform, and that creates a massive network effect. At each step, our market expands and the platform gets stronger. Our goal is to make Renesas 365 the platform of choice for the embedded industry. What kind of customers are we trying to target with this platform? These are the three different personas of customers that we want to focus on. We first have the traditional OEMs, our current customers. Their challenge is agility. They are focused on speed and competitiveness, and we help them move faster with our model-based design, with our electronic design, with our digitalization, increasing our share and content per system.

Then there are the new-age companies where for them, they are trying to compete with the traditional OEMs and where the speed to market is critical. There, we want to act as the virtual Tier 1 using AI to win the designs quickly. Last but not least is our emerging markets. I mentioned about localization post-COVID, and that's driven by growth, localization and regulation. We want to enable these local players from turnkey solutions to customization, expanding our reach. In essence, we've got the three segments that drive growth, but it's one platform. We deepen our engagement with our current customers, we acquire new customers, and we expand our geo presence.

This is an eye chart. I'm not intending to go through every block, but this is the execution of our road map through 2028 across 4 layers: solutions, workflows, developer experience and platform. Today, the foundation is already in place. RA is platform-ready. Key workflows are live and the core system, the ESD, the electronic system design and the digital thread is operational. In 2026, we broaden. We're going to add more devices, RX, RL78, RZ, RH850, all of the capabilities of Renesas plus our analog and power components with -- essentially with AI-driven workflows and a unified data model with open APIs.

By 2027, we are going to scale up, expanding into higher complexity devices with subsystem solutions and full life cycle management. By 2028, we will be completing our vision. We will be adopting agentic design and agentic flows that really makes the platform a lot more active. It makes intelligent recommendations and legacy migration will happen at scale. Each step builds proven capabilities with AI as a step function accelerator throughout our journey. So what -- how are we going to leverage Agentic AI as the future of Renesas 365? Our intention is to make the platform active, not passive. It understands where the developer is in the process and guides the decision in real time without slowing them down.

It also helps developer get started faster by understanding the intent of the developer and setting up the environment and generating working designs from the very beginning. Importantly, it moves us up the stack from component-level tools to system-level guidance, bringing hardware, software and designs together. This is the key transformation from a silicon supplier to a platform-driven company. So I gave a lot of great ideas, Renesas 365. Are we really set up to succeed and execute within the organization?

So the platform sits at the intersection of three key groups: software and digitalization, product groups, which are all the different business units and the user interface group or UX led by Ivo. Together, these 3 groups will deliver all the layers that we need for the platform. Developer experience will be provided by SWD. Product building blocks will be given by the different product groups and the open ecosystem subsystems will be driven by the user interface group. So this is not a side initiative for us. This is at the core of our company. We have a very clear mission, and there is a lot of accountability that is being driven from top to bottom. So with that, I will summarize my presentation and add with four closing points. First, AI growth is a tailwind for us.

We are very well positioned for edge and physical AI with the right silicon and a platform that makes adoption easy. Second, there is a clear advantage. 365 reduces time to design, improves retention and builds strong switching costs. Third, differentiated IP. We have a very large portfolio of our IP-enabled software-defined systems across artificial intelligence, motor control, security, connectivity, power. These are all the modalities that we are looking at in terms of developing our platform and our IP. First, the execution is in place. We have strong aligned investments, a very clear road map and early traction with 365. Overall, we are shifting from product sales to a platform-driven recurring model, driving long-term growth and shareholder value for our shareholders. Thank you. And now I'll invite Leigh to give a demo of Renesas 365. Thank you.

I will do my best to bring all of this to life with a real demo today of Renesas 365. Okay. All right. So what you're looking at right now is a real-life Renesas 365.

This is in the browser, okay? And this is effectively where users or developers will come to, to get started on Renesas 365. The great thing about it is that it is available anywhere, any device, any place, anywhere in the world, you can come and access this. So immediately, you're being freed from the shackles of those point tools, which are generally buried or located somewhere else, a lot of the time inaccessible. So it's a very accessible platform. What you're looking at here is what's known as a workspace, okay? And this brings together all of the different design assets in a design. And it also allows people to come together to collaborate. So all of those stakeholders in the value chain can come together and work together in one digital place.

There's a few different ways you can get started with Renesas 365. If you're an existing customer, you could connect your existing project to the platform. You might also come in and want to explore some of our technology, some through our evaluation kits or software projects. And the other way is you might have some idea. We want to actually get started and maybe bring that idea to life from scratch, so you can go ahead and do that here as well. Now as I scroll down, what you're looking at here is what we call solutions.

And solutions are essentially things that contain a home for all of the different kind of design assets that come together on the platform. I've got a bunch of them in here today, but we're going to take a look at one of them specifically. So we're going to jump into this balancing robot solution. So this is a real balancing robot that we built. You can see here on the left-hand side, this big tile is the system design. I'm going to jump into this in a moment, talk a bit about what you can do here. This is where ideation starts.

On the right-hand side here, we've got other tiles, and these represent things like hardware designs and the actual software projects themselves. And if we scroll down a bit further, you can even start to see devices that come alive on the platform. This is real instances of these devices that have been built that we can deploy and manage software on. So that's the kind of operational life cycle management part of this. When you start a new solution, we've also got the ability to bring in reference designs. So a lot of the time, as Gaurang was saying, these things are fragmented. Can be difficult to go and find the assets that you want to actually use and bring in and start the design from. But in Renesas 365, we make that really easy.

So for example, if I want to find all of the evaluation kits for our RA series of microcontrollers, I can just scan them here, click import and they're brought immediately into my solution. Similarly, with software projects, I can do the same thing. So this makes it extremely seamless in terms of starting to leverage all of the design assets that Renesas provide today, making it very easy for you to get started with designs. So let's jump into this electronic system designer because this is where, as Gaurang mentioned, this is the heart of things and where you get started. Most designs start with some block diagram, some conceptualization, some idea of what you're trying to do.

And so here, much like if you're using, say, a Visio or a Lucidchart, you can just start effectively free drawing what you're interested in and what you're trying to achieve. This is the beginning of capturing system design intent. But of course, in Renesas 365, this is much more than just a graphical diagram. This isn't just a bunch of blocks and pictures. The platform itself actually starts to understand what you're trying to do. And what this means is that -- and I'll show you this kind of in action is that as I'm drawing these things, and this is a diagram, obviously, that's been built up a bit. So there's a few things in here.

But I can start to say click on the things inside the diagram. And you'll see on the right-hand side, this panel starts to react to what I've got selected. It's reacting to my context and what I'm interested in and what I'm looking at. Now this means that the platform can actually start to surface design documentation, design assets, things that are relevant to you in helping you build things. You think about how people do this today, it's really up to them to go away and start finding these things, searching through websites, trying to find links and things that might be relevant. With the platform, it starts to come to you based on your context.

So you can start to see the intelligence emerging here. The other thing that can do, I mean, it gets much deeper than that. You'll see up here, we've got this little thing in the top right that says we found 595 matching parts for you. Now what the system is doing is that as I've described my design intent here, I've got this block with a few different interfaces and some connections. In the background, what it started to do is look across all of our product portfolio as far as the RA series goes today, and it started to come up with devices that actually fulfill those requirements. Now doing that today is a very manual thing to go and do.

I've got to go and take that intent, search through wherever I've got to search through data sheets, so on and so forth and actually find things that might fulfill my needs. But here, we actually do all of that completely automatically. Now we not only do that automatically, we do it across several hundred of those devices in one go. And if I want to come in and change those requirements, say, for example, I want to increase the number of UARTs that I have on my design or whatever it might be, we will go away and evaluate all of those, hundreds of them just within a few seconds and actually come up with, say, a new set of devices that fulfill those requirements. And this is really, really powerful because it means that individually, users don't have to go away and kind of do that essentially one by one.

Doing that one by one would be very laborious. It would take quite a lot of time ordinarily. But now the system is going away, and it's doing that completely in the background. So in a few seconds, that will come up. and I'll get a list of all the devices that are essentially compatible with those requirements. And on the right-hand side, you'll see we've actually gotten the configuration of that device. It's not actually just searched to say, well, this might work. It's actually come back and said this configuration will work for your design.

And that's really, really powerful because this is the deterministic nature of this model-based approach to design. So now we've got our high-level system design here, our robots looking like pretty reasonable. We've said from a very -- from the top what we want this to kind of go and do. We now get into the kind of development phase of this. So the development phase would be, for example, actually implementing hardware. So again, the whole platform connects not only the system design part, but the hardware design and the software implementation together. So what you're seeing here, if I select this thing surrounding this blue block is actually one of our evaluation kits that I can bring in directly into the platform.

And that evaluation kit, I can click on this open project here. And that will actually take us to, say, the actual model of the evaluation kit directly here inside the browser. I get this nice 3D visualization on that evaluation kit. I get all of the reference material supporting that. So this is all the schematics, layout and all those kinds of things. And again, it gives me a great starting place from which I can start my design from. Similarly, I can bring all of my custom hardware into this as well. So this is a custom board for that robot. And that, again, is connected directly into the platform, as you can see it here.

Now let's just jump back out real quick. It's not only the hardware side of things, but it's the software side of things, too, that's also connected into the platform into the system designer. Now this is where it gets really exciting because what we can do, we can take that high-level intent that we've already kind of work put together, the systems already, say, understood what device I want to use and how I want to use it. And we can actually now generate software for the user to actually start building their end application.

And going back to what Gaurang was saying, this is really important because engineers are not now spending time doing all of the things, which I say is the grunt work, the kind of boilerplate things. The things that's not particularly interesting or value-add to them, we get them past that much quicker, and we get them to focus on what they need to do, which is building their application and building that quicker. So the whole thing makes for a much nicer experience. It makes it much faster. It makes it much more enjoyable. We want people to come and use and want to use what we do and what need to use at what we do. So let's just say, for example, we've completed this implementation now. Our software is there, our hardware is together.

I actually want to go and say, deploy this either onto an evaluation kit that might sit on my desk, maybe it's a prototype that's in the lab. It could even be something that's out in the field and later on, even production devices. And this is where we've got the full kind of operational life cycle management part in the platform. So I'm just going to go back to our solution here. And you can see I've got a few different devices and connected three of them here. So I'm just going to switch to one of those over here. And you'll see that -- this is one of our balancing robots, and this defines essentially information about that robot. That robot can report that telemetry to the platform.

You'll see that actually in a really nice demonstration a little bit later with the robotic hand, how we're actually not only bringing back, textual telemetry, but also even things like live video feed and things like that can also be brought back into the platform. And then from here, we can also start to do things like deploy software directly. So if that thing might not be accessible, it might not be sitting next to me. It might be out in the field somewhere or something like that. We can manage all of that from the platform as well. So I appreciate this is something of a whistle-stop tour, and there's a lot within the platform.

So it's difficult to kind of compress all of this into 10 minutes. But hopefully, it starts to give you guys some kind of understanding and an insight as to how we start to tie this digital thread together and weave it all together. So thanks very much for your attention and listening today. And if you'd like to see some demonstrations after this, I'd be very happy to talk to you at the back afterwards. Thank you so much.

[Interpreted]

Vice President and Head of UX, Ivo Marocco and Vice President, General Manager of Analog and Mixed Signal, Peter Jenkins, will present. The floor is yours.

Hello, everybody, and welcome. My name is Ivo Marocco. I'm the Head of UX for User Experience at Renesas. So today, after looking at the growth drivers of intelligence at the edge as one of our secular growth vectors for Renesas, we will dig into humanoid robotics in more detail and particularly why we believe this market is so important to us and how we're addressing it today. We will look into some of the challenges, technical challenges and how Renesas today is looking to address them and the differentiation we bring with our portfolio and especially what we're going to do in the future to establish ourselves as a credible and reliable player in this space, of course, with the intent to grab a significant part of this market share. So as I said, let's take a quick look at the composition of revenue that is supporting intelligence at the edge and physical AI.

That are key growth drivers for Renesas. And the contribution of revenue is encompassing edge AI, smartphones, IoT devices, robotics and humanoid robotics. And our growth is actually supported by four foundational drivers. The expansion of intelligence is increasing demand for processor solutions. These are including, of course, microprocessors, microcontrollers and SoCs. The increasing system intelligence is also driving much more content in analog connectivity and sensors. We see also expansion of power and energy management is becoming critical. And this is due, of course, to the emergence of physical AI, the proliferation of IoT devices. And this is, of course, including PMIC, battery management and GaN solutions.

Lastly, with our platform approach that we have just seen, basically, we are combining components together with software, making the solutions stickier, but creating also more designs, more solutions, go-to ready solutions that enable partners and enables also customers and users to scale and adopt faster. So let's take a look -- a closer look at physical AI and human robotics. So with emergence of physical AI, intelligence is actually changing in the sense that it's interacting with real world is much more than a compute problem statement that requires pretty much low latency. It is an intelligence that interacts with the world, so has to learn from it and respond to it. And in this way, basically, what we are observing is an increased complexity of how to solve this problem.

And this is basically pulling more sensing, more compute, more power management, safety and reliability. All of this has to be dealt with in a very harsh environment. So robotics and particularly, we will see also humanoid robotics is the embodiment of such complexity. And of course, this is representing a shift or is driving a shift I'm sure you all are aware of what the interaction with machines will mean moving forward. But this shift actually is also opening up a full-stack silicon opportunity for us.

So this is where the excitement comes from. And I think we all believe, of course, we are very well positioned to address these challenges. So let's dig into the market, why we believe the market is attractive. Let's also take a look at the challenges and the position we have to address the challenges today and what we're going to do in the future to basically continue to gain the momentum and the market share. So clearly, with the emergence of physical AI, the long-term opportunity is created. And we're looking at here, robotics as one of the segments that is benefiting from it.

And within it, we can see also how the humanoid segment, the humanoid robotics segment stands out in terms of attractiveness. And this is where we want to play. This is where actually our strategy is aligned with the trend. We will go through the reason why in the next few minutes. But this is creating really a meaningful and this transition is really creating a meaningful unique opportunity for us to capture. So humanoid robotics should not be seen as a single product, right? It's really a composition or an aggregation of connected system domains that each of them has their own challenges. So brain and motion, sensing, actuation and motor control and power, power management, each of them have their demanding technical requirements. And in each of these domains, Renesas already plays a fundamental role.

Let's take, for example, brain and motion. Perception data needs to be processed locally and then needs to be translated into deterministic real-time control for rapid decisions. But where is the challenge? The challenge is that there are very tight limits from a power management standpoint, from a compute standpoint, low latency standpoint and, of course, memory. So here is where we have a fit already in offering a scalable portfolio of processors, having already experienced in motor control and progressing in development of motion control solutions. We have also connectivity and a long history of functional safety that we can leverage.

In sensing, low latency is not only the name of the game, but also accurate -- very highly accurate data acquisition that needs to be synchronized and turned into actionable intelligence to support real-time fast decisions. And Peter Jenkins will dig into this, showing our portfolio, our strategy and especially above all, our differentiation. When we come -- when we talk about actuation, for example, which is another of the most relevant challenges or most relevant subsystem, the focus has to be around precise and safe motor control for all the joints through the robot. So we do it through motor control MCU, sensors and power devices.

These are all connected together in a feedback loop really like a single system. And this is a natural fit for Renesas given the experience and given the long history of working in applications, both in the industrial market and automotive market where we solve these challenges already. And lastly, in power management, system efficiency is really critical. I'll touch this in a second about what evolution of human robotics is really meaning. But of course, you can imagine runtime for battery is going to be extremely important. So the ability of addressing these challenges with intelligent power, intelligent battery management, really taking care of handling thermal performance and heat dissipation and especially I'd say, very important, enabling and keeping the overall delivery of the power throughout the whole architecture is imperative for the functionality of the humanoid robot.

So basically, as humanoids become more capable, this becomes more important and also in battery management and in power management in general, we do have a strong portfolio and a way forward. So today, basically, with all this, we are in the position to cover roughly 30% of the overall Bill-of-Materials for humanoids. And we are doing it through all the solutions that I mentioned through the ability of providing safe and accurate control systems and system-level solutions ready.

As a result of it, we actually have more than 100 customers globally with -- are actively engaged with us today. But just to make sure that I make my message clear, where is this growth coming from? What is the reality behind this? So the emergence of physical AI is happening, but the evolution is something that we're going to witness very soon. And we see -- we will see this even though there is a very strong price pressure on each component in the semiconductor world. Let's take, for example, humanoid in 2025 or even, let's say, today. They are very early stage. There are basically maybe around about 30 joints throughout the overall robot.

There is limited functional safety and the ability of using hands is very basic as well as the fact that the intelligence is very much concentrated in the brain. And as a result, they can operate very well, but in a very controlled environment. Now fast forward 10 years from now, okay, 2035, for example. And we can foresee the number of joints going much higher. So maybe 40-plus that are safety-enabled joints with more sensing capabilities, more integrated position, force and torque sensing. Hand will definitely develop and evolve from just bare dexterity or grippers to the ability to interact with the world around. And this is through an increased number of degrees of freedom, probably around about 20 degrees of freedom and more rich sensing.

And intelligence also, we will see becoming more distributed. So again, going from just the brain with architectural development of different type of way of doing it, intelligence will most likely also be distributed in joints and limbs. And as a result, this will bring better latency, better scalability and safety. And actually, this is the reason why with the growing complexity and evolution, the semiconductor content will expand.

And this is the reason behind the fact that we are so interested and we're also already positioned to go after it. So this is why portfolio breadth matters. This is why the position we have today is already strong. We offer end-to-end coverage across motor control, actuator, network and safety and with high product solutions that are spanning from compute power, analog sensors and so on. So as a result of this, we expect and we can claim confidently that we could go from a 30% BOM coverage today to a 70% BOM coverage in the future, positioning us to catch a disproportionate amount of market share. Having said that, I would like to now pass on to Peter Jenkins for digging into the sensors and analog portfolio.

All right. Thank you, Ivo. My name is Pete Jenkins. I'm the General Manager for the Analog and Mixed Signal Product division. At sensors, our -- at Renesas, our sensors portfolio is based in a strong automotive foundation. We continue to be ranked #1 with over 30% market share in automotive SSC solutions, giving us a solid foundation in future revenue growth and market knowledge. New product intros consisting of position and impedance sensing are winning designs at leading EV manufacturers and two-wheeler companies across the globe, particularly in the U.S., India and China. Targeting motor control and sensing has been key to our success and will remain a key focus area for us in the future. However, looking to tomorrow, our fastest growth will be outside of our traditional expertise and revenue lanes.

Renesas is expanding its focus into new secular growth areas and among these, advanced mobility, industrial AI and robotics, which are natural fits for our existing portfolio and maximize our technology advantages and key customer relationships. This evolution reflects a natural shift as the markets of automotive and industrial sensing start to merge. It brings Renesas to the forefront as a key supplier and innovation leader. Just to name a few examples of this, leading robotics manufacturers out of India are evaluating our solutions for use in welding applications and warehouse autonomous robots, while U.S.-based precision surgical companies are evaluating our new solutions for robotic-assisted surgery.

When looking at future trends, supporting robotics and humanoid advancement, our automotive expertise carries over extremely well into this emerging market. From safety and reliability to EMI-hardened in tune solutions, Renesas is well prepared to address these development needs and plan for future advancements that are required for humanoid adoption. Our newest solutions in impedance sensing and inductive position sensings are great examples of how this technology is bridging markets. The same successes our last -- our latest sensors are seeing in automotive applications like EV Motor control, hands-on detection, drive-by-wire are the same technology humanoid and robotics companies need for joint encoders, force feedback and safe human contact.

The duplication and reuse matters here. We are extending a proven automotive-grade platform into a brand-new market without rebuilding our R&D base. So upside and new opportunities will materialize quickly. A single vehicle uses a handful of these sensors, but a humanoid needs more than 30 joint encoders alone, which multiplies our addressable content per unit as the robotics market scales. In short, our automotive franchise derisks the technology while our robotics expertise dramatically expands the total addressable market, diversifying us beyond a single end market and into one of the fastest-growing categories in technology today.

Very quickly, let's address how these technologies cross market boundaries. The force feedback we already deliver in a steer-by-wire solution is the same in a calibrated grip a humanoid needs to touch and feel. The active suspension we tune for ride quality becomes real-time contact detection at the joint or the hand and the haptic response in drive controls becomes the safe co-working behavior required when a robot operates right alongside people. It's these similarities that have triggered core robotics and humanoid companies in China to start evaluating and using our tactile solutions today. Several leading Chinese humanoid robotics companies, including major players in dexterous hand development and full body humanoid platforms have either chosen Renesas solutions already or are working with our engineering teams today on integrating these sensors into next-generation designs.

So let's talk about one of those activities next. One of the wins in robotics that I want to showcase today is with Inspire, who is a leading dexterous hand manufacturer. Inspire selected our Strain Gauge SSC to reach human level tactility, requiring sub-1% precision and extreme repeatability. Winning a category leader validates our differentiation and tends to pull through follow-on designs across this field. The reason we won extends beyond just performance though and into system-level knowledge. Performance is obviously key, but our solution was able to reduce calibration into just a single step. It lowers our customers' cost and time to market.

With dexterous hands being extremely sensor-rich, having multiple force and tactile sensors across many degrees of freedom, each win like this carries high-value content per unit and technical advantages that can't be replaced. Our goal is to have the highest performing sensing solutions on the market, but our rich sensing background with these devices enables greater benefits that we just showed here today. Examples like these are the reason Renesas sensing solutions are gaining traction in multiple end markets across the entire robotics landscape.

The full analog solution surrounding our sensing platform runs extremely deep, including a refresh of standard products and basic analog and all the way to our fully customizable solutions in GreenPAK, AnalogPAK and GreenFET. Add on top of that, our ForgeFPGA technology that targets Ajax applications, Renesas is able to deliver the analog solutions to enable hardware level sensor aggregation in real-time data processing needed to excel in this space. As part of the complete solution approach, Renesas is offering our software tools for sensor and analog customization online.

Our ICOT tool, purposed for designing inductive sensors embedded in the PCB gives hardware engineers freedom of customization to their own solution based on size and performance. Alongside online sensor tools, our GoConfigure software hub is the key to truly unlock customizable analog hardware and in the entire family of GreenPAK products. But we're evolving from selling hardware to delivering complete solutions that are bundled together with software and tools under the new Renesas 365 framework. Pairing these core technologies allows for true platform digitalization, pushing Renesas up the value stack and targeting a broad customer landscape. Back to you, Ivo.

Okay. So as we have learned already through Gaurang and Lee, basically at the center of this robotics ecosystem, there is the Renesas 365. Basically, it's our flexible and scalable cloud-based development platform enables developers to go from ideation to realization and eventually utilization. And this is, of course, helping customers and users to optimize virtually, eventually visualize everything in front of them before deploying everything else on the hardware itself. So this is actually enabling a much smoother path in developing products, removing a lot of friction between software and hardware and actually easing the process of integrating the software on the hardware itself. So I would like to share with you maybe a couple of minutes video that is giving a taste of the capabilities of the 365, our technology using 365 and our products in developing a dexterous hand. Can we play the video, please?

[Presentation]

Excellent. So the demo is at the back of the room. I encourage you and invite you to familiarize yourself with that at the end. So a couple of more things before we close the segment. What is our forward strategy and go-to-market moving forward? Basically, first, we will expand our robot development kit, and this is going to be done by providing complete model conversions tool chain, software stack and operating system support to simplify the overall development across parts of the robots like joints, dexterous hands, motion and eventually brain, leveraging our portfolio, as I mentioned, of the scalable processors from microcontrollers, microprocessors and SoCs.

We want to accelerate this digitalization through Renesas 365 so that the development and the test can be done virtually before the deployment is done on the hardware itself. And then lastly, also, we want to take an approach where we support overall the mass market direction that Stephen has mentioned at the beginning by providing, again, a quite rich content -- digital content, providing more ready-to-go solutions, more models that we will populate on the 365 and especially having a distribution focus with our collateral and with our resources. So together, these pillars help customers move faster from concept to deployment, which will directly tie eventually into our growth. So I want to basically close this segment summarizing a couple of things.

First, we do believe that humanoid robotics represents an important long-term opportunity for us. And as physical AI evolves, as I mentioned before, also the semiconductor content will expand. And this plays directly into the strength of our portfolio breadth as well as our solutions across compute, connectivity, analog sensors and power. And what differentiates us is not only the breadth of portfolio, as I mentioned, but also our ability to deliver system-level solutions, software ecosystem enablement and the Renesas 365 will help us go into this direction very fast. So we believe for this reason that we are uniquely positioned to capture an increasing value of this market as it matures over time.

Again, I want to thank you for your attention and continued interest in our portfolio and our journey. Thank you.

[Interpreted] Thank you. Moving on, we would like to invite Zaher Baidas, the SVP and General Manager of Power. The floor is yours, Zaher.

Thank you. Hello, everyone. My name is Zaher Baidas. I'm the General Manager of Power Product Group at Renesas. I'm very excited to share with you today Renesas progress in the very fast-growing and very dynamic AI infrastructure and compute market. I would like to start with an overview of our portfolio. Renesas has an impressive portfolio of products and technologies that addresses the AI infrastructure and compute market needs. We have three pillars of growth.

First, our digital power plays a critical role by delivering the high power density and thermal efficiency required for next-generation data centers. In addition, we have been, for a long time, leading the memory interface market with technology critical to maximizing compute efficiency and addressing data bottlenecks. This is becoming increasingly important for AI inferencing. And finally, our legacy with MCU technology puts us in a great position to capture control opportunity in this market as well as analog attach. The balance of these pillars is shown in our 2025 revenue mix. Combined, they uniquely position Renesas to capture the healthy sustained demand we are seeing in AI infrastructure and compute.

So AI infrastructure and compute market for Renesas includes digital power, memory interface, control plane and other analog components servicing AI servers and general servers. Over the past two years, we have seen tremendous revenue growth in this space. And as we look ahead, we expect to continue our momentum and grow market share with our three growth pillars. There are 3 compounding effects here. First, we see a huge increase in AI accelerators and CPU volumes, which means more power and more memory product. Second, our growing portfolio allows us to address more sockets in the data center for both power delivery, data and control plane functions. And finally, the architecture shift to support 800-volt DC as well as higher power demand favors our module solution that are specifically designed for AI workloads and command a higher price. All of this translates to a faster revenue growth, positioning us to achieve above-market growth well into the future.

Our confidence is supported by the massive demand we've all seen for compute driven by generative AI adoption. As reported by Gartner and Omdia, the data center market is expanding at a great pace with AI-specific server volume expected to more than double by 2030. What's really interesting here is that while GPUs for AI have been dominating the initial build-out, we see AI ASICs and CPU volumes growing at a faster pace as workloads shift towards AI inferencing. Since Renesas' diverse product portfolio serves AI and general server, CPUs, GPUs and AI ASICs, we stand to benefit from the overall growth regardless of the speed of transition of AI inference. It's important to note that with CPU-related power and memory interface content now growing alongside AI accelerator, the distinction between AI and non-AI is becoming blurred. And as Shinkai-san answered in one of the questions in the earlier Q&A session, going forward, we will be reporting and discussing this business as data center revenue.

Let us take a look at the big picture, starting with the whole power delivery path from the grid all the way down to the sub-1-volt supply on an XPU. AI incredible power demand are driving a major redesign of this entire chain. And Renesas is one of the few companies with products and expertise in every critical stage. Our portfolio today can address the high-voltage conversion from the grid, the 48-volt distribution in the rack and the core power on the board.

Now, as seen on the next slide, we continue to invest and innovate in power technologies such as GaN FETs and isolated gate drivers, which will allow us to capture more content as the power architecture transitions. At the same time, our memory interface technology will continue to play a pivotal role in improving speed and bandwidth of data transaction at the rack level. And we have an excellent attach opportunity with our MCUs targeting both power and control plane. Let us now spend some time to expand on each one of these growth pillars, starting with digital power.

Overall, we see power content growing by over tenfold as next-generation data center packs large number of accelerators or CPUs as close together as possible. Doing so will maximize system performance but require a careful planning of power and heat management. This is not a trivial problem as next-gen racks are on pace to consume over 1 megawatt of electricity each. That's enough electricity to power over 1,000 homes just for a single rack.

Now Renesas' presence in this market is highlighted in the figure on the right. showing a leading next-generation AI board where Renesas digital multiphase core power and intermediate bus converter occupy a sizable footprint. In this example, we were able to provide a total power solution, including MOSFET in the 48-volt IBC stage, which is, in this case, has a leading performance as measured by our customer in this particular board.

Now supplying large numbers of accelerators in Iraq require a new type of power architecture and move towards 800-volt DC. 800-volt DC reduces current, minimizes conduction loss and improve system efficiency. To address this, Renesas is continuing to invest in discrete technology. Our -- our high-voltage D-Mode GaN products are ideal in the conversion stage from 800-volt down to intermediate voltage like 48-volt and in some cases, 12-volt due to its compact form factor and fast efficient switching. In addition, our bidirectional GaN switches opens the door to replacing a two-stage architecture with a single stage for improved efficiency and cost saving. We believe these investments will continue to help position Renesas as a key GaN market leader. We also continue to invest in our MOSFET technology and deliver competitive products that are getting designed in this market.

To summarize, within AI Infra & Compute portfolio, the main growth engine so far has been digital power. We are currently in a very strong position. Our solution gaining share with all leading market players. As each new AI generation demands a big leap in power delivery, our power modules and vertical power solution directly addresses this. It's our biggest content opportunity in this market. It's worth spending a moment to highlight the innovation in vertical power stages. Our module-based approach to this technology delivers a world-class solution that does not only deliver best-in-class performance, but also addresses some of the customers' most challenging problem, managing the SoC thermals.

Our modules is 50% better than our competition at conducting heat out of the SoC. This is a clear example where Renesas system knowledge and innovation allowed us to differentiate. We did not stop there because we cannot be complacent. We know our competitors will catch up. We are working on our next generation of that module that will offer similar lead in heat conductivity. Overall, the growth equation is simple, quantity times value. On one hand, we have more XPUs being deployed over 2x growth in volume by 2030. And on the other hand, each of these XPUs require far more Renesas content, roughly 5x in power. These together create a powerful growth trajectory. In addition, we expect the shift towards Agentic AI will further unlock accretive growth opportunities as we supply stand-alone CPU power rigs.

Speaking of CPU growth, I wanted to highlight that our digital power growth engine is built on top of a very robust and stable memory and control foundation, the other two pillars of our AI infrastructure and compute growth story. As AI inference dominates and server GPU to CPU ratio decreases, we expect the volume of x86 and Arm CPUs to significantly grow above our current modeling. Each CPU will require RAM, making our memory interface products a key enabler of AI system scaling. As shown in the slide, our comprehensive memory interface portfolio covers all chips in DDR modules. Next-gen data center performance will increasingly depend on efficient data movement between the processor and the memory and Renesas memory interface technology innovations are going to be critical.

Finally, our expertise in MCU is well known, and we are beginning to see increased popularity of MCU-based implementation for control plane as well as power management within the server due to flexibility MCU over -- provides over other solutions such as FPGAs, for example. Now it's very important to highlight how Renesas will deliver in this current environment. AI demand, as you know, can be volatile. How we scale as a company is critical. Renesas is one of the few companies that purposely built a balanced supply model. We combine our own internal manufacturing with external foundings to add capacity on demand. This gives us the agility to respond to rapid shifts while reducing execution risk compared to being a single-sourced company. With 14 manufacturing facilities in Japan, China, Southeast Asia and the U.S., we will have stable base capacity in-house plus flexible capacity through our partners.

Finally, I actually -- this is one of my favorite slides, and I was discussing it with some of our guests in the break. I wanted to touch briefly on what sets us apart when it comes to working with our customers early in their design cycles. Currently, these ASIC design boards happens in parallel with the actual ASIC. There is a greater risk to customers that these boards do not behave as expected. We help mitigate that risk through an early engagement with pre-PCB modeling followed by an excellent test tool and software. We do have the test tool in the model. I encourage you to have a look at it. Basically, this test tool emulates with great accuracy the thousands of amps the SoC consume, including transients. And it has an accompanying extensive suite of software for analysis and monitoring. This allows us much higher initial design quality and first-pass power of success.

For Renesas, digitization and UX, along with our world-class system and application teams means that we are the first to engage at very early stage in SoC development. This increases visibility into system-level challenges quite early in the design, which directly improves our [ DN ] success and more importantly, expands our attach opportunity of complementary product. And while competitors now are working on similar offerings, we have released our third generation of this hardware. In addition, we are actively investigating a path to offer these tools to a wider audience through Renesas 365.

To summarize, we are living through an unprecedented market expansion as AI usage drives more power and more memory. Today, I shared how Renesas can offer not just next-generation power delivery solution but also memory interface technology. On top of that, MCU capability will also play a critical role in control plane. More importantly, with our deep automotive supply chain heritage, we are able to do so at the quality levels demanded by our customer. Ultimately, with our digitization and UX efforts, we offer a smooth design experience that helps our customer and ultimately makes our lives easier. Thank you for your time and attention.

[Interpreted] We are moving on to Q&A session. Please give us some time to prepare the stage. And we'll have Shibata-san, Gaurang-san, and Ivo-san, Zaher-san joining this Q&A session. [Operator Instructions] So let's start with Fujiwara-san from Citigroup.

[Interpreted] This is Fujiwara from Citigroup Securities. My question is about the power. I have a couple -- two questions on power. First question, the target for the power to have a slightly stronger growth than the market growth and gaining market share, I believe that's what's meant by this. And I'm sure there are many other competitors in this market. In order to ensure the market share in this market, what are you going to do? How are you going to ensure the market share? And what confidence do you have?

We are confident, but we cannot get complacent. It's a great position Renesas finds itself in. It came through the multiple years of innovation in this field and our ability, as I discussed, to support customers in a very unique way with our system knowledge. So we need to continue to innovate, and we have high level of confidence that we are capable of innovating. And as long as we innovate, we should be able to continue growing in this market. It's not an easy challenge. And when I talked about the innovation we've done in vertical power stages and when I discussed our crown jewel with the modeling system and the emulation system we have, we have to continue doing that.

[Interpreted] I have one more question. This is again related to the power business. In the first half of your presentation, you talked on the AI infrastructure, but there is no major price increase, maybe not factored in for AI. But in this midterm, for the power products, what is your pricing strategy? Can you maybe elaborate on this? Zaher-san, please?

I think Stephen did actually mentioned that. So we will not be shy from increasing prices if the cost increases. Now this has to happen in a very, very delicate balance. Our customers today are big customers with a very, very big pull. And we want to make sure that we adjust our pricing to protect our margins while we actually protect our market share. It's a delicate balance. We are working on it every day as we speak, and we are confident we can execute.

[Interpreted] Regarding margin, on the same note, from the revenue perspective, as you see further integration, taking place, then you have more current, then ASP will be growing, right? So it looks like you seem to be selling something similar, but your unit price ASP is going up. So along with the volume from both perspective, I think that will work positively on revenue, right?

Now moving on to the next question. That will be Okawa-san from Daiwa Securities.

[Interpreted] I am Okawa from Daiwa Securities. I also have two questions pertaining to power, especially digital power. In your presentation, you said that it's not going to be so easy to expand your market share in the earlier presentation session. But you are going to achieve growth this time around at a pace faster than PAM. So was there any event that allowed you to deepen your confidence?

And I had an impression that you are very strong at the Board. But in order to expand your business on the rack level and higher, is there anything that you still have -- is there any missing piece? So what is your confidence coming from, especially for digital products?

[Interpreted] Now okay, then we'll start with Zaher again.

So our confidence is high. The big piece of the story is what I mentioned with these modules. our innovation in modules, gaining market share in modules and delivering a unique vertical power stage module for our customers, which is already seeing a big traction is going to be providing us with the growth against the market. Now you mentioned other sides. We have modeled it as not a very significant growth at this point. But as I mentioned, we will continue to invest in our discrete, our GaN devices and try and address as much market with that with innovation.

[Interpreted] The vertical power supplies, yes. The vertical power supply, I think other companies are ahead of you in that regard. So you are going to catch up with that. So the thermal design, I think you are very good at the thermal dissipation. Why are you so strong in that space? Can you elaborate on that?

It goes back to our system engineers. So when we presented vertical power and modules last year, we got a lukewarm response. But that's what Renesas' DNA is. We try to innovate, differentiate and find a place where we can deliver power in a very, very specific innovative way. So these vertical power stage modules that we are talking about, we actually delivered unprecedented performance. And our competition are working now to actually match this performance, taking our vertical power module footprint. And as I said, we cannot be complacent. We found a unique entry to this market that we are using. That's why we are working on our second generation of this module. While the first generation is still going to samples and hasn't reached production yet.

[Interpreted] Regarding -- my second question relates to memory interface. The microphone is not on. The memory interface, other companies are achieving a higher growth rate, I believe. I'm so sorry. So this is a question relating to memory interface. All people -- all these players are expecting a higher growth than the [ PAM ]. So once again, compared to your competitors, what is your strength in memory interface? Other companies have a good portfolio of memory interface products. So they have a one-stop solution. So once again, can you elaborate why you are confident that you will be able to increase your market share in the memory interface space?

[Interpreted] So for that, Pete, I think, will be responding to that question. Pete?

So I think the question is a good one. Renesas is -- will be the only one that is a full solution provider across all the memory interface components, right? So the one-stop shop definitely applies to our core portfolio. But our key to success is being the first to sample. in every new iteration of device from DDR to MR, we're the first to sample. That's our #1 goal. That's how all of our metrics are based, right? If we're first to sample, we set the benchmark of what performance looks like and what quality looks like. So that's our goal. That's how we maintain market share, and that's how we evolve customer relationships for future growth, right? So that's key. If anything else, that's the #1 that we focus on.

[Interpreted] So this is a product with a standard. So it's not we are going to deliver some uniqueness with our design. But instead, the speed of execution and the quality becomes very important. In another expression, put it the other way, if you do that a good job in there, even before the actual revenue comes in, we shall be able to predict the position that we can secure in the market. If it becomes two generations or three generations ahead, we shall be able -- as long as it's one generation away, it is very predictable. Our position is quite predictable. So if it's the next 3 years or so, we have -- we can talk about the story with a good amount of confidence. We cannot foresee 10 years ahead, but this is the nature of this product.

[Interpreted] Next question -- the person with the jacket over there. Now we're getting close to the ending time. So we want to make this as the last question.

[Interpreted] Kojima from Nikkei CrossTech. So power and memory interface related question. So in the past, Renesas had a certain level of capability in this era. The very first with the Rocket AI infrastructure, I think we heard it was quite -- seems to be quite promising. So whether are you going to introduce new type of products? Is that what you mean? Or those strong product you had, are you trying to increase the SKUs or maybe increasing slightly performance or the capabilities or functions? Would that be the case? Can you elaborate on this point first? That's my first question.

My second question is about the automotive, the cars. I have this question on the car. Sorry about asking about the car. So there are people who are driving for more than 10 years. I've been driving my car for 15 years. And it's quite long. But compared to that, AI growth is so fast. With the R5, I think we had a quite strong computing power. So I think you mentioned that you should be able to accommodate the expected evolution of AI. But when we think about the future from now on, just by updating software will be good enough to keep up with the evolution.

Do you have to maybe change the hardware? Is that the other way of -- is that also option? I just wondered if that is also an option or not. For example, you could use -- when you're talking to OEM maker or component makers, -- so the hardware will remain the same. So trying to upgrade the software, is that how you're trying to reach them? Is that still the case? Or are you also talking about potentially changing the hardware? Would that be also in the scope or not? That is my second question.

[Interpreted] The first question, first answered by Zaher. If needed, Pete can elaborate. Zaher-san, please.

Sorry, the question was long, I missed the beginning of it.

[Interpreted] Yes. In your presentation, AI infrastructure and power and memory I think you're showing -- growing faster than the market, meaning that you are taking market share, right, to grow stronger than the market. But to do that, are you trying to introduce completely new products to accomplish this market share gain? Or are you thinking of utilizing existing product? And then you're trying to increase the SKUs or different products? What is the direction you're thinking to grow the business?

I think Shibata-san in his introduction did touch on that. We are not going to do something drastically completely different where we cannot differentiate and we don't have any core product. Having said that, our power heritage and memory interface heritage puts us in a place where we can do a lot. As one example we have where we said we went from [ SP ] assets all the way to module and vertical power stages. And then we will be looking at the next generation and the next generation out of that.

And at one point in time, we will be working on four different generations, looking all the way to the future when it comes to power. And it's all about increasing the density and improving efficiency and dealing with better thermals. When it comes to memory interface, memory interface, I actually had the luxury of being involved with some of these designers based on my previous life and that was part of the analog interface.

It involves everything, very high-frequency SerDes, a lot more complex clock management. And this applies to many things that we can do where you can -- when Shibata-san briefly talked about interconnects, that could be a place where we can actually strive because it's in our core business -- our core capability and our engineers are uniquely positioned to deal with that.

[Interpreted] Yes. In the power business, this is slightly different from other product lineups. So to integrate many more IPs or multiple devices to be lay out on the board to build a system, that's not the only thing we can do. The [ mono ] factor itself is actually changing [indiscernible] it's not like just many more layers on the chip, but trying to increase the voltage to get closer to chip. So it's something going beyond conventional semiconductor and such an innovation is taking place in a very rapid manner.

So we have a dedicated team for that. So conventional semiconductor engineer to take care of everything that's no longer happening right now. So this is quite unique area. The same product reinforcing furthermore is not the case. So almost every day, but every year, completely different product must be generated or created.

[Interpreted] So you're introducing new products at the module level?

[Interpreted] Yes, roughly speaking, yes, roughly speaking, at the module level, yes. For automotive, probably, I am assuming according to your question, this is my understanding, though. In the past, automotive sector, in order to ride a car for 15 years, the electronics has become quite old-fashioned even from the new car. So I've been thinking what we can do about this situation. Let's say, ECU is like a blade. And if you can re-insert the board, then we can use the new electronics. That's what I thought. But it hasn't become like that.

Well, partly, Tesla is doing things like that, but it's not that easy to reinsert with something new. It's just like a battery replacement. It's how hard it is. So unfortunately, at this point of time, such an architecture is not really considered, and we haven't really heard that -- and no one has really approached us in that direction. I don't think there's no OEM looking into that possibility. I think currently, they were rather working on trying to secure enough headroom and then trying to address by updating software. But finally, we started to see that direction. But of course, we're very excited to see more to come, such a modular approach, still not seen at all right now, so it could happen.

[Interpreted] We would like to wrap up the Q&A session because we have exceeded the allotted time. Shibata-san and others, please -- Shibata-san remain on stage. Others, please get back to your seats, thank you.

So in closing, will give a closing remark.

[Interpreted] Yes, this has been an in-person Capital Markets Day in a while. It's been several years since the previous one. Thank you very much for your participation. Let me repeat. Of course, numbers are important, but those are results, result-related indicators. How are these numbers going to move going forward? That has to do with competitiveness. And even if we say it, you need some evidence. By talking to our executives and taking a look at the demos and samples that we have partially provided, I think you will have a better understanding of where we are headed.

Up until now, be it online or in person, we have been conducting Capital Markets Day every year. And up to this point, as I responded to one of the questions, I think the way forward has become clear, at least to me. So whether having this every year or not or following our competitors having this every two years or three years or not, that is something that we would like to consider and update you in due course. I am not sure how useful this was for you.

But at least, I hope you were able to feel something beyond the usual earnings calls. So some kind of leading indicator, although qualitative, I hope you achieved that at least in today's event. This year is expected to be a very strong year. So I hope to see you again at the next earnings call. Thank you for your participation today.

[Interpreted] With that, we would like to close the Capital Market Day 2026 for Renesas. Today's materials and videos will be made available in our Investor Relations website. And these will be uploaded from this evening onwards. Thank you very much for participating over a long period of time. And in the venue, we will have a breakout session with some of the presenters today. If you want to ask further questions or have discussions, please utilize this opportunity. If you have used simultaneous interpreting receiver, please leave that on the desk and take part in breakout session. If you need to leave, please be careful, and thank you again for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Thank you for taking the time to join the Renesas Electronics First Quarter 2026 Earnings Conference Call. Simultaneous interpretation is available during the call. Please click Interpretation icon at the bottom of the screen and select a language. At this time, speakers are asked to turn the video on.

Joining me on the call today are Hidetoshi Shibata, Representative Executive Officer, President and CEO; Shuhei Shinkai, Senior Vice President and CFO; and some members of the staff. After initial remarks by Mr. Shibata, the first quarter results will be presented by Mr. Shinkai, which will be followed by Q&A session. The earnings call is expected to last for 60 minutes. The materials that will be presented are the same as those posted on the IR page of the company's website. Shibata-san, please turn on the microphone. The floor is yours.

Good morning. This is Shibata speaking. The earnings results this time had the effect of the divestment of the timing business during the period. Because of the decision to divest the timing business, it may be more difficult to understand the numbers than is the case usually. Later, Shinkai-san will explain and would like to provide a thorough information so that apple-to-apple comparison is possible as much as possible.

All in all, I believe we had good Q1 results. Generally, in comparison to the guidance that we issued last time, we had stronger results overall. And as a result and since our outlook is that demand will be growing, we wanted to build up channel inventory, but we were able to do so by a smaller margin than we expected, and we will have to increase channel inventory more.

Automotive demand was also stronger than expected. It is still small, but generation for SoC R-Car is ramping up very successfully. On the other hand, the previous generation of R-Car and micro controllers are also showing strong growth. Automotive results were, therefore, strong.

As for sectors other than -- segments other than automotive, data center AI may be attracting much attention. Data center AI and client-side AI were both growing strongly. Regarding these, towards the end of last year, there was a major earthquake in Taiwan, as some of you may recall. Our partners were affected by that large earthquake. Originally, to begin with, the supply -- demand supply was already tight. And on top of that, because of the earthquake, the supply is not catching up. And after Q2, we did our best to catch up. Demand is very strong. But because of the rate-limiting factor of production, the first quarter, there was an impact from that.

In Q2, we have overall strong outlook. Of course, there are some products where there is a strong seasonal factors, and there may be a decline as a result of such seasonality factors. But overall, the impression is that results are very strong. Automotive is strong, and other segments are also strong, especially in nonautomotive segments.

If I may repeat, we have to catch up with demand. The bottleneck is on supply constraint. And if we can successfully address this, we may be able to see results better than the guidance that we will be issuing today. So execution is the key.

That is the overall situation. The conditions are very strong. And for the foreseeable future, it will -- we anticipate the conditions to be strong. Now I would like to turn it over to our CFO, Shinkai-san.

Thank you very much. This is Shinkai, CFO. I would like to present the results from Q1 based on the slides. Next slide, please, Page 3. This -- what you're seeing on the screen is the disclaimer. In February 2026, timing business transfer was announced. After the announcement from February onwards, in non-GAAP reporting numbers, timing business is excluded. In Q1, only January, the month of January is included. And beyond February, timing business is not included anymore. But for the sake of apple-to-apple comparison, we also included numbers, excluding timing business entirely for comparison's sake.

Next page, please. Financial snapshot. In Q1, non-GAAP results are shown on the fourth column from the left in the table. Revenue, JPY 372.3 billion; gross margin, 59.2%; operating profit, JPY 125.4 billion; operating margin, 33.7%; EBITDA, JPY 146.2 billion; net profit, JPY 102.9 billion; exchange rate dollar, JPY 156; euro, JPY 183.

Timing business -- trends regarding timing business. Last time on February 5, at the current time of the last earnings call, we announced a forecast, which included 3 months of timing business. However, in actual, only the month of January is included. And therefore, for apple-to-apple comparison, based on forecast and actual results or for both forecasting actual results, it would be better to exclude timing business. So pro forma number are prepared as shown on the rightmost 3 columns. It says after adjustments for timing business, assuming that there is no timing business in forecast and actual results. The shaded columns are actual or pro forma basis, JPY 369.1 billion in revenue. This is above our forecast by 1.4%, and gross margin is 59.1%, above 1.1 percentage point from forecast. Operating profit, JPY 123.7 billion. It is above the forecast by 2.5%. Gross operating margin is 33.5%.

And based on this pro forma basis, I would like to turn to the next page. This shows revenue, gross margin and operating margin in Q1. This is a pro forma basis number. Company total is given on the leftmost column shaded in blue. Revenue is up by 1.4% from the forecast. About 8% of that -- 80% of that is due to yen depreciation, and the remainder is due to automotive segment, especially with Japanese clients outperforming. And gross margin was above forecast by 1.1 percentage points. About 1/3 of that is due to mix improvement and 2/3 is due to a decline in manufacturing expenses.

As for the mix improvement, to begin with, we expected deterioration in mix. But rather, it was flat. It did not deteriorate. Those that will be impacting gross margin the most are power products with a lower gross margin than company total. And in comparison to forecast, the results were lower due to some supply factors.

As for manufacturing expenses, fixed cost decreased, and COGS decreased. Maintenance expenses were also reduced. And we had a more conservative forecast.

As for operating margin, up 2.5% from forecast.

Gross margin increased and the revenue increased. Aside from those, operating expense decline impact accounted for about 1 percentage point. Expense decline, however, was mostly onetime or there is a time differential which will be booked and therefore, expenses will be booked in Q2. So that will be a deteriorating factor for Q2.

In the next column, Q-on-Q results, generally, it is repetitive with what I have already presented. Regarding gross margin, it improved due to depreciation of the yen, and mix was flat. Operating margin, because of increase in volume and a onetime factor improvement, we had declined Q-on-Q. By segment shown on the right, automotive, there is nothing noteworthy. Industrial infrastructure, IIoT, if you could refer to the right bottom in operating margin, Q-on-Q, there was a significant improvement by 9 percentage points. OpEx seasonality was one factor. And there is also a decline from the higher level from last year. And Q-on-Q, a 10% increase was recorded in revenue, and there's operating leverage. And the 3 percentage points is accounted for by all of these 3 factors each.

Next, revenue by quarter. This is based on non-GAAP numbers. For the first quarter up to January, the timing business is included in the non-GAAP results. So we have company-wide and by segment results year-on-year and Q-on-Q. Please refer to the numbers on the right-hand side.

Please go to the next page. This is about inventory. On the left-hand side is in-house inventory. For the first quarter, on Q-on-Q, both inventory actual amount and DOI increased in line with our expectations. As for the second quarter, in terms of the actual amount, we are expecting flat to increase. On the other hand, for the DOI due to increase in revenue and in the scale, we expect DOI to decrease. As was mentioned during the previous earnings results announcement, as for the buffer and making advanced arrangements for certain risks. Our target for DOI is 150 days. But considering the risks, both by banks and finished products for accommodating buffer needs for shorter deliveries, this is a policy that we will have.

And on the right-hand side is the channel inventory. For the first quarter, the channel inventory increased Q-on-Q. As for automotive, we'll sell in and sell-through had upside compared to the expectations. We had originally planned for expansion of the channel inventory. But due to the increase in sell-through, we were not able to achieve the expected increase. And as a result, the channel inventory decreased.

As for the industrial infrastructure, IIoT, generally speaking, we were able to have a slight buildup of the channel inventory, mostly for data centers. For the second quarter, looking ahead to anticipated demand, the policy is to continue to build up channel inventory, but we expect a higher sell-through increase. As for the ratio in terms of WOI for automotive and IIoT, we expect WOI to decrease.

Looking by segment for automotive, we expect an increase in demand and also to respond to short delivery demands. The policy is to further build up the channel inventory. As for IIoT, including the mass market and for the general market, we continue to build up inventory. And also for data centers, we have new products. Before certification, we plan to have advanced shipments and also for mobile mass production ramp-up. Before the high season, we will also have advanced shipments. So these are mostly advanced shipments. And from the actual amount basis, we plan to continue to build up the channel inventory.

And if you could go to the next page, this is the utilization rate and CapEx status. On the left-hand side is the utilization rate based on front-end wafer input. For the first quarter, utilization rate was around 55%. And the previous quarter, the fourth quarter in the previous year, since then, we have seen utilization rate increase by about 6 points. Naka factory, 12 inch MCU, 47 MCU and also [ Saijo ] digital power products. These are mostly seeing increase in demand. And as a result, we also increased the wafer input. For the second quarter, we are expecting a flat to slight increase from the current state.

As for CapEx, as shown on this graph, for the first quarter, we made the decision to invest in capacity expansion. This is a rather substantial investment decision made in terms of the amount JPY 94 billion in terms of the decision-based investment. And 80% of that will be investments for capacity expansion. Specifically, AI, data center, digital power for these applications will be made in-house. Most of these are for front-end investments, Kofu, Naka, [ Saijo ] factories, this is for 8 inches. We hope to make these investments for capacity expansion at these factories. And also for the back-end process as well for package and module must increase the production. And for the development, we plan to make investments. For the front end, mostly investments for digital and power products have been completed. So we are now considering investments for the back-end process.

Please go on to the next page. This is the second quarter forecast. On the left-hand side, the fourth column from the left, in the shaded column, please refer to that. Revenue midpoint forecast is JPY 388 billion, gross margin of 57.0%, operating margin of 29.0%, and exchange rate assumptions is JPY 156 to the dollar and JPY 180 to the euro.

And in relation to the timing business, the second quarter forecast does not include the timing business. The timing business has been excluded from the non-GAAP results since February of this year. Therefore, it is not included in the second quarter forecast. However, for comparability sake, we have year-on-year and Q-on-Q results adjusted for timing business figures shown on the right-hand side.

As for the second quarter forecast, on a pro forma basis, Q-on-Q, this is the 2 right columns. The far right column to be kept in mind as I make this comment for the revenue midpoint of JPY 388 billion. But on a pro forma basis, we expect to increase by 5.1% Q-on-Q. And excluding FX impact, revenue is expected to increase by 5.0%. For both automotive and IIoT, we expect both segments to increase. As for gross margin, we are forecasting 57% on a pro forma basis. That would be minus 2.1 percentage points from Q-on-Q due to production absorption. So we expect improvements due to FX impact and also mix. This mix also includes a currency mix impact thereof and also increase in manufacturing costs result in expected Q-on-Q deterioration.

And as for operating profit margin, we are expecting 29.0%. That will be minus 4.5% Q-on-Q. It's a rather significant decrease. This is due to the deterioration of the gross margin decrease. Excluding that factor, there's also a deterioration coming from operating expenses increase that contributes to about 3%, and of which, 1% concerns onetime factors that was mentioned during the first quarter and the timing differentials. So about 2% is the net increase in operating expenses for the second quarter expected.

If we look at the breakdown, first, is labor cost increase. The annual salary to be increased from April term, so that will be affecting the second quarter results and also the continued investments in R&D as well as seasonality factors, all contributing to operating expense increase by 2%. As for the FX sensitivity, you can see the table at the bottom.

And in the appendix, there are several items that I would like to highlight. Please go to Page 18. So highlights. Please look at the far left, our R-Car Gen 4 is ramping up. So these are the specific customers that will be using this.

And please go to the next page. Regarding Altium, I would like to also give a progress update. First quarter ARR was increased by 8% year-on-year. Compared to the past growth rates, we've seen slight slowdown in the short term. Rather than maximizing the ARR growth in the short term, we would like to promote the adoption of platform and also increase in the number of accounts. That has been our priority. And as a result of that, you've seen this result in some services and some regions. We are seeing transition from the older model to the new model, and this has resulted in a temporary decrease of the ARR. As for our approach to ARR and how we should constitute the transition period, how we should apply the thinking of KPIs, that will be updated in due time.

And on the right-hand side, we started the general availability of Renesas 365 as shown here.

That concludes my presentation. Thank you.

Thank you very much. We will now open the floor for questions. Shibata-san, please turn on the video. If you have any questions, please press raise hand icon at the top of the screen. Participants will be called on by name and company name based on the order their hands are raised. [Operator Instructions] In the interest of time, I would like to ask the attendees to please ask no more than 2 questions.

First, from Goldman Sachs, Takayama-san, please.

This time, you emphasized the rate-limiting factor of supply, supply not catching up with the demand. 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?

As for the capacity of Renesas itself, realistically, I believe we will be having a contribution -- contributory effect from the beginning of next year. So in a step-function way, we are not expecting increase in supply in step-function way.

Bottlenecks change constantly in a small way. What are we doing recently to address bottlenecks? We are looking at testers. Even when we receive wafers, since the number of units of tester is not sufficient, so wafer just lay idle. In some cases, we have placed orders for testers quite some time ago. But as you are aware of, overall, there is a shortage in general. So we would like to receive tester earlier and by greater number even by 1 unit. And as we continue these efforts, we expect bottleneck to be resolved and shipment to increase. If this is successful, then it could be an upside factor in Q2.

On the other hand, some products -- concerning some products, as I discussed earlier, last year, on December 27, there was an earthquake in Taiwan, and there were also subsequent earthquakes, and there was also a blackout. And that resulted in a wafer being a bottleneck. Wafer side, we are making efforts to pull in. Depending on what the product is, the situation is different. But we want to pull in incrementally. We want to increase gradually. We are making a great effort in this, and we will continue to make these efforts. Gradually, we expect capacity to increase.

As for suppliers, especially beyond -- Q3 and beyond, suppliers are already increasing supply as these materialize, then Q3 and beyond. In particular, regarding wafer, which I mentioned earlier, I believe that we can expect significant increase in supply from some time in Q2, at the earliest supply begin to increase. If not, we expect wafer supply to increase from Q3.

As for automotive segment, I did not mean to emphasize that the performance is extremely strong. It is stronger than we expected. Mainly, for one thing Gen 4 R-Car, it is nano MCU and Gen 3 R-car are also contributing our R-Car fluctuate from quarter-to-quarter as we discussed before, but the trend is a stronger trend. I have covered this last year as well. The environment surrounding automotive industry has changed and more so than we expected. I believe there is a tendency to continue to use previous generations products.

As for 28 nano micro controllers, we see steady growth. But in particular, because China is large, especially some customers in China, their production and sales are affecting our results. So there is some volatility in the short term. But overall, the trend is a smooth growth. Microcontroller, the older generation, newer generation in -- older generation newer generation, we are seeing ramping up of the new generation not by a very large margin, but steady increase. And as for older generation, they are being used more longer than we expected. And I believe the combination of these resulted in stronger results.

I see. Second question is about price environment. I would like to understand better some non-Japanese players are commenting to the effect that there may be price increase. How do you see the situation? And what are the developments that you expect?

That is a question that is difficult to address because of different expectations from investors and our customers. Raw material, transportation, as you know, costs are rising. There are also supply constraints. Memory price, as a result, is increasing. And when necessary, our competitors are also increasing their prices. That is the actual situation. Given this situation, it would be very difficult for us alone to not increase price. So at some point in time, by certain magnitude, by some magnitude, we may have to adjust our price.

Next, BofA Securities, Hirakawa-san, please?

This is Hirakawa of BofA Securities. The first question is 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? That's my first question.

I will ask Mr. Shinkai to respond to those questions.

Regarding gross margin decreasing by 2 percentage points. As for the breakdown, due to the production absorption, we expect a slight improvement, but because of the FX impact and the manufacturing cost increase, we expect the overall deterioration.

As for the contribution and the breakdown, FX impact is 1/3. Manufacturing costs is about 2/3 in terms of the impact. As for the FX, second quarter, we expect the depreciation of the yen -- appreciation of the yen. So in terms of that FX, there is an upside based on our current view.

As for the mix, there is the product mix. And also currency mix, that's also impacting the results. For the second quarter, the yen portion is expected to slightly increase. And the foreign currencies upside would decrease in turn. Therefore, the currency mix will also contribute to the deterioration.

In terms of the product mix, we have the legacy power products. These are low gross margin products, and shipments of those products is expected to increase Q-on-Q, and this will impact the overall gross margin.

As for the manufacturing costs, this accounts for about 2/3 of the overall impact. For the second quarter, there is a unique factor to the quarter. The utility cost, the energy costs, with higher temperatures, of course, utility costs will also increase. And the operating expense, when I talked about that, I mentioned this briefly, due to the merit increase, we also expect labor cost to increase. And the periodic repairs and maintenance, this will be done during the Golden Week holiday. And also in preparation for the capacity expansion, there will be some inspections done, so contributing to overall increase in costs. And as a result of the manufacturing cost increase and contributing to lower gross margin for the second quarter.

If I may supplement, as Mr. Shinkai already gave the forecast for the second quarter, but generally speaking, as for the currency and product mix, simply, we expect fluctuations power for AI demand. We have low gross margin products to high gross margin products. There is a rather wide range of products with gross margin levels. And our customer -- in customer share is also expected to change drastically. So it's a bit difficult to forecast, but our intention is to have higher gross margin products and higher customer share. And if this starts to be realized, then if we have an increase in power for AI demand, this should not contribute to the lower gross margin. But for the time being, we expect some fluctuations.

And generally speaking, as Shinkai already mentioned, manufacturing costs are expected to increase given the current crude oil situation. And according to the media reports, we should expect the impact in 6 months' time or so. So maybe looking at the second half, we should expect impact in terms of the energy costs. So generally speaking, we do not expect gross margin to continue to rise. So the key is how to manage the manufacturing cost increase, including the energy costs through such measures as improvement in mix. For example, for products for AI, by improving the mix, we can absorb, to an extent, the increase in manufacturing costs. So you should not expect this to have a steady increase.

And sorry, I forgot to answer another part of the question. In terms of the OP margin, we should expect a positive contribution, positive impact.

Another question. Maybe I misread. But on Page 9, the FX, JPY 156 to the dollar is the assumption, and the second quarter -- that's for the first quarter. So would that have any impact Q-on-Q? Sorry for the euro, in terms of the euro FX sensitivity, I don't see much impact. Would that have a much impact in terms of the JPY 1 fluctuation. That's rather a limited impact, correct?

Yes, the currency mix has a bigger impact, bigger yen. This is an expected increase in sales for Japanese customers contributing to that.

I see. I understand. And this relates to my first question. 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?

Well, it is uncertain for sure. I don't know how I should phrase this. But macro uncertainty affecting automobile consumption certainly exists, and that's a big factor to consider. If there are no such factors, we do not expect such a substantial increase, but depending on what platforms to be launched and other factors all included, we do expect an increase going forward to some extent. So outlook is rather bright. But the Middle East situation is affecting the crude oil prices by and large. And maybe this will result in sales of gasoline cars, hybrid or EV, so all factors that need to be considered.

Having said that, as for sales for ourselves, as was shown during Shinkai's presentation, recently, we are seeing stronger results coming in compared to our expectation. So inventory, particularly channel inventory has to be built up. So adjustments, in that sense, have to be made, and that will give the necessary support to an extent. As for our sales outlook, relatively speaking, we have an optimistic view for our sales going forward. That is an honest assessment of where we are. Thank you.

Next, from Daiwa Securities, Okawa-san, please.

I'm Okawa from Daiwa Securities. I also have 2 questions. First, 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?

Shinkai-san, please.

This time between Q1 and Q2, there were some timing issues of when expenses are booked in Q1 or Q2, and that accounts for 1 percentage point. Adjusting for that, in Q2, operating expense will be about JPY 100 billion or more. And therefore, in Q2, labor cost increase and seasonality factors are taken into account in the second half and this also depends on the foreign exchange rate, but every quarter, JPY 100 billion or so of operating expense is what we generally expect towards the second half of the year.

I see. Second question is related to business concerning data center. 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?

At least as far as -- until the end of this year is concerned, our outlook remains more or less unchanged. At least it is not deteriorating. And so it is not unchanged in a good sense.

As for next year onward, I believe strong momentum will be maintained. As soon as possible, we would like to increase our internal capacity to capture that stronger momentum.

As for non-AI, it's not glamorous, but certainly, it is increasing, growing, and we expect this growth to continue. It is true for power, but memory interface also is one of the driver for profit where we can enjoy the benefits. So we would also like to make sure that we capture that benefit. Overall, I think we are similar to our peers. In the near future, we expect a strong momentum. And because of that expectation, we will need to expand capacity. Towards next year, supplier partners from Taiwan that I've mentioned earlier, we would like to increase capacity further. We are discussing with them as such. And so we believe we will be able to secure necessary capacity. I expect strong growth in a step-function way in the third quarter and also next year.

As a follow-up, do you have an outlook about share digital power memory interface? Do you expect any change in outlook in positive or negative sense?

In memory, in the positive sense, we do not expect any change. Especially in Gen 5 and beyond, we believe we are in a good position. We would like to maintain that good position. As for AI power, I have been discussing this on numerous occasions. We would like to maintain our share or increase share. But in the short term, there is going to be a large competition, so we should not become complacent. I believe that is the best way to put this. Thank you.

Next, from Citigroup Securities, Fujiwara-san, pols.

This is Fujiwara from Citigroup Securities. I have 2 questions, please. First, 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? That's my first question, please.

In comparison to the peers, we do not consider it to be a tailwind. There are 2 factors to consider here. First, we have power discrete, but we do not sell this in large quantities. So SiC MOS companies that sell such products would be directly impacted more by EVs and BEVs in a positive way. That's the first thing.

And the second thing, I believe, last year or the year before that, from that timing, in a continued manner, this is something we've talked about. As for our share of micro controllers, as a fact, in terms of EV, German competitor has higher share, and the situation is expected to continue for some time. As I've said before, of course, we are implementing certain measures, and we expect the results of those measures to be realized going forward. But in the short term, for the next quarter and the quarter before that, there are timing differentials. So with a shift to EV, we do not expect any negative impact on our company alone, but in comparison to our peers, our growth rate would be muted. That's all. Thank you.

This is my second question. 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 Lima's 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?

The P&L impact will be explained by Shinkai.

Yes, we do have a visibility as to the operational start at Kofu. This is going to be [ 300 million]. What used to be 8 inches interest product, so using 8 inches, will run the lines. So the line change -- the running change is something customers do not readily accept, but we will expect a gradual shift, and we do have visibility now.

As for the impact on P&L, Shinkai will explain.

With the investments that I've covered, the actual start of the production is expected to be FY 2028. And depreciation will start from the time of the start of the production. As for the actual [ repair ] amounts, the back end and the intermediate process investments are not yet determined. So the finalized amount will be determined after determining these other processes and investments.

I believe the CapEx, JPY 94 billion, and you mentioned about 80% of that is for capacity expansion. Just to get a general idea what will be the allocation to each factory of this investment?

Shinkai-san, please.

Capacity expansion is 80%. So that will be about JPY 77 billion in investments for capacity expansion. About half of that is for Kofu. Over 20% is for Naka, and around 15% is for Saijo. The remaining amount is for the back-end processes.

Next, from Mizuho Securities. Yamamoto-san, please.

This is Yamamoto from Mizuho Securities. I also have 2 questions. 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?

Since last time, personally, my view has not changed so much. It is a concern, but it's not materializing. And is this going to be a large impact? I have a sense that it will not be a large impact. DRAM oftentimes is highlighted, but not only DRAMs. For example, PCBs on which devices will be mounted, but PCBs, for example, are in shortage. Because of short supply, it is not possible to produce. That is a possibility. But if I may repeat, many people are anticipating this, and they are taking preemptive measures. So I do not think that there will be too huge an impact. That is my take at the moment.

My second question is 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.

It is difficult to say on our part. We would like to do what is best for shareholders and customers what is reasonable for shareholders and customers in terms of pricing. As for surcharge method, it is difficult to implement this in reality in many respects. So we would like to have a more clear-cut way to adjust price. That is all.

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

Former Renesas and other businesses, we do not make such distinction anymore. In the short term, if we do something radical about price, of course, no customer would like to see that. We would like to be sincere -- and I think we focused primarily on customers when we try to be sincere, but we would like to be sincere vis-a-vis customers as well as vis-a-vis our shareholders when we consider price. I hope that answers your question. Thank you very much.

Next, Semicon Portal, Suga-san please.

This is Suga from SEMICON Portal. 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?

In principle, basically, what we mean is using digital technology to manage and control. That's what we mean.

So I think it's a strength of Renesas that you have everything covering the whole range. So are you going to sell in a bundled way right?

So we have the control of using digital to control various devices and components and also for designing such products, we also have the environment. This is what is unique characteristics for us. And in recent media reports, Finally, NVIDIA's strength, CUDA, is now highlighted in more occasions. Of course, those in the industry have been aware of this for quite some time. For our digital power as well, it's same kind of differentiation. That's that. For each individual device performance, of course, we work to further improve and enhance that. But more so, we focus on the use of these devices. That's where we find attractive in our solutions. We provide solutions that are attractive in the usage.

I think 48-volt DC is currently selling.

Yes, of course. We also are within the grid to core from grid to core, including GPU, we cover the whole range. We originally focused on core where devices actually operate, but then we've expanded gradually towards the grid, including the 48 volts. So we are still in the process of expanding towards the grid.

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

We already have solutions for that. Certain GPU manufacturer publication covers our solution. So we do have a full suite. But of course, we intend to further expand and innovate in terms of offering. So yes, your understanding is correct, that we will be pursuing these areas going forward.

Thank you. It is now time to end the conference. We would like to end the Q&A session. But before we end the conference final remarks by Shibata-san, please.

At the risk of repeating myself, due to macroeconomic factors mainly, there are uncertainties -- uncertainties remain. But despite these uncertainties, we also have several structural drivers that are becoming more visible. And in the meantime, we would like to deliver as much upside as possible. And we will focus on execution. And if all goes well, we hope that we will have higher inventory next year and stronger expanded capacity to achieve further growth. I hope we will be able to realize that trajectory.

And we would like to ask for your continuous support on Capital Market Day, which will be held in about 2 months' time, I don't expect any major news, but rather than providing simply an update, we would like to have a good Q&A session, a longer time for Q&A session. And thank you very much for joining us today.

With that, we would like to end Renesas Electronics First Quarter 2026 Earnings Conference Call. Thank you very much for joining us today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

[Interpreted] Thank you very much for attending the Renesas Electronics Quarter and Full Year 2025 Earnings Call. Today, we offer you simultaneous interpretation service. Please utilize interpretation icon and choose the language of your preference speakers. Speakers, please turn your video on.

For today's presentation, we have presented Executive President and CEO, Hidetoshi Shibata; executive officer CFO, Shuhei Shinkai; and other staffs are present. After Shibata has given his words, Shinkai will explain about fourth quarter and full year earnings. And then we'll go into a Q&A session. We're planning for 60 minutes for this earnings call.

The presentation material that we're using today is available on our website on the IR site. Mr. Shibata, the floor is yours.

Good morning. This is Shibata speaking. So the fourth quarter, I think it was better than our expectations. The end demand, not large, but it has grown. And AI is strong. I think that goes without saying. And on top of that, the industrial applications, it has been slightly moderate than expected, but we have seen a good, strong, robust growth.

So towards the first quarter of next fiscal year, and I would like to give you an outlook about that. So our revenue outlook, it is shown in the presentation. But beyond that, the end demand outlook, so Automotive, IIoT, we are expecting a moderate growth, specifically for IIoT. And of course, AI is going to be very strong.

And for the Industrial we are expecting solid growth first quarter consumer applications due to seasonality will go down. But IIoT, overall, will be -- saw a moderate and solid growth. And as a result, for the whole company, this is a repetition, but although moderate, we think we'll be able to show some solid growth.

For this fiscal year for the full year, we haven't shown you guidance in terms of the numbers because we have not been able to decide the details. But mid to the previous presentation, I think we have started to see a better momentum.

For Automotive, basically sometimes it goes up, sometimes it goes down. But Industrial, we think we were able to expect a solid growth. So the AI, data center, those areas, I think we'll be able to see robust growth. And for AI infrastructure, for this year, I think I see for the sites other companies, we are expecting a very good growth year-on-year basis.

So we have transferred the timing business. So towards the Capital Day that we're going to hold in June, we want to update our AI business. But roughly speaking, maybe double and grew by double. I think that is our outlook.

In terms of IIoT, a very moderate growth is what we are expecting, specifically towards the second half, the DRAM shortage may have an impact on the business. So that is the reason why we are a little subdued in our outlook. So compared to the previous earnings call, I think we have a more positive view.

So then let me pull up a slide and talk about the transfer of the timing business. So this is a brief summary. And after that, I will hand it over to Shinkai for more detailed numbers.

So broadly speaking, the timing business. So mainly, this is a clock business, we have decided to transfer this business. So half and half cash in common stock is in total, $3 billion transaction value.

So from our point of view, our timing clock business, we think we can grow this business. But for the technological trend, it is high potential MEMS timing. So if that is the case, SiTime is a better owner. And it is better for us to integrate this business and seek for growth.

It's not the case that we just sell it and then that's it. We will acquire some stock from SiTime's. And from my point of view, we would like to enjoy some of the fruit that will be coming from the growth of the MEMS timing. So there's a reason of the partnership.

The timing business transfer that we're going is the size of the scales on the top right. So before -- so this is for FY 2024 because we have not closed the books yet. For 2025, the full year revenue won't change that much from this level. So $207 million to [ $208 million ] business is what we are going to talking about. So I think for SiTime, this is a very complementary business.

So we focus on clock SiTime as basically focusing oscillators. So if you combine both, this will be a kind of end-to-end technological coverage. So we do not assume any roadblocks, but of course, we have to clear some regulation hurdles. So by the end of this year at the latest, we think we'll be able to close this deal.

So in terms of the use of this cash, so whether we go to hold all this cash? Or is we going to sell at early timing? We are still considering. But in any case, this is growth for investment or for the shareholder return, we will look at both ways to allocate the cash.

So that has been the summary about the just for the timing business. Then I will hand it over to Shinkai and talk about the details of our numbers and then go to Q&A afterwards. Shinkai-san, please.

So this is Shinkai. I would like to talk about our fourth quarter, full year results based on presentation.

For the fourth quarter, please look at the left-hand side, from the left to the middle. So the revenue is JPY 350.9 billion. Gross profit margin, 59.3%; operating profit, JPY [ 108 ] billion; operating margin, 30.8%; EBITDA, JPY 127.8 billion; net profit, JPY 90 billion. The ForEx, JPY 152 to the dollar; EUR 1, JPY 176.

So compared -- and for the full year, please look at the blue column on the right, blue one. So the revenue, JPY 1,318.5 billion; gross profit ratio of 57.6%; operating profit, JPY 386.9 billion; operating margin, 29.3%; EBITDA, JPY 464.1 billion; net profit JPY 329.3 billion; ForEx assumptions, JPY 150 to the dollar, JPY 167 to the euro.

So for the full year outlook, I would like to give you some brief comments. So this is on the year-over-year comparison is shown. In terms of the revenue, it's 2.2% of decline. So Automotive due to minus, and Industrial IIoT is minus -- plus. So net-net, it was a minus.

In terms of the gross margin year-over-year, 1.6% of improvement. This is due to the manufacturing cost reduction based mainly on the fixed cost. And last year -- from last year, from FY '25, we have been changing the depreciation period. So this is not a one-off. This will contribute to us going forward.

In terms of the operating profit margin, so 0.2% worsening because of cost reduction, we have been able to reduce costs, but basically, this was offset with the demerits. So the sales volume decreased, and there has been a backlash coming from a one-off in the '24. So net 2.2% worsening.

So let's go to the next slide. So the fourth -- going back to the fourth quarter, so let's look at the column on the right, revenue 3.2% plus. So half is through the weaker yen, half is through the actual demand -- due to demand, Automotive, Industrial, IIoT, this has been our expectations.

And in terms of the gross margin, plus 2.3% improvement. So this is due to the mix improvement and the reduction of the manufacturing expenses. In terms of the mix, we were anticipating that this will worsen, but it has not been bad as such. So the high gross margin products, for instance, memory, timing, et cetera, has increased and that led to improvement of the gross margin.

In terms of the manufacturing cost, so there are some a lot of one-offs. For instance, the project -- manufacturing-related projects cost has been less than expected due to this. The gross margin improvement -- this has [ made ] contribution to the improvement of the gross margin.

But the operating margin is plus 3.3% improvement against the target. So the volume growth, the gross margin improvement, there is some contribution for the operating cost. Expenses has been in line. In terms of the expenses, it was basically in line with our expectations.

So the quarter-on-quarter comparison, please look at this chart. In terms of the revenue plus positive, gross margin plus 1.7 percentage points. On a quarter-on-quarter basis, manufacturing cost has gone down. The utilization has improved. In terms of the operating expenses, minus. So the OpEx has increased, is the main reason. And this is due to the seasonality because it's more concentrated at the year-end.

For each segment, it is on the right-hand side for Automotive and Industrial, Infrastructure and IIoT, there's nothing that's notable this time around. But when you look at OP margins for Industrial, Infrastructure and IIoT; it has deteriorated Q-o-Q by 3.4 points. This is due to development items and loss recognition that happened in the fourth quarter.

Also, regarding segment performance for this fiscal year from fiscal '26, non-GAAP segment performance definition is scheduled to change. Up until 2025, as shown here, out of total company non-GAAP adjustments items, if they are inherent to the segment, we were adding it back; or if it's a loss, we were deducting it by segment. However, from this fiscal year, in principle, we will be adjusting it together with company-wide non-GAAP performance. So that is the way we intend to report going forward.

Please turn the page. So this page is about revenue. We changed the format a little. For Industrial, Infrastructure and IIoT, we made it more visible. And on the right-hand side, for revenue, this is year-on-year and Q-on-Q numbers that are shown. Inclusive of FX as well as in parenthesis, it's excluding FX impact. We have added that because FX is fluctuating quite a lot. So we wanted to make things more visible and easier to understand.

Please turn the page. This page is about inventory. First, on the left-hand side, for in-house inventory. For Q4, Q-on-Q, inventory amount and DOI both increased in line with expectations, and it was at 117 days of DOI as of end of Q4. For Q1, we are expecting an increase in amount Q-on-Q due to demand recovery, we will be expanding the Diebank in anticipation.

And also in Q2, the IT system or the ERP system integration is scheduled to happen. Therefore, at the time of integration, we will need to build up towards this phase. And due to this impact in Q1, we expect a little higher work-in-progress inventory.

And under the third bullet, as shown for the DOI target, it used to be 120 days. We have updated it and are thinking about raising it to 150 days. It's because demand is increasing, especially around AI and data centers and also supply chain risk-wise, we believe that we need to have some more buffer stock for finished products and Diebank on top of that to secure raw materials that may be subject to risk.

In consideration of these factors, we have decided to raise DOI targets from 120 to 150 days in managing our in-house inventory.

Looking at the right-hand side, it's channel inventory. For Q4, Q-on-Q, channel inventory declined. Overall, it was 7.5 weeks of inventory WOI. For Automotive, we were planning to do shipments in line with sell-through. But sell-through went higher than expectation, so channel inventory went down.

For Industrial, Infrastructure, IIoT; inventory went up slightly, but this was due to power for data centers and AI where demand is strong. So we were shipping as soon as it was completed. And therefore, sell-through was a little bit higher than expected.

And for Q1, Q-on-Q, we are planning to expand sales channel inventory. Orders have been brisk. And up until the end of Q4, WOI was trending at low levels. So for sales channel inventory, we would like to strive to have higher levels of inventory. That is why we intend to expand inventory levels.

Turning the page. We talk about utilization rates on the left-hand side. First of all, for Q4 compared to our forecast, it was a little bit higher, at close to 50%, 5-0. And also for Q1, we are expecting a slight increase in trend at around 50%-plus utilization.

Regarding capital expenditures on the right-hand side, Q4, there is no items that were notable. But for Q1 towards capacity expansion, we are planning to make investments, which we will share with you on a later date.

Please turn the page. So this is our forecast for Q1 '26. Please look at the shaded area in the middle. For revenue and the midpoint forecast, it's JPY 375 billion; gross margin, 58.5%; operating profit margin, 32%; and FX, JPY 154 against the dollar and against JPY 182 against the euro.

For revenue, Q-on-Q, we're expecting growth of 6.9%, as you can see on the right column. FX-wise inclusive, we're expecting revenue growth of 1.9%; and excluding FX impact, 4.9% growth. And we're expecting gross margins to go down by 0.8 points to 58.5%. The weak yen is a tailwind. But due to mix, we're expecting a reactionary fall Q-on-Q. And due to the price increases, we are expecting a minus 8 point decline.

For operating margin, we are expecting 1.2 points higher operating margins Q-on-Q to 32% due to volume growth due to revenue growth. That is the main factor. And for OpEx, Overall, we are expecting flattish trends Q-on-Q expenditure-wise.

For FX sensitivity, you could see the sensitivity analysis at the bottom. Based off the sensitivity, the forecast for Q1 and OP margins of 32%, we -- at JPY 100 against the dollar and JPY 120 against the euro, OP margins will be 25.7%.

So I would like to also pick up some slides from the appendix as well. Please turn to Page 18. These are the GAAP numbers. On a full-year basis, the second from the right, please refer to this column. On a GAAP basis for net income, JPY 51.8 billion of losses were generated. This is related to Wolfspeed. And impairment losses were JPY 237.6 billion. That has led to the loss. So this is the big difference between GAAP as well as non-GAAP.

And please also turn to the next page. These are highlights from the fiscal year under review. we will continue to pay dividends worth JPY 28 a share. And for Wolfspeed transactions, CFIUS approval came through. So common stock and convertible notes, the rights have -- will be acquired.

Looking at the next page, this is a continuous update on Altium. Left-hand side shows ARR steadily increasing. And for the KPIs concept, we continue to work on it. For comprehensive updates, we will do it in June when we have Capital Market Day.

That concludes my explanation. Thank you for your kind attention.

Let's go to Q&A. [Operator Instructions] UBS Securities, Yasui-san, please.

So I have two questions. The first question is that the comment Shibata-san made at the beginning, the AI, said that it may double for this year. Basically, it will be interface, PMIC that will be the major applications. Can you explain in more detail? What is your outlook for [ 2026 ]? I think that will be also pipeline, PMIC, GPU plus custom is going to -- ASIC is going to grow. So what are the types of things that will drive the growth in these applications?

The second question, this is not related to the earnings, but in Japan, there is a lot of realignment or integration with the domestic power semiconductors. Mitsubishi Electric's President has said that maybe they would like to consider that for the -- for this fiscal year. So maybe for the silicon carbide again, maybe for the data center demand, maybe it will improve again. So are you going to be engaged in this type of realignment in the industry for the domestic business.

For the AI-related business, as I said in the beginning, well, our definition, so we are going to transfer the timing business, and we are considering how to update the business. So in June, what we are going to present is based on updated information. But as of today, basically, we'll be talking based on the existing definition.

In terms of the digital power, this will drive the growth in terms of the absolute amount, in terms of the growth rate, I think this will be the driver. Last year, so GPU has grown strongly. For this year, ASIC, I think application for ASIC is going to grow a lot. So going to the first quarter numbers, I think that's what I'm anticipating for the hyperscalers. ASICs for hyperscalers by phases, they are being ramped up. So I think that will be the main driver for this business.

But the memory interface, again, the same story. I think it's going to grow. But the baseline has been bigger. So I think the growth rate in itself will be more moderate. But overall, maybe if we include all these factors, maybe double around that level will be the level of growth that we're anticipating. So power will be the driver, and memory will grow as well.

So we are -- we have to understand this more deeply. The AI computing when it is growing, it used to be the case that the GPU draw a lot of attention. But CPU, I think, will grow as well. So the ARM is showing a greater stronger position. So I think it will be SOCAMM, et cetera, maybe a lot of directions. But if you look at 1-year timeline, I think traditional-based architecture will be the mainstay. Our memory interface will be used in various content. So that is what we are anticipating.

About for the power semiconductors, GaN, as you know, we have already our own, do it internally. So of course, we need some time, but you're going to internalize our manufacturing. So I think I talked about the utilization rate at our plants continue to be slightly higher than 50%, out of which some is going to be utilized for GaN.

And what we have to be more conservative is about the silicon-based MOSFET because in terms of volume, it's going to be used a lot. And BCD process, we want to bring this internally as well. So the utilization rate of the plant with CapEx, I think -- including CapEx, I think this will be going up.

So SiC, what are we going to do about SiC? All this is a thing that we have been pondering a lot. Currently, ourselves -- well, we are not anticipating that we will be doing the development. And Wolfspeed is one of the partners that we are looking at and with other partners. By having these partnerships, we will procure the SiC and then embed it into solutions. I think that is the direction that we are considering.

So in terms of the realignment with the power semiconductor industry, us taking the lead of being proactive, I don't think that, that matches our direction right now. But depending on how things go, we'll consider it case by case.

The next question is from Takayama-san from Goldman Sachs Securities.

My first question is about -- you talked about digital power, and a follow-up question about it. Regarding your share positioning, it's about 1/3 to 50% for GPU. And for ASIC related, it's likely to grow this year. And in November, you were saying that it's really high. But for this year and your positioning, what are you going to target? Or what do you already see?

Also related to profitability, I think you were saying that it's relatively low. But when volume goes up this much, are you going to be able to secure better profitability? Can you give us some implication on that?

Well, actually, it's really hard. For us, having 1/3 or 50%, we have it as milestones. And of course, it would be better to be on the better side of things. And at minimum, we would like to exceed 1/3. But then on the other hand, I think other companies are the same. But when you look at the demand coming from customers, supply is not keeping up. Therefore, it's always the case in these circumstances.

So what is the inflated demand piece and what is the underlying demand? When demand is strong, everybody always talks about this, and we are not able to figure it out. But if it's real demand, obviously, we won't be able to catch up. Therefore, qualifying multiple suppliers will happen on a constant basis.

So the 1/3 or 50% numbers, we do not feel that it's going to be steady, depending on generation or because of a supply pickup, I think we're going to see our positioning dramatically change and possibly it will go up or down.

For power interfaces, right now, we need to ensure that we supply steadily as a supplier. So as Mr. Shinkai said in his part, we would like to ensure we have sufficient inventory as well as sales channel inventory or else it's going to be dangerous. Therefore, even if we have to put a further load on our balance sheet, we would like to have greater levels of inventory so that we won't have to sacrifice our share or positioning.

How about profitability? For gross margins, depending on the product or the customer, it differs and varies. But for gross margin itself, compared to the company-wide average, it's not that great greater. It's not that greater. But if volume goes higher, operating margins should improve, as you rightly said, Takayama-san. So if volume increases, it should be a positive incremental impact on OP margins.

My second question is about managing company-wide profitability. At JPY 100, it's 25 to 30 -- well, 30 to 35 based off current FX levels. So you're at around 32% right now. So you were saying that -- were you trying to say and imply that the improvement is going to be moderate this year? But because you were also talking about advanced investments in R&D spend. So if profitability is going to steadily improve, there may be a chance that you will be able to exceed 35%, right?

Or there are some companies who decide to invest more because profits are increasing. So are you going to allow profitability to improve? Or are you going to allocate the excess profits to fund your future growth? -- and make investments?

Just because profits are higher, we are not thinking about simply allocating that for investment purposes. And when you think about increasing R&D on a quarter-by-quarter basis, the nature of it is not one where you could increase it significantly all of a sudden.

As we said, operating margins in the first quarter, my personal view is we are facing challenges because when we show these numbers, we will get questions like the one you asked, Takayama-san. So we would like to increase R&D spend steadily in the future.

So for this fiscal year, for top line, our forecast looks good at this moment. So if operating margins become higher as a result, of course, that is -- that may be possible. However, we don't want to be reactive to top line and would like to ensure that we make R&D spends to areas that we need to invest into.

Of course, for digital power, investments are necessary, and we would like to go ahead with our investments. But I would say recently, when it comes to AI in the edge or embedded world of things, regarding its adoption, it has been spreading nowadays. And when it comes to automotive and robotics, mainly for inference.

AI, the role of AI is becoming greater, and it's likely to become even greater in the future. So we are reviewing where we stand, and we are thinking that towards AI, we need to be more proactive in our efforts, meaning understanding AI applications better and showing our capabilities, developing capabilities internally if needed. So regarding power and AI, those are some big R&D targets. Another area would be AI inference, especially for automotive and robotics.

We do believe we will need to make some big AI-related investments there. So is this going to be through an M&A? Or is this going to be organic? Of course, we are thinking about the options constantly with an open stance, and we will accordingly give you updates. But compared to before, we do believe we need to do more in a proactive manner. That's all from me.

So if that's the case, just to confirm, you're not going to control profitability intentionally, but you will also be making necessary spending in areas like AI for R&D. But as a result, if top line goes up, because of marginal profitability, you should see naturally profitability increase. Is that all right? Do you feel comfortable with that? Because that was my view in hearing your comment.

Yes. For OP margins, naturally, it should go up and down. Right now, in this case, it should be increasing. Just because of increasing profitability, it's not like we're going to open or shut R&D spend.

Let's go to the next question, BofA Securities, Hirakawa-san.

This is Hirakawa from BofA Securities. My first question is at the beginning, you have explained about the timing business transition. So I think basically, you're going to allocate it to the growth investment or the shareholder returns. What we have been understood in terms of the cash usage, so paying the debt. So growth in investment and then -- I think basically, you've given us in terms of your priority of usage of cash. What is your idea right now?

My second question, so in terms of the Automotive business, I think basically, you said that it goes up and down. And I understand it's very difficult to have a visibility, but what's your take on the first quarter for the full year of FY 2026? What are the positive and negative factors for the Automotive business?

So in terms of the AI-related -- in terms of cash usage, AI-related investment, well, we are not being coy. We have -- nothing is decided, so that we have been very frank about that. So depending on how we're going to look at this matter, I think the use of cash allocation will be different. So that's the reason why the use of proceeds, we gave you to all these factors.

If there are no major acquisitions and no major M&A, if that -- if we assume that way, I think, Hirakawa-san, you're right, so paying the debt, shareholder return, I think that will end. I think that will be our focus.

So internally, I discussed this Shinkai-san, maybe at this point, we will show this and say that we pay the debt and then make it -- use it for shareholder return. So if it's a growth investment, if that happens, we'll be acting that way.

But we didn't want to mislead you. So we decided that this will be the right expression. So if there's no specific investment target, then we will use it for repaying debt and shareholder return. So if there is a specific candidate, then we will invest for growth. I think that is the idea behind this.

For the Automotive business, so if you talk about the quarter-on-quarter and compare the quarter-on-quarter, there are individual reasons that have an impact on the business. So I do not want to mislead you. If you look at the first quarter, some -- Nikkei has written about this in China, so we have a major client there, and they are slowing down right now. So for our overall Automotive business, and it is not a positive. So China as a whole slowing down, I think that is what we're looking. So Japan, I think flat. So for better or for worse, it's stable.

Europe, mainly Europe, maybe the same situation as us, but I think that maybe they're trying to build up the inventory more. The end demand is not that strong, but maybe they are feeling that they reduced inventory too far. So Europe, maybe we think the revenue is going to go up.

So all in all, a slight growth. So as a momentum or a trend, we do not feel that this is the beginning of the higher growth. I think for individual reasons, I think the business will go up and down. So things are very fluid right now.

And there is a possibility that I may change what I'm going to say. But as we have been considering the situation for a long period of time, for geopolitics-related supply situations and we have to consider the supply chain and the way to hold inventory; well, the dramatic change happening and then things will not -- we will be driven to a corner. I do not think that it's going to happen.

In the short term, there will be some specs or some pushbacks, et cetera. But depending on that, the inventory of the supply chain will be disrupted. Maybe that's the nature of the thing that is happening right now. So that is the way I'm thinking right now.

From that perspective, so trying to dramatically change the direction of the supply chain, no, we're not thinking about that. We will, of course, look at the supply chain. But actually, looking at the inventory by looking at the way to hold inventory to how to absorb this for short-term stocks, I think that is the most effective way to operate the business. I think I have the feeling the customers are going to that direction.

So with the change of geopolitics and the impact that has on the business is not will lead to a drastic change of the supply chain. I think having the inventory in a strategic matter will be the way the people will be responding to the situation.

The next person is Okawa-san from Daiwa Securities.

This is is Okawa from Daiwa Securities. I have two questions. First, regarding gross margin for Q4, you talked about you were expecting deterioration, but it didn't. So can you give us more flavor on that? Q4-wise, Q-on-Q, Automotive and IIoT improved by 1 point plus. Therefore, can you sort things out for us?

For Automotive, there were price negotiations for certain deals. And we were anticipating price decline Q-on-Q, but that didn't happen as a result of the negotiations. Also regarding mix, low gross margin, sales were expected to rise, but it didn't grow as much. So these products are new products related to digital power as well as automotive, old products for mix. That's all for me.

For Automotive and that prices didn't go down as much. Is that because of positive impact from demand and supply? Or is that because positive impact from share? Or was it by chance? So are there any reasons why things are working out well?

It's more of a specific factor actually. So it's not notable. But from Q1, actually, it's going to deteriorate. So it's just a timing thing.

The second question is about Automotive and IIoT regarding share or products. When you look at other company results, Europe, Automotive; they have a cautious outlook and a cautious outlook on Automotive overall. But when you look at your forecast as well as hear your comments, it's not that bad. It seems that your share is also rising in Europe apparently. So for Automotive and share, are you getting good response in business? Are there any unique reasons why you're feeling that way?

And for IIoT, physical AI has now come into the picture. So it may be too early to say, but have you been able to capture any opportunities? So can I have a comment on both Automotive and IIoT?

Unfortunately, we won't be able to meet your expectations, Okawa-san. In Automotive, idiosyncratically, there is nothing that we're seeing that is amazing that's underway. It was last year or the year before last, our MCU share went down. And when we were talking about what we're going to do about it, we were saying that it may take time, but we do have various countermeasures underway. So we're not that concerned about the longer future.

And that was true actually. It's not that bad. But it's not as if we're going to see big impact this year or next year. Over the short term, 28 MCUs, we do believe steady growth this year. And for Gen 4 [ Alcon ], we will start to pick up as well, which are likely to become growth drivers.

But as you rightly know, probably, since last year, traditional auto OEMs technology updates, in a sense, have started to slow down. It's probably because it's under review. 47 MCU and Gen 4 [ Alcon ] is likely to sell. But it was more moderate than expected. For '26, I think we'll go back and forth. Hopefully, we'll move forward and move backwards less.

For IIoT, I would say the DRAM impact is the uncertainty, so impact from memory. Of course, we have accounted for this uncertainty when looking at the second half of the year. If we're able to well manage this, for IIoT, I think business will be strong because AI is strong, and military and aero is strong in Industrial.

And for mobile IIoT, I don't know if I should put it as a share gain, but a number of sockets we were able to win have increased in number. So due to inherent reasons, we are expecting growth. However, because of lack of DRAM, there might be converged to higher-end models. And I think that trend is likely to happen. So we are cautious in our stance. But trend-wise, momentum-wise, I think it's relatively strong. That's all from me.

Next, Citigroup Securities, Fujiwara-san.

Fujiwara from Citi Securities. I have two questions. First, this time, so 150 days, you're going to raise your internal inventory target to 150 days. So when you answer your question, so you think you have to increase your inventory for AI-related applications, so 150 by applications for segment by Automotive and IIoT; is it different inventory levels? How -- and the pace of this increase of the inventory. And by doing so, how much can we expect this will push up the profit. So this is the first question.

So between Automotive and IIoT, we do not that there is an appropriate way to look at the inventory. The reason is that we have 3 buckets that we're looking at. One is the high -- the demand growing area, that will be data center AI. So that is IIoT. The second bucket is that we want to be -- we don't know how to respond to the request of the customers [ who ] have redundant supply chain. That will be more on the Automotive side.

And the third bucket is, generally speaking, the risk of the supply of the material. For instance, if it's rare earth, some will be difficult maybe to acquire or so there are some situations that some parts was difficult to acquire. So this was taken up by other demand, meaning that demand/supply was tight. So we want to be proactive in securing that procurement.

So we have these 3 buckets that we're thinking about when we talk about inventory. In terms of pushing up the profit, we are not actually looking into that too much because in terms of raw material, we have to have the raw material. And then for AI data center, that we procure from data centers, so that will be contributed to the profit.

So the buffer stock based on some products, some producing internally, some not; so it's not the case that the 30 days of increase of the inventory will fully cater profits, maybe some contribution, but not all.

My second question is that you said to the previous person is that due to the high price of memory, so I would like to ask you about that. So I think PC, smartphone, automotive, I think that is where the DRAM price will hit you. If you look at PC, smartphones; the impact on the volume in itself, and specifically, maybe smartphone is in the case, but if we look at the cost, maybe there is a negative impact when you have a price negotiations compared to the competitors.

In terms of Automotive, so infotainment area, maybe that will impact the infotainment area. So when you're negotiating the customers currently, do you think that this will impact the volume?

In the previous cycle of the lack of semiconductor, so there was a move to have lower specs for the automotive applications. Are you discussing about this at this point?

So for automotive, we do not have a clear visibility about the situation right now. In terms of volume, it's not that big business. So maybe the volume is not that large in terms of usage. So maybe you can just pay up, we'll be able to get our hands on the DRAM. So volume-wise, that's the situation.

But what I said that I don't know what's going to happen is that so there are applications that they're using old models. So for instance, using DRAM, [ DDR4 ]. So the memory suppliers are saying that we can't supply [ DDR4 ], but we can supply [ DDR5 ]. I think that's going to happen. So that is where we do not have a visibility.

So all in all, I think things it's like one step forward and one step backwards. I do not think that the volume in itself is going to plunge, but we cannot be too optimistic about the situation.

So for the nonautomotive areas, of course, the DRAM price is going up this level. Some customers will ask us to do something about that. But as of now, we are not experiencing that. I think our customers are very, very careful in this area already. As Shinkai has implied, this frenzy that the AI is generating, some raw material is already lacking in supply. So there are already some areas there is a lack of supply.

So if that is the case, if they put too much pressure on the suppliers, then there is a risk that they will not be able to get their products from the suppliers. I think the customers are trying to strike a balance in this area because it is true that there is a shortage of products.

So we do want to be ahead of placing orders and try to build up an inventory so that we don't have a lack of the supply. So this kind of imbalance situation is already there. So we are telling ourselves that we should be very careful about the supply chain.

Thank you. We are dry close to the ending time. So we would like to conclude the Q&A session here. Finally, Mr. Shibata will expand closing comments.

Market cycle-wise, we are finally at a point where we're seeing light, also centered around AI. In consideration of geopolitical risk, the way we hold inventory as well as how we can settle in supply, will be one of our focus areas for the time being. It will be a tailwind if we do it well. And if we fail, it will be a headwind.

And regarding the transfer of the timing business, in the area of AI, the necessity of making investments are growing higher day by day. So we're going to change our narrative compared to before. And accordingly, we would like to make -- think about making significant investments where necessary. Apart from that, we will be focusing on balance sheet management and shareholder return.

And like I always say, factors that may allow our performance to go upwards or downwards are all over the place. Therefore, we would like to ensure that we are able to disclose information to you so that we could heighten your predictability without delay. That's all from me. Thank you very much.

Thank you very much. This concludes Renesas Electronics Fiscal '25 Q4 and Full Year Results Briefing. Thank you very much for joining today.

Good morning, everyone. If you'd like to listen to this session in English, please click the interpretation icon at the bottom of screen and select English channel.

Thank you very much for taking your precious time to attend Renesas Electronics 2025 Third Quarter Earnings Call. We thank you very much, indeed, for your attendance. Today, simultaneous translation is made available. Please click the translation button at the bottom of the screen and select the language of your preference. Now speakers, you are requested to turn on your video.

For today's presentation, we have the attendance of President and CEO, Hidetoshi Shibata; as well as Senior Vice President and CFO, Shuhei Shinkai, as well as some other staff members. After this, we will hear some greetings from Mr. Shibata, and then Mr. Shinkai will follow with the explanation on the third quarter results, which will be followed by the Q&A session. We intend to finish the entire session in about 60 minutes.

The materials to be used for today's presentation is already posted on the IR site of our home page. Mr. Shibata, please turn your microphone and begin your statement.

Good morning, everyone. This is Shibata here. Today, I caught a cold. So maybe it might be difficult for you to hear my voice, but please excuse me. The temperature has come down quite suddenly, and school events, there are so many -- so much events. So there are many people around me catching cold, so please be careful yourself as well.

Now the third quarter, maybe have already seen. In a sense, I think I would say the results have landed in line with the expectations. As you may recall, there might have been some upside, but we have declared to operate the business in a very diligent manner, and the numbers came in as anticipated. So the revenue came in as planned. The revenue from the channel, there were some upside. So the channel inventory is now becoming smaller. And that is the -- by and large, the highlights of the results of the third quarter. And so if things stay as is, we are not really assured. So towards that fourth quarter, we hope to further reinforce the channel inventory in the fourth quarter. So that's how we plan to manage the business.

Overall, I would say, from the sell-through at the end demand. If I talk about the end demand, the sell-through, by and large, I think the performance has been flattish. There were some ups and downs depending on the elements, but by and large, it was flattish.

Automotive, for some certain customers, the production and also inventory adjustment has been done. So there might be some decline on the -- there was some decline on automotive, but 28-micron and Gen 4 SoC, they are taking off steadily as planned, but the scale is still limited. And of course, the 28-nanomicron MCU, especially due to the China-specific element, we are going through some phase of adjustment. So it's not at a phase of achieving a significant growth, but we are enjoying steadfast increase.

On the other hand, for nonautomotive, towards the fourth quarter, how should I put it? The outlook compared to the last time, I think, is more favorable, I would say. So -- I'm sorry for the ambiguous expression of favorable, but I think things are turning to the better. As for the industry overall, there are, of course, some ups and downs depending on each element. But overall, we are seeing a robust growth.

At the third quarter, continuous after the third quarter in the fourth quarter as well, the AI infrastructure, there has been a very strong demand, and that has been continuing to be the case. And the production side, we are now making efforts on the production side rather, so that we can make sure to supply the needed demand, so we will produce and sell and produce and sell. So those are the areas that we are going to attach focus on in the fourth quarter.

And consumer, consumer mobile and IoT, this segment, nothing strange. But third quarter, we have seen a significant increase. And the decrease in the fourth core, that kind of seasonality is already factored in. But there has been a share gain in this segment. So overall, we are seeing a general uptrend here. So IIoT overall, as a general trend, I think we are seeing a favorable trend.

Automotive, next period, and there are some uncertainties there. But as always, we'll keep the same attitude of having a deliberate management, and we'll keep a close eye on the management, the inventory level and be cautious in our management. Especially when it comes to channel inventory management, this is some time ago already, but about 5 years ago, we have experienced a very bad situation. So learning from that lesson, we will continue to be cautious. So I would like you to keep an eye on our performance and evaluate as adequate.

Then up until the last earnings call, because it's been than 1 year since we acquired Altium, so we have been listening -- we have been hearing some questions from the investors regarding Altium. So just today, I would like to give you a little bit of update on Altium. In a phased manner, we'll try to enrich our disclosure regarding the Altium. So I will just give some overview today. Just a little overview.

So if you can put up the screen, please. Yes, this is Altium stand-alone. So far, as planned, cost synergy and organic growth, they are performing in line with our expectations, so steadfast progress has been achieved. So those are the 2 elements that you see on this slide here.

The sales synergy takes longer time, definitely. And the so-called enterprise or the large accounts that's leading the world. The sales expansion to those clients have just started on a gradual basis. So that's what is meant by the box on the far left.

Right now, we are making a focused effort to the middle section here, i.e., after the acquisition of Altium from a stand-alone basis, we are now -- that will not make sense if it's standalone. So we are now going through a major transformation.

One thing, as it was already announced by Altium. And if you can look at the website, I think you'll be able to have a better understanding. So far, the PCB designer software and Octopart, those different products had been provided by Altium. But right now, we are making a transition to become a platform company. So we are in the middle of this effort. And in parallel to that, the user base is planned to be expanded. So we are now expanding our efforts to expand the user base as we had declared from before. So those efforts are now being propelled.

And why Renesas? One of the pillars why Renesas is this Renesas 365. This is our own platform. And we -- the development is currently underway. And in the first half of this year, Embedded World, at that trade show, we demonstrated a demo. So by the end of the year, we plan to launch this and the progress -- the preparation is currently underway.

As for the future, as you can see on the right-hand side of the slide, Renesas 365 is planned for launch within this year. At the point of launch, at that time, it's not going to be something splendid that will surprise you naturally. So in the past, Windows made a very silent debut, but then with Windows 95 made a huge takeoff with Windows 95. So that is the kind of avenue that we would like to follow with. So please expect for this Renesas 365, but not with a huge anticipation.

The overall progress, as I mentioned, because we are in the middle of this major transformation, we don't want to set the KPIs everything from the beginning. So -- and because we don't want to change them later. So we are very cautious in setting the KPIs. So if things go as planned, I think we will be able to disclose what kind of KPIs will be set for this business during the next earnings call. And the progress will be reported at the Capital Markets Day next year with a more bird's eye view with more enriched data. So we would like to give you an update on the progress on that occasion.

So from here, I would like to -- starting off with the Altium business and also the details of the earnings call will be handed over -- will hand over the microphone to Shinkai-san so that he can give some updates on those things that I just mentioned.

This is Shinkai, CFO. On the left-hand side of the previous slide, we have -- there was progress. I would like to give some more details regarding the progress so far. It's been 1 year since the acquisition. So I would like to talk about the progress thereafter. If you can look at the right-hand side, cost synergy.

Cost synergy. There was the initial cost reduction immediately after the closing and also the cost suppression after that, absorbing the cost increases using Renesas resources. So we had been contemplating this 2-tiered approach.

The first phase will be -- was completed by the end of the first quarter of this year. And the organic growth, the second point there. As you can see on the left-hand side, the ARR, annual recurring revenue, annual recurring revenue is the indicator that we have used here. This is based on term-based contract and subscription-based contract revenues. So the annual recurring revenues per 1 year is indicated by this indicator. So compared to third quarter 2024, we have achieved a year-on-year 15% increase in the ARR. This represents the same pace of growth prior to the acquisition.

The sales synergy, we have started to see this. We are starting this with the cross sales measures for enterprises and the transformation to the platform business. Renesas Retail Supply development in addition to this line of development, in the finance and account area, as we discussed the other time, the revenue recognition policy was changed as we announced the other time -- the other day in view of this transformation into a platform business. So starting this year, we've changed the revenue recognition policy because of this. That was about the progress relating to Altium.

From here, I would like to use your usual slides and explain the results for the third quarter of the year. If you can go to Page 6, please. This is the overview of the financial results. For the third quarter, if you look at the dark blue columns in the middle, revenue, JPY 334.2 billion; gross margin, 57.6%. Operating profit, JPY 103.2 billion. Operating margin, 30.9%. Profit attributable to the owners of parent, JPY 88.2 billion. EBITDA, JPY 122.5 billion, and foreign exchange, JPY 146 to the dollar and JPY 170 to the euro.

Compared to the forecast, if you look at the 3 columns to the right, and I would like to explain them in more detail using the subsequent slides. That was the non-GAAP. And for the GAAP performance, I'll come back to you later.

On the next page, please. This is the third quarter revenue, gross margin and operating margin and also the segment results. For the company total, first, compared to the forecast, operating revenue was 1.3% higher, 2/3 of this increase was the result of foreign exchange, a weaker yen and the remaining 1/3 is from other factors.

Automotive was in line with the expectations, and the sell-through upside, we had planned for this shipment that can cater to sell-through. And sell-through was okay and shipment was almost in line with the expectation.

And the IIoT compared to the forecast, we have achieved upside, AI server and PC and also memory interface, those were the major drivers behind this incremental performance.

Now regarding gross margin, gross margin compared to the forecast came in 1.1% higher. The details of that. There are mix improvement and also utilization improvement. And mix improvement was due -- as I mentioned with the revenue increase, this was due to the memory interface, because they are higher in gross margin, they sold well, and that drove the growth and also utilization increase.

I'll come back to this topic later, but input utilization came in higher than expected. We review the schedule and the input was increased in the -- towards the third quarter compared to the fourth quarter.

OP margin, this increased by 3.9 percentage points. So the significant improvement compared to the forecast. As I mentioned earlier, because the revenue also increased and also in addition to the gross margin improvement, operating expenses also accounted for a major bulk of this improvement of operating profit.

In actual numbers, operating expenses, OpEx ratio and also plus R&D, there was a reduction of JPY 6.3 billion. So almost half of this improvement was due to the timing difference of R&D projects and the remaining half has come from the net cost reduction, so the net reduction in costs. So those had a stronger impact than expected. And therefore, the timing difference of R&D because this is now postponed from the third quarter to the fourth quarter. So that has accounted for a major impact of the profit improvement. And I'll come back to this topic later.

But in the second half, if you average out for the second half, I think the OP margin will reflect a more realistic number.

Now on a Q-on-Q basis, if you look at the bottom box on the right-hand side, revenue came in 2.9% higher and automotive Q-on-Q decline and IoT Q-on-Q increase. Operating gross margin improved by 0.8 percentage points, on a Q-on-Q basis and mix improvement, utilization increase and cost reduction, those were the drivers behind this.

OP came in 2.6% higher. OP margin came in 2.6% higher due mainly to the expense reduction and revenue growth, as I mentioned earlier. And also, I have one more thing regarding here.

Regarding the segment, the -- as far as automotive is concerned, if you look at the very bottom, if you look at the OP margin there, OP margin Q-on-Q achieved a significant improvement because this -- in the second quarter, there was a one-off factor or one-off losses regarding litigation expenses. In reaction to that, there has been an increase. So on a Q-on-Q basis, it seems larger as an improvement.

But the actual -- if you ask me if this is recurring, then if you even out the 3 quarters overall, then in the 9 months up to the third quarter, the automotive OP was 29.5% OP margin. So that I think, reflects the reality, I believe.

As far as IIoT is consumed, nothing in particular that I have to note. So I can move on to the next page.

So next is about the revenue. As a whole, year-on-year, 3.2% decrease Q-on-Q, 2.9% increase. As for by segment, this is as shown here.

Next page, please. Now different trends of the different numbers. Nothing to be -- nothing remarkable. So moving on.

About the inventories. Q-on-Q up and down and also the forecast are summarized here. First of all, in-house inventory. In Q3, Q-on-Q, the inventory and DOI, both of them increased as expected. In Q3, DOI was 111.

Q4, Q-on-Q increase is expected. As for the work in progress, the internal production, mainly the die bank will be expanded or increased. At the same time, the strong demand for AI and data centers, we want to increase the die bank, but we are unable to do so, so far.

As for the finished products at the beginning of the year, in order to prepare for the shipment at the beginning of the year, we will be increasing slightly for that.

Next is the channel inventory. Q3, WOI and inventories decreased in real terms. And it was 8.9 weeks and then down to 8.1 weeks. So this is due to the higher sell-through and the channel inventory came down. Q4, overall, the slightly decrease is expected.

For automotive, it will be aligned with the sell-through inventory will be flat. As for the IIoT, we will try to align with the sell-through. But for the AI data center, the sell-through will be brisk. And as a result, the channel inventory will decline. That is what we expect.

Earlier, Shibata-san mentioned that we are trying to expand the channel inventory. But Q-o-Q from Q3 to Q4, sell-through is almost flat and sell-in is likely to increase. So in that sense, the channel inventory decline or decrease will be smaller.

Next page is the front-end utilization. Q3, as I mentioned slightly, the expectation of 50% -- less than 50% and the actual was 50%. So slight increase of the utilization based on the input. This is not due to the fundamental, but we revisited the schedule for the holiday season and bringing the schedule from -- input schedule from Q4 to Q3. So because of that change, we expect a slight decrease in Q4. And we do not have any particular things about the CapEx.

As for Q4 forecast, in the middle of the table, please refer to the dark blue. The gross margin median is JPY 340 billion -- sorry, the revenue median JPY 340 billion; and the gross margin, 57%; and operating margin, 27.5%.

The ForEx expectations, dollar is JPY 150 to the dollar. JPY 175 to the euro. So this is a 3-year Q-on-Q, weaker yen for dollar and JPY 5 weaker in euro. So as for the revenue, median is JPY 340 billion. So this is the 16.2% increase year-on-year and 1.7% increase Q-on-Q.

Now Q-on-Q increase, the ForEx impact is high and the device sales related is small. And the Q-on-Q for the device for mobile and IoT seasonality will lead to the decrease, but we will offset that with a strong DC, data center as well as the signs of the bottoming out of the customer inventory.

As for the gross margin, 57%, it's down 59 basis points Q-on-Q, so slightly decreased. This is due to the mix deterioration. And the 338 basis points negative -- sorry, OP margin, 27.5%, down 338 basis points Q-on-Q. And from -- there was a shift from Q3. And also, there is a concentration towards the end of the term and the ForEx. So these are -- each represent 1/3 of the factors. So Q-on-Q increase of the operating expenses is JPY 11 billion.

As for the 27.5% change of the OP margin in the second half -- in the first half, it was 27.7%, and there's been the improvement of the 100 basis points, and this is due to the progress of the top line and the higher expenses and others.

At the bottom of the right-hand side, we added the ForEx sensitivity for the first time. The volatility of the ForEx is relatively high. And the constant currency, what would look like if the currency is JPY 100 to the dollar. So we wanted to add this so that you can see that. So what I can say here is that as sensitivity against the dollar and the euro, when there is a change of JPY 1, what will be the impact on the revenue and operating profit are shown.

As for the dollars, with the JPY 1 change, JPY 1.7 billion impact on revenue and JPY 0.7 billion impact on operating profit. Based on this ForEx sensitivity, if I assume -- sorry, based upon the constant currency of about JPY 100 to the dollar and JPY 120 to euro, the forecast of the Q4 operating margin is 22.3%. And so that is from 28.5% to 23%. So going on to Page 19 in the appendix, the net income, JPY 106.3 billion Wolfspeed-related evaluation gain is included in the interest expenses, that is JPY 44.5 billion.

The following page on the break down or how to think about this Wolfspeed-related number. On the left-hand side, originally, before going to the Chapter 11. At that timing, the securities that we held, we had the convertible bond and equity and the warranty for the shares. And then there was a Chapter 11 at the end of September. So these assets at the end of the quarter, we needed to evaluate that. So basically, this is equity-based assets. So we have to look at the market, the share price of the Wolfspeed, it would change.

So as you can see in the middle, at the end of Q2, the market cap was the JPY 1.66 billion. And our stake for that is a JPY 0.575 billion. So after the Chapter 11, the market cap was updated. And then based upon the share price, we multiplied what we own, and we calculated the total amount. At the end of September, $28.6 was the share price, and we calculated $2.71 billion. And our stake based on that is the $0.874 billion. So in Japanese yen, that is JPY 130.1 billion. So here, we booked the gain of JPY 44.5 billion. So that is the impact on the finance up to Q3. So what would happen in the future is summarized at the bottom right.

As of now, the CFIUS approval is not something that we have gained. So strictly speaking, the warranty and the share equities, those are something that we would obtain after the approval of CFIUS. So those are considered to be the similar right or the same level.

But as for the CFIUS approval, we expect that this is something that we would have. But because of the shutdown of the U.S. government, the schedule of this approval is being delayed. And ultimately, this after the CFIUS approval and after getting the equity and converting the bond and so forth and about 30% is what we'll own.

And let me turn this. We can separate this from the equity method, Wolfspeed financial impact. And with that, I would like to end my presentation. Thank you.

Thank you. Now we'd like to move on to the Q&A session. Shibata-san, please turn on your video. So let me first explain how to raise a question. [Operator Instructions] In the interest of time, we would like to limit the number of questions to 2 questions per 1 questioner.

Now first, Takayama-san from Goldman Sachs. Can you begin your question?

So let me ask a question. The first question is about the infrastructure business. Memory interface as well as NVIDIA PMIC. I think those are performing very strongly according to what I see. What are the requirements that are given to you towards next fiscal year because you said that you are not able to keep up with this demand. So what is the request from these companies? Are you receiving massive amount of orders? Or is there a very strong appetite among from these demands?

And based on your position, the memory interface, your market share has come down, but is it coming up again? For NVDIA related, from 1/3, you said to 1/5. Have you been able to improve your position in the market as planned? Can you comment on those points as well?

Yes. For memory interface and RDM, we keep a bullish forecast. And we -- there's no factors that will force us to change that outlook. So for the market share as well, we also maintain a bullish forecast.

For power, for a specific customer, we cannot comment on a specific customer, but these matters, it's very difficult to forecast on a 1-year basis or for several quarters basis. The requirements from the market are very strong. They are giving us a very strong order amount as a request. But the suppliers that can qualify are also increasing on the other hand. So it should not be -- so reassured. For the time being, more than 1/3, I think we have an expectation that will be -- we will achieve much increases. So if I talk about the next quarter, a very high market share will likely be maintained. Beyond that, I think we cannot talk about that until we get into the next quarter. But the demand itself is quite strong. So it's all up to us whether we can execute. If we are able to execute properly, we shall be able to secure these.

All right. For the memory interface, recently, the DRAM memory, the outlook for that is quite strong recently. What was the expression you used for the January to March quarter and the April to June quarter, what is the likelihood of increase? What are the requirements or requests coming from the customers for this?

Well, it's very difficult to predict up to that point. We cannot -- we don't have a very definitive number for that far out. But for -- if you look at the trends, recently, as of September end and also towards the end of October backlog, if you look at the backlog trend, as you mentioned, if I -- we are seeing a step increase like a staircase. It's not a crawl. It's a significant sudden increase. That's what we see.

All right. The second question, automotive by region. Can you talk about the performance by region? You mentioned a specific customer. I think that is about China. There might be some decline in the October-December period, but it's coming back again in January and beyond. What are the major -- the outlook for the major markets like Europe and Japan? What is the inquiries from the customers?

To give you a comment on the recent performance. As far as Japan is concerned, because of the cycle, Japan is likely to be very strong. But for Europe, I think relative -- Europe I think, is relatively weaker. China. For China overall, compared to one time, we have seen a slight slowdown. Amid that, depending on the customer, there are customers who can expect a further increase or other customers that is going through an adjustment. So mixed performance when depending on the customer for China.

So depending on exposure to the customer, the aggregate numbers may be affected. But overall, the market conditions, I would say, is slightly weaker, I think. That's my impression.

If I may supplement. So the overall tone, of course, the year-end profit margin may come down because of the expenses. But the operating profit bottoming out, can -- do you see signs of that towards the beginning of the year, next year? Or is that the message you want to get across? Or do you still maintain a cautious forecast? And will that stay flattish? Is that your message, Mr. Shibata-san? So what is the message, your main message today?

Well, that is the point that I find difficulty with. Flattish, slight increase in terms of margin. I think if you can achieve that number, I'd be happy. I do understand the background where your question is coming from. But I, myself, we have to accelerate the investments for the longer term of the business. So if you consider that rather than continuously increasing the margin, we would like to achieve a gradual increase in line with the revenue. So that I think is the best scenario for us.

Next, UBS Securities, Yasui-san.

I would also like to ask a question about the data center. That's my first question. Or GPU customers, in addition, there will be a custom ASIC increase next year. So the 1/3 or higher share and based upon the certain size, non-GPU, is that something that you think you can achieve?

Well, that's a very good question. How can I say this? It is yes, but it's a custom -- so it has to do with our bandwidth. So doing everything is not possible. And if we try to do that, execution will deteriorate. So each one, choosing each socket is something that we will be doing.

I will not mention the numbers, but in Q4 forecast, custom power number is coming in, and it's going to grow strongly next year. And custom platform for the hyperscalers, we have several different ones. So for example, try to do everything. Getting 50% or 100%, that is not realistic. So choosing some of them rather than 1/3 or going for a higher share. That would be our approach.

So in that sense, PMIC, digital power for different customers, I think that there will be differences?

Not really, but depending on customers, the architecture that they want is different. And the generation change and the timing of that will be different. But having said that, wafers and back end, the production side would be the same. So it has to do with the capacity allocation and equipment facilities that we need, because of those factors, if you look at end-to-end, it's not just making one product and apply it to everything else.

I see. The second question is about automotive. In Q3, the gross margin is 55%. So I think this is the highest level that you achieved based on the disclosure. So do you think that this will go up further? Q3 was high. Is this sustainable? If you can comment on that.

Yes. I would ask Shinkai-san to respond.

Yes, Q3 automotive the utilization rate increased and the production expenses coming down. So it has to do with the cost side improvements. And because of those, this is a Q-on-Q increase of 22.8%. So whether it's sustainable or not, it really depends on the utilization rate. So half of that will be changing based upon the utilization, and the remaining half will be the cost reduction, and the continuous progress of the cost reduction. Based on that, we might be able to continue. Thank you.

Moving on to the next questioner. BofA, Hirakawa-san.

BofA, Hirakawa here. My first question. The noncore business write-off or the reorganization, what is the progress? By the media, you said that you're planning to sell timing-related business? I'm sure you cannot -- if you can comment to the extent possible, that would be appreciated. But rather than these specific names, I would like to talk about the overall progress, how that is positioned? And what kind of actions are being implemented together with the time horizon? That's my first question.

Shinkai-san, can you talk about that?

Yes. The product portfolio review. We have an annual cycle and on a continual basis, we are reviewing this with that approach. So in that cycle, we decide whether to focus or which one to go for an alternative approach. At this point of time, it's not that we have decided everything, and this is in the portfolio for restructuring. We are looking at things on a continual basis.

The criteria that we apply for that selection, is whether that is suited for our core embedded semi. How much they can offer a synergistic value inside the company, we look into that, the contribution to the core. And based on that, we decide whether to focus on the business or not to focus on that particular business.

Well, a follow-up question on that point. So the synergistic value, what kind of asset? So if you take the total asset of your company as 100, which -- what percentage of such -- do you have such kind of assets that can be synergistic to your core?

Well, it's very difficult to give a quantitative number as to this much is the synergistic asset. But we would like to conduct a continuous update and review the product line on a continuous basis. And because these changes -- these things changes on a relative basis based on these considerations.

All right. My second question. Relating to Altium Renesas 365. You said that you are working to expand the user base of Renesas 365. What kind of actions are you implementing in order to expand the user base? And if you can give us some quantitative indication as to the pace of increase of user base. And also, you said that you are taking a Windows-like approach. You're not going to be hasty. But when you launch this system in the end of the year, what are the features to be made available upon the launch? If you can comment on that, that would be appreciated.

User base expansion has just started. It's just earlier. So we cannot comment on the pace of progress. By having this on the cloud, the pricing structure has changed significantly weak. So compared to before, for small users, I think it's easier to use. So we are going to provide an option that will make it easier for use for the smaller scale users. That's one thing.

Another thing is that by region, we will apply more resources such as China and India. For those markets, we'll become more full scale, full scale in addressing these markets. So those are the 2 major pillars that we are working on in order to expand the user base of Renesas 365.

And for Renesas 365, for one thing, at the Embedded World, we have demonstrated something that will serve as a benchmark for you. But beyond that, I think this is more effective and maybe not be a clear cut at site. That is about the cloud-embedded nature.

Previously, we had provided many different tools. We thought that we had been providing good tools, but that can be downloaded from the website, but the version management was so complex. So we had taken that kind of classic approach. But this time around, everything will be cloud enabled from this time onwards.

So when that happens, I'm sure you're using this, but Office -- if you use Microsoft Office 365, you don't have to care about the version difference of the software and all the bug fix will be done automatically. So in that way, in that kind of approach, all the latest versions are provided seamlessly through the cloud. That is the state that we would like to realize in this first phase of this product.

So the functionality is not going to increase significantly, drastically. Rather, the ease of use compared to before will improve significantly. That is the first focus. And then from there, our philosophy is that we would like to work together with lead partner customers. The number of such customers will be limited. So together with them, we would like to discuss what are the futures that will -- that needs to be improved, that could be most effective for the customers. So we will work on that and then decide on the priority of our development.

As you may be aware, in the cloud environment, the update cycle will change significantly compared to conventional products. So agile will be the key here. So we will constantly upgrade and update the product. So when you notice, the customers will notice that the ease of use has changed dramatically. So that is the initiative that we are contemplating.

Next, Daiwa Securities, Okawa-san.

Okawa from Daiwa. In the IIoT, the gross margin, the -- I think that the data center is brisk with the high profitability, but this is not growing as much as expected. So Q4, you mentioned that the deterioration of the product mix. Could you elaborate on that? IIoT and automotive, maybe it's for both. So if you can make some additional comments.

Yes, Shinkai-san, please.

Well, first of all Q3, IIoT, there are differences. So gross margin relatively high, is for the data center, the memory interface grew. So for example, the same data center segment would have lower profitability. So we are trying to drive that mix.

So right now, what is growing? And among them, the higher -- they're not always higher than the average gross margin. So there are some differences of the gross margin level. And so IIoT margin changes reflect those differences. So for example, high-density power compared with the average, gross margin is not so high. So if it grows, the overall margin will be pushed down. So margin, gross margin growth is muted, so to speak. It appears to be muted.

So in Q4, the similar reason, Q3 was good. So there is a reaction from that. And as a whole, the low-margin products will grow. And as a result, the margin would come down.

Second question is about the industrial prospect. Competitors, of course, they handle the different products, but the industrial, I think there are some conservative or prudent prospect by other companies. So for you, what is your prospect? And by different regions, do you see the differences of the recovery? So about the industrial?

Yes. Well, maybe if I can categorize them into 3 groups. The first is traditional factory automation and energy management is another. And the third is the smart appliance or white goods. So if I categorize them into 3 energy management is strong, it appears.

So by region or rather than differences by region, there are customers who are strong in energy management. And of course, there are regional differences. But regardless of the geography, energy management is strong.

As for white goods, it is also quite good, quite strong. No differences of the region. Well, China is big in terms of volume. But rather than the regional differences, hitting the bottom and a recovery cycle has already started.

As for the hardcore factory automation, there is a mixed view. The Japanese customers are not so strong. If you look at the world, they don't really look very strong. But in the past, there was a very difficult situation, but that is over. So gradual recovery is something that we expect.

So by region, as I said, and in the short term, Japan Europe towards Q4, how can I say this, because of the comparison to Q3, the growth will be driven, but as an overall trend, it is not so strong.

Now moving on to the next question. Citigroup Securities, Fujiwara-san.

This is Fujiwara from Citigroup. I also have two questions. One, well, I'm just -- this just happened recently. So this is about the Nexperia supply issue. I just want you to remind us once again. I'm sure that you are now sorting things out at the customer side, but what is the likely impact on the fourth quarter performance according to your assumption? Or what are the potential outcome that is indicated by the customer? If you can share that with us to the extent possible.

Shinkai-san, can you answer that question?

Yes. At this point of time, the current outlook does not factor in this impact. As far as the shipment is concerned, there won't be a significant impact according to our view because of the backlog -- in relation to the backlog. As far as the sell-through is concerned, we are anticipating a slight impact from this. We cannot rule out that possibility.

Sell-through, we are going to ship things based on the sell-through. But if there's any downside to the sell-through, then the inventory may climb up. So that's a possibility that we have to foresee. But we don't have the details available. So that's the reason why we have not factored this in -- in the forecast.

So the -- it's not -- unless there's a major adjustment, the October-December period will be landing as planned. And if there's any impact, you're going to adjust with the first quarter in the next year.

Yes, if there's an impact in December, then we'll have to adjust and there may be a handover effect on the January to March quarter.

Okay. The second question regarding the procurement attitude on the part of customers, if you can comment on that. Well, this year, you received many short-term orders, I believe. But when you look at the overall industry, the inventory level is quite slim. So customers are not increasing their inventory level according to what I see. So have you seen any changes in the customers' procurement attitude, if there's any indication that you can share with us towards 2026?

What is the direction of customers purchasing or procurement attitude? If you can share with us, that would be appreciated.

Well, a very good question. Well, at this point of time. As a general trend, the inventory buildup trend were increasing lead time, that's what we do not see at the moment. But if you think about the possibility, data center or AI-related components, some components relating to AI because they use a significant amount of certain components, like because the device die is so large, and therefore, that's the area where we have a shortage in terms of components and then our capacity. So then we cannot rule out the possibility of everybody trying to go secure that. So that may result in a longer lead time. If that is the case, then the inventory buildup trend and initially, I would say, may be difficult for us to distinguish whether that is a buildup of inventory. So we have to make sure that we have a close communication with customers and address what is happening there. So at this point of time, I would say we are not seeing any conspicuous changes.

For the short term, there might be some customers narrowing down the inventory level too much and therefore, increasing, but we don't see a general trend across the board yet.

We are getting close to the end. So we'd like to end the Q&A. Lastly, I'd like to ask Shibata-san to say the closing remarks.

Yes. So we continue to see that strong AI and as a derivative of that, energy-related is strong, and also IoT, part of it, we are gaining market shares. And so it's strong. So those are the major parts and especially the execution, we want to make sure that we don't make any mistakes. We want to work on the internal initiatives.

And as for automotive, there are some uncertainties. So we'd like to be careful, but we want to make sure that we capture the upside. So that is the attitude that we have had, and we would like to continue that. So I hope that you will continue to support us, and thank you for joining us today.

So with that, I'd like to end the Q3 earnings call of Renesas Electronics. Thank you very much for your participation today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]