Tokyo Electron Q1 FY2026 slides: Revenue dips as chip investment patterns shift

Introduction & Market Context

Tokyo Electron Ltd (TYO:8035) presented its Q1 FY2026 financial results on July 31, 2025, revealing a slight year-over-year revenue decline amid shifting semiconductor investment patterns. The company reported that while the quarter progressed as planned, the broader semiconductor equipment market is experiencing a transition from aggressive upfront investments to more measured, steady capital deployment by chip manufacturers.

The company revised its calendar year 2025 Wafer Fab Equipment (WFE) market forecast upward from $110 billion to $115 billion, though this adjustment primarily reflects currency fluctuations rather than increased unit demand. For FY2026, Tokyo Electron projects a WFE growth rate of -5%, indicating continued market softness through the first half of the fiscal year.

Quarterly Performance Highlights

Tokyo Electron reported Q1 FY2026 net sales of 549.5 billion yen, representing a 1.0% year-over-year decrease and a more substantial 16.1% quarter-over-quarter decline. Operating income fell 12.7% year-over-year to 144.6 billion yen, with operating margin contracting to 26.3% from 29.9% in the same period last year.

As shown in the following quarterly financial summary:

Net income attributable to owners of the parent decreased 6.6% year-over-year to 117.8 billion yen. The company’s gross profit margin declined to 46.2% from 47.6% a year earlier, while SG&A expenses increased 11.2% to 109.2 billion yen, reflecting continued investment despite revenue challenges.

The financial performance trends over recent quarters illustrate the company’s declining profitability:

Detailed Financial Analysis

Tokyo Electron’s regional sales composition reveals significant geographic dependencies, with China representing 38.6% of total sales (212.1 billion yen) in Q1 FY2026. This highlights the company’s exposure to the Chinese semiconductor market, which has been affected by both scaling back of legacy investments by emerging Chinese chip manufacturers and export regulations.

The following chart breaks down the company’s regional sales composition:

In terms of product mix, non-memory applications (logic, foundry, and others) dominated the company’s Semiconductor Production Equipment (SPE) new equipment sales at 64% in Q1 FY2026, with DRAM accounting for 26% and non-volatile memory for 10%. This reflects the current industry focus on advanced logic for AI and high-performance computing applications.

The company’s product mix by application is illustrated in this chart:

Tokyo Electron’s capital expenditures more than doubled year-over-year, increasing 120.2% to 52.8 billion yen, while R&D expenses rose 16.3% to 62.1 billion yen. These significant investments, despite declining revenues, underscore the company’s long-term commitment to innovation and capacity expansion.

Strategic Initiatives & Future Outlook

Looking ahead, Tokyo Electron revised its full-year FY2026 financial estimates, projecting net sales of 2,350 billion yen (a 3.4% decrease from FY2025) and operating income of 570 billion yen (an 18.3% decrease), with an operating margin of 24.3%.

The company’s updated financial forecast for FY2026 is detailed in this table:

Tokyo Electron expects a shift in product mix in the second half of FY2026, with non-memory applications decreasing from 71% to 59% of SPE new equipment sales, while DRAM increases from 26% to 30% and non-volatile memory from 3% to 11%. This projection suggests an anticipated recovery in memory investments later in the fiscal year.

The company’s SPE new equipment sales forecast by application is shown here:

A key driver of future demand is the increasing complexity of cutting-edge chips for AI servers. Tokyo Electron highlighted that from CY2025 to CY2027, AI server chips are expected to increase from 200 billion to 500 billion transistors, with memory capacity growing from 288GB to 1TB, and GPU nodes advancing from two 4nm GPUs to four 3nm GPUs.

This technological progression is illustrated in the following image:

Forward-Looking Statements

Despite near-term challenges, Tokyo Electron is investing in new facilities to support future growth, including a New Development Building in Kumamoto Prefecture, a Tohoku Production and Logistics Center in Iwate Prefecture, and a New Production Building in Miyagi Prefecture. The company plans R&D expenses of 295 billion yen and capital expenditures of 240 billion yen for FY2026.

The company’s facility expansion plans and investment strategy are shown here:

For shareholders, Tokyo Electron announced a dividend forecast of 485 yen per share for FY2026, maintaining its commitment to a 50% dividend payout ratio. The company also indicated it would flexibly consider share buybacks as part of its shareholder return policy.

CEO Toshiki Kawai expressed confidence in the company’s long-term prospects, noting that "semiconductor demand is expected to grow toward next year, and that outlook hasn’t changed at all," while acknowledging the need to scrutinize market trends carefully. The company’s strategic focus remains on innovation and maintaining market share in leading-edge technologies, positioning it to capitalize on the anticipated recovery in semiconductor demand driven by AI applications.

Full presentation:

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