Operator: I am Nishika from the Investor Relations Division of the Corporate Communications Department and will be serving as the moderator. Thank you. First, I would like to introduce the speakers. Executive Vice President and Chief Financial Officer, Yoshihiko Kawamura. Executive Officer and General Manager of the Corporate Communications Department, Toshiaki Fujikawa. These will be the two speakers. I will now go over the agenda for today's briefing. After noting some disclaimers, Fujikawa will discuss the NAND market overview as well as enhancement of production capability to support growing demand in the AI era. Following, Kawamura will be presenting the results for the Q2 of the fiscal year ending March 2027, as well as guidance for the Q3, and surrounding all of the initiatives for enhancing our corporate value. After that, we will move to the Q&A, and the event is scheduled to conclude at 8:15PM.
Operator: This is going to be recorded for on-demand distribution in the future, so please do be understanding. Allow me to go over the disclaimers. Please be aware that the forward-looking statements and explanations contained in today's materials and presentations are based on assumptions and beliefs formed by the company based on information available to us at this time. Actual results may differ due to various risks as well as uncertainties. Furthermore, the company assumes no obligation to update the forward-looking statements contained in today's materials as well as presentations. For more disclaimers, please refer to the information displayed on the screen. Now over to Fujikawa.
Toshiaki Fujikawa: Allow me to begin with an overview of the NAND market. At a high level, we expect NAND supply-demand dynamics to remain tight, supported by AI-driven demand and data centers. First, on the left, is data center enterprise.
Toshiaki Fujikawa: AI-related demand remains exceptionally strong, driven by the growing adoption of agentic AI applications, while demand for KV cache continues to grow. In addition, the explosive increase in AI-generated data is supporting the adoption of high-capacity QLC SSDs. Next, in the center, are smartphones and PCs. For smartphones, unit shipments of low-price models are moderating at a faster pace, while premium models remain resilient. We therefore expect no significant changes in NAND demand through calendar year 2027. For PCs, unit shipments are declining due to higher BOM costs, and NAND demand is also expected to decline through calendar year 2027. On the right is our NAND market outlook. Data center enterprise demand is expected to offset softer smartphone PC demand, with robust demand growth continuing in CY 2028 as well. We expect bit growth in the high teens percentage range in CY 2026 and the low 20% range in CY 2027.
Toshiaki Fujikawa: Kioxia's bit shipment growth is also expected to be in line with the market outlook. Next, I will explain how we are enhancing our production capability to support growing demand in the AI. To address growing AI demand, ramp up production of cutting-edge products, and ensure a stable supply, we have begun site preparation for Fab 3 or K3 at the Kitakami plant. K3 is planned to produce advanced node BiCS FLASH, with operations scheduled to begin in fiscal year 2029. As we expand production capacity, we will first fully utilize available space at the existing Y7 fab in Yokkaichi and K2 fab in Kitakami. We will then expand K3 in phases calibrated to market demand growth. The photo on the right provides an overview of the Kitakami plant, including the planned K3 construction site together with the existing K1 and K2 fabs.
Toshiaki Fujikawa: In addition, the absorption-type merger of Kioxia Iwate Corporation into Kioxia Corporation announced today is intended to achieve sustainable growth by strengthening manufacturing scale for cutting-edge flash memory products, as well as by improving management efficiency and reinforcing our business through the integrated deployment of management resources, including personnel and technologies, and the optimization of our business structure. As such, alongside the Yokkaichi plant, the Kitakami plant is an extremely important site in our business strategy. We will continue to make strategic capital investments while carefully assessing demand trends, steadily building the production base needed to meet growing demand in the AI era. Now, over to Kawamura.
Yoshihiko Kawamura: I am the CFO, Kawamura. Thank you very much for your attention in advance. Continuing from Fujikawa's discussion, allow me to discuss the FY2026 Q2 results, as well as the FY2026 Q3 guidance.
Yoshihiko Kawamura: I would like to be going along with the slides. Please follow the slides on the screen. First, starting with slide 8, please. This will be the financial highlights. For the Q2 highlight, as you can see from the left to right, you can see there is revenue, adjusted non-GAAP gross profit, non-GAAP operating profit, our free cash flow, as well as capital efficiency. You can see that revenue has marked record highs quarter-on-quarter. It has increased by 1.4 times, and it is JPY 2,480 billion, and including the JPY 66.6 billion for JV-related sales as well. This is a record high. When it comes to non-GAAP gross profit after adjustment, this was record high as well. Quarter-on-quarter, it was 1.5 times, and it was JPY 2,091.9 billion, and the margin was 84%.
Yoshihiko Kawamura: After excluding JV-related items, the margin was 87%. Next will be the non-GAAP operating profit. This was also record high, and quarter-on-quarter, it was 1.5 times, and it was at JPY 1,988.3 billion, and the margin was at 80%. When it comes to net profit, it will be available in the next slide. It was JPY 1,348.6. That was also record high. There was operating cash flow, which is going to be net of Capex spending. That was also record high, and quarter-on-quarter, it was 1.7 times. It was JPY 1,438 billion. Either way, all of the numbers were record highs. As a result of that, when it comes to capital efficiency, you can see that our ROIC number, return on invested capital, was 102%. In this world, this is something that is pretty much unprecedented.
Yoshihiko Kawamura: If we were to look at the capital cost as 10% with WACC, the ROIC minus WACC, there is a 10%, which is 90%. It is an astonishing number. As a result of that, the net cash, JPY 1,127 billion. The net cash, you can see the small numbers and the balance sheet on the left-hand side when it comes to cash as well as cash equivalents. All of the borrowings have been netted, and that is JPY 812.7 billion. The share buyback that was completed back in August, there was JPY 800 billion that has been allocated, and that is a cash-out. Another highlight to note here. You can say that there is revenue as well as non-GAAP operating profit after adjustments.
Yoshihiko Kawamura: In the past year, for FY2026 in the 12 months, it is the full year's worth that has actually been posted in the three months from July to September. You can see that our profitability has been improving quite significantly. Moving on to page 9, slide 9, please. You can see the Q1 as well as the Q2 guidance as well, which has been announced at the end of July. This is a comparison sheet. On the left, we have all of the revenue, non-GAAP operating profit, non-GAAP net income, as well as non-GAAP EBITDA, as well as non-GAAP EPS, as well as exchange rates. On the left, you can see the results for the Q1. The Q2 guidance is available in pink, and the very right will be the results.
Yoshihiko Kawamura: All of the Q2 results have, of course, been above the guidance. Revenue guidance was JPY 2,390 billion, whereas the results were JPY 2,480 billion. This is in alignment with the previous slide. For non-GAAP operating profit, the guidance was JPY 1,900 billion, whereas the results was JPY 1,988.3 billion. As you can see, the margin was above 80% levels. The Q1 margin was 75%, therefore it is exceeding quite significantly at 80% levels. The non-GAAP net income, the guidance was JPY 1,280 billion, whereas the results were JPY 1,348.6 billion. The margin is 54.4% as a significant hike. Non-GAAP EBITDA, this was JPY 2,065.7 billion. The margin was 83% levels. As a result of this, the non-GAAP base EPS, the guidance was JPY 778.57, whereas this result is showing that it was JPY 833.94.
Yoshihiko Kawamura: Exchange rate in the Q1, we were expecting JPY 150 to the dollar. The Q2 is JPY 161 to the dollar, so the yen has weakened by JPY 1. When that happens, operating profit-wise, there is about JPY 15 billion worth of impact. It is about JPY 14 billion out of the JPY 2,400 billion, and therefore it is very minuscule as an impact. There are two things that I would like to note. One will be ASP increase, and the other will be bit growth. This will be the increase in our bit growth. ASP-wise, on average, it is the mid-20% increase. When you look at the like-for-like basis, it will be the low 30% increase. For bit growth, it is in the low teens, a percentage of increase.
Yoshihiko Kawamura: In the Q2, ASP has risen, and bit growth has also risen. Moving on to slide 10.
Yoshihiko Kawamura: We have the sales by application here, and you can see the different colors on the slide. The pink part would be SSD and storage. The blue would be smart device. If you take a look at the right side of the slide, we have SSD and storage. It is JPY 1.616 trillion, and blue smart device is JPY 788.9 billion. On a QoQ basis, and also on a YoY basis, we have been able to grow, but it is a substantial growth. The reason behind this is on the right side. For the smart device, the sales price significantly increased, and it drove the majority of this quarter's revenue growth. We have been able to achieve an all-time high in sales revenue. On the bottom, we have the SSD and storage results.
Yoshihiko Kawamura: For PC and others, the mix was 65%, and for data center and enterprise, it is mid-60% range. SSD shipment driven by strong AI server demand combined with higher ASPs, and this contributed to a record segment revenue. As a result, on the very left, in pink, the SSD and storage accounts for 65% of the total. Smart device is 32%. The BiCS FLASH, which we call BiCS8, this would be our core product now, and we have been able to have this product to drive the sales. Please turn to page 11. We have the results by application. We have the figures on a quarterly basis and also on an yearly basis to see the trend. For all applications, the quarterly revenue was a record high. You can take a look at the bar graph on the bottom.
Yoshihiko Kawamura: The third from the left would be the Q1 to Q4 figures for FY2025, and we have the Q1, Q2 figures of this year, and we also have the full-year results of FY2025 on the right side. It is very obvious, it is on the right. When we look at the Q2 breakdown, the pink is SSD and storage. It is JPY 1.616 trillion. The blue smart device is JPY 788.9 billion. If we compare this with last year's figures, SSD and storage for last year was JPY 1.3626 trillion, and this accounted for 58% of the total, and now we have been able to reach 65% in the second quarter. You can see that we have been able to steadily grow the SSD and storage business. The annual results of FY2025 was JPY 2.3376 trillion, but when we look at the Q2 results, it is JPY 2.48 trillion.
Yoshihiko Kawamura: This quarter alone has already exceeded last year's full-year results. SSD storage is the driver of the performance. On the other hand, if you can take a look at the foreign exchange rate on the very bottom, if you take a look at the left, we started off with JPY 145 in Q1 last year. The yen has depreciated and difference, and this has an impact of a couple billions of yen. Compared to the revenue of JPY 2.48 trillion, it is a limited impact. Please turn to page 12. I would like to have you take a look at our cash flow results for the second quarter. On the left, we have the bar chart. We have JPY 791 billion on the very left. In the small font on the bottom, this would be the cash balance as of the end of June 2026.
Yoshihiko Kawamura: On the very right, for the end of September 2026, the cash balance is JPY 1.3973 trillion. I will be referring to the balance sheet afterwards, but cash and equivalents is this value. The ups and downs, on the very left, we have JPY 791 billion. That is the balance. The operating cash flow is added onto that, JPY 1.5132 trillion. From there, we have the net CapEx of minus JPY 75.2 billion subtracted. We have the core free cash flow of JPY 1.438 trillion. This would be free cash flow affiliated to our business operation, and we track these figures. Going forward, we will be using this core free cash flow as a key index. We have the adjustment, and we have minus JPY 827 billion. A majority of this would be the JPY 800 billion coming from the share buyback.
Yoshihiko Kawamura: We have the adjustment of minus JPY 4.2 billion, and we get to the cash balance of JPY 1.3973 trillion as of end of September. On the right, I have the explanation of operating cash flow, as I mentioned. Due to the increase in selling price and the increase in sales of data center and enterprise SSDs, the operating cash flow had improved. We also have the production expansion of BiCS FLASH generation 8. So, operating cash flow is 1.7 times on a QoQ basis. It is a record high. When we look at the investing cash flow, the gross CapEx is JPY 84.6 billion. The government grants is JPY 9.3 billion included in here. If we net these figures together, we get to the JPY 75.2 billion on the left side.
Yoshihiko Kawamura: The BiCS FLASH generation 8 and generation 10 would be subject to our investment, and so a lot of the investment is coming from this production of gen 8 and 10. The financial cash flow includes the share buyback of JPY 800 billion. So, what do we do with this cash? Towards the H2 of the year, we will continue to spend on CapEx, and I will be talking about this in the end, but we have been able to build up this much cash, and so we would like to use this for interim dividend. Please turn to page 13. This slide shows our balance sheet. Let me explain in detail. We have significantly strengthened our financial position, with the equity ratio improving to 60%. On the left side of the slide, you can see the assets with 2 bar charts.
Yoshihiko Kawamura: The bar on the left shows the figures as of the end of FY2025, while the bar on the right shows the figures as of the Q2 of FY2026. First, I would like you to take a look at the total value of our balance sheet. The total was JPY 3.6901 trillion in FY2025, and it is now JPY 5.8839 trillion. The difference is JPY 2.1938 trillion. In other words, our assets have increased by approximately 60%. Even with this significant expansion in assets, our investment efficiency, as measured by ROIC, has improved. So, although the size of our assets has increased substantially, investment efficiency has not declined. In fact, it has moved in the opposite direction. The right side of the slide shows liabilities and equity. Here again are 2 bar charts. The left shows the FY2025 figures, and the right shows the Q2 of FY2026 figures.
Yoshihiko Kawamura: The key point here is the increase in equity ratio, as I mentioned earlier. It increased from JPY 1.399 trillion at 38% as of the end of FY2025 to JPY 2.9291 trillion, 50% at the end of Q2 FY2026. On the top, JPY 1.3746 trillion of other liabilities reflects JPY 300 billion to JPY 400 billion worth of higher income taxes payable as a result of the increase in profit. Further top part of the chart, you can see bonds and borrowings. It decreased from JPY 1,047.6 billion at the end of FY2025 to JPY 603.9 billion at the end of Q2. A little over JPY 400 billion in senior loans was fully repaid in Q1. On the right side, you can see days of inventory. We consider approximately 100 days to be a normal level.
Yoshihiko Kawamura: As you can see, the figure was 94 days in Q2 FY2026. Please turn to the next slide. Q3 guidance for FY2027 or 2028. We have the Q2 actual on the left, and we have the guidance on the right side. Revenue, the Q2 results was JPY 2.48 trillion. Q3 guidance, we have set it at JPY 2.5 trillion. It is a 1% increase. non-GAAP operating profit, Q2 was JPY 1.9883 trillion. Margin is 80%, and we want the margin to be flat for Q3, and the value is expected to be JPY 2 trillion. non-GAAP profit before tax is JPY 1.9612 trillion for Q2, and the Q3 guidance is set at JPY 1.985 trillion. The margin is flat. non-GAAP net income is JPY 1.38486 trillion for Q2 results, and Q3 guidance is at JPY 1.365 trillion, almost the same.
Yoshihiko Kawamura: On a QoQ basis, everything is pretty much +1%. non-GAAP earnings per share, Q2 was JPY 833.94, and this is an increase of 2% for the Q3 guidance at JPY 854.24. The EPS is increasing, and even with this much of the balance sheet, there is the buyback impact, and this 2%, for example, if we look at the 1% increase of the profit, the earnings per share of non-GAAP is increasing. Please turn to page 16. I would like to explain our initiatives to enhance corporate value. Our first priority is investment for growth. Investment for growth is our top priority, including the funding required for contingencies. After meeting these needs, any excess cash will be returned to shareholders. Please take a look at the bottom of the slide, which shows the investment and spending required for growth. This naturally includes future Capex.
Yoshihiko Kawamura: It also includes R&D investment to support Capex, investment in human capital, and strategic investment, including potential M&A opportunities. Other future expenditures and contingencies are also included. Together, these items represent the cash we consider necessary. Next, as shown in the middle of the slide, we will ensure financial soundness. We intend to maintain a net cash position with cash exceeding interest-bearing liabilities. This comes to cash larger than interest-bearing liabilities. We will monitor capital market conditions as the cost of debt may fluctuate and manage our cash balance accordingly. However, our basic approach is to keep cash above interest-bearing liabilities. Any cash remaining beyond that level will be returned to shareholders. We intend to return 100% of excess cash to shareholders, to be specific, through progressive dividends and flexible share buybacks. The next slide provides further details on our shareholder returns.
Yoshihiko Kawamura: We will be paying an interim dividend. At the beginning of the fiscal year, we were not yet in a position to determine whether we can pay an interim dividend. However, as I mentioned earlier, our cash flow is currently very strong, and we have therefore decided to pay an interim dividend. Looking at the shareholder returns we have made so far, starting from the left, we completed an JPY 800 billion share buyback in August 2026. Even after the buyback, we maintained a net cash position. The buyback has also improved our capital efficiency. The interim dividend is expected to total approximately JPY 48 billion. As you can see on the bottom, equivalent to JPY 90 per share on a pre-stock split basis. Following the 3-to-1 stock split in October, this is equivalent to JPY 30 per share on a post-stock split basis.
Yoshihiko Kawamura: The year-end dividend has not yet been determined. Our guiding policy is to provide progressive dividends, and we are thinking of raising it higher than JPY 60, and we will also consider additional shareholder returns, such as share buybacks. On the right side of the slide, you can see our approach to funding these returns. As mentioned earlier, we will prioritize investment for growth. Any excess cash remaining after those investments will be allocated in full to shareholder returns. Dividends and share buybacks will be the two means of providing those returns. This will be our first dividend since listing, and we are very pleased to be able to make this payment. I would like to take this opportunity to sincerely thank all of you for your continued support. Finally, I would like to summarize the key takeaways from our Q2 earnings call.
Yoshihiko Kawamura: There are three key points listed on the slide. First, growth continues to accelerate, supported by expanding AI demand. Revenue in Q2 exceeded total revenue for FY25, with SSD and storage products serving as the largest growth driver. Although revenue and profit for Q3, as mentioned in the guidance, are expected to level off somewhat, we expect a strong rebound in Q4, resulting in a record-high full-year result. There is a clear reason behind this. Demand has been extremely strong, and some shipments were brought forward into Q2. That is the first reason, and the other reason is the product mix has shifted with data center sales increasing. Because data center products generally have longer production lead times, some orders that would normally have been recognized in Q3 have effectively been split between Q2 and Q4.
Yoshihiko Kawamura: This affects how the Q3 results appear. However, the portion shifted to Q4 will be recognized then, and we therefore expect a strong rebound in Q4. As a result, growth momentum is expected to accelerate further through Q4. Kioxia's FY26 bit shipment growth is expected to be in the high teens percentage range year-on-year. That is the level of growth we currently expect. Second, we have structural demand visibility extending into calendar years 2027 and 2028. Strong demand from data center and enterprise customers is expected to offset softer demand for smartphones and PCs, with robust demand growth also expected in calendar year 2028. We are seeing growth across the short, medium, and long term. As I have said repeatedly, we are clearly entering a super cycle.
Yoshihiko Kawamura: In CY2027, bit market growth is expected to be in the low 20% range. Our bit growth is also expected to be broadly in line with the market. For CY2028, multi-year LTAs cover more than 50% of our shipment volume on a gigabyte basis. Discussions are still ongoing regarding the remaining volume, but we have already secured coverage of at least 50%. For CY2027, capacity allocation is essentially complete, meaning that our available supply is effectively sold out. This reflects the exceptionally strong demand environment. Third, we continue to pursue value creation through our strategic priorities. We will prioritize growth investment while maintaining financial soundness, and we have also clarified our shareholder return policy. Over the medium to long term, we aim to return 100% of excess cash to shareholders. We will also pay an interim dividend of JPY 90 per share.
Yoshihiko Kawamura: The year-end dividend has not been decided yet, but we intend to pursue progressive dividends. We completed an JPY 800 billion share buyback in August 2026 and will consider future actions in light of our cash flow. Finally, I believe we have three key strengths. The first is our technological advantage from BiCS8 through BiCS10. The second is our longstanding relationships with customers. These relationships enable us to provide products in a timely manner that meet our customers' technical requirements. Our third strength is our sound financial position. These are the three key strengths that we believe distinguish our company. That concludes my presentation. Thank you very much.
