TOKYO ELECTRON ANNUAL REPORT 2017

PAGE9CONTENTS

Business Overview
and Financial Highlights

To Our Stakeholders

Interview with the CEO
Message from the CFO

Corporate Governance
CSR-Oriented Operations

Review of Operations
and Business Outlook

Financial Section

Corporate Data

Review of Operations and Business Outlook

Review of Operations and Business Outlook

Semiconductor Production Equipment (SPE)Share of Net SalesFPD Production Equipment

2016 Business Environment

Share of Net Sales

Driven by the arrival of the internet of things (IoT), the growing sophistication of smartphones anddata center servers continued unabated, while demand ramped up for higher-capacity memory andfaster logic chips. Given this backdrop, investment growth in memory was particularly robust in thearea of 3D NAND. In logic chips, capital expenditure was implemented primarily by foundries, whichinvested aggressively in cutting-edge 10 nm generation products. As a result, 2016 global capital
expenditure for wafer fab equipment (WFE)* grew more than 10% year on year to approximately
US$37 billion.

2016 Business Environment
In small- and medium-sized panels for smartphones and other mobile devices, on top of investment in conventional LCDs, capital investment targeting new OLED displays began in earnest,
anticipating their widespread adoption. Driven mainly by this investment in small- and mediumsized panels, display panel capital investment in 2016 grew considerably year on year, surpassing
US$10 billion. Within this overall market, the equipment market for thin-film transistor (TFT) arrayprocesses,* in which Tokyo Electron operates, grew about 30% from the previous year.

6.2%* Thin-film transistor (TFT) array processes: The processes of manufacturing the substrates with the electric circuit functions that drive displays* Wafer fab equipment (WFE): The semiconductor production process is divided into front-end production, in which circuits are formed onwafers and inspected, and back-end production, in which wafers are cut into chips, assembled and inspected again. Wafer fab equipment
refers to the production equipment used in front-end production and in wafer-level packaging production.

93.8%

Fiscal 2017 Business Overview
Segment net sales rose 10.5% to ¥49.3 billion.

Net Sales andProfit Margin by Segment(Billions of yen)(%)

750600

749.8

576.2

613.0

24.43024

Fiscal 2017 Business Overview

Net Sales andProfit Margin by Segment

Segment net sales grew 22.3% year on year to ¥749.8 billion.
• By region, sales mainly grew in Taiwan, China and South Korea, reflecting booming investment in NAND flash memory and by foundries.
• By product, rising demand and market share increases drove sales growth in the key field ofetch systems. In deposition systems, sales of semi-batch ALD** systems for cutting-edge
miniaturization were double their fiscal 2016 level.
• Sales in the field solutions business (encompassing sales of parts and used equipment, modifications and maintenance services) rose 12% year on year to approximately ¥208.0 billion.

(Billions of yen)5049.32040** ALD (Atomic layer deposition): An atomic level film deposition technique** PICP: A plasma source that produces extremely uniform high-density plasma on panel substrates

10.630

9.4

10Business Outlook
300

12150

60015

1617Segment net sales
Segment profit margin
Segment profit corresponds to income before income
taxes on the consolidated statements of income.

With the arrival of IoT, semiconductors are beginning to be used in all kind of everyday objects. At
the same time, research into autonomous driving and AI is advancing toward commercialization. As
a result, demand for cutting-edge semiconductors that can instantly process and analyze clouddata is growing rapidly. Backed by this expansion in demand, the WFE market is beginning to enteran accelerated growth trajectory toward the US$40 billion mark and beyond. Tokyo Electron has
positioned etch, deposition and cleaning systems, which are expected to see especially strong market growth, as key fields. By achieving technological differentiation in these fields, the Company
aims to increase its profitability and market share.
In particular, 3D NAND requires advanced deposition technologies to increase the number of vertically stacked layers as well as etch technologies that can simultaneously etch said layers with highprecision. Tokyo Electron will continue to hone its long-held strengths in deep hole etch technologies and expand its market share of etch systems used in the NAND field.
In logic chips, miniaturization using multiple patterning continues to advance. This multiple patterning uses etch and deposition technologies to realize microfabrication. Tokyo Electron aims toincrease revenue and profit by expanding sales of etch systems, for which it boasts a high market
share, as well as high-productivity semi-batch ALD systems and cleaning systems that reduce pattern collapse.
Furthermore, over the long term, the expected adoption of new materials and changes in transistor structure will lead to considerably more formidable and complex technological challenges. To
address these challenges, Tokyo Electron will leverage its robust product lineup to both improve theperformance of individual products and to support the rapid development and release of solutions
that optimize entire processes. By taking part in our customers’ technological plans for next-generation and future generation products from an early stage, the Company will accelerate its growthover the medium and long term.

 he segment profit margin decreased 1.2 percentage points to 9.4%, as growth in sales ofT
highly profitable PICP etch systems was offset by aggressive investment in R&D related toequipment for generation 10.5 panels.

1532.71820.1• Tokyo Electron introduced and recorded sales of new PICP etch systems for large-sized panels.

 okyo Electron captured business related to generation 10.5 panels through technological
Tdifferentiation.

44.7

 he segment profit margin rose from 20.1% in the previous fiscal year to 24.4%, due in part
Tto the increase in net sales and a high rate of factory utilization.

23.6450(%)• PICPTM** etch systems for small- and medium-sized panels, which are especially competitive for use with high-resolution displays, were adopted by multiple customers, causing
sales to expand substantially.

205100-4.00-5151617

Segment net sales
Segment profit margin
Segment profit corresponds to income before income
taxes on the consolidated statements of income.

Business Outlook
In the display market, demand is expected to grow both for displays used in mobile devices andthose used in televisions. As the market begins to grow again, Tokyo Electron aims to increase both
its market share and profitability.
In small- and medium-size panels for mobile devices, displays continue to get larger amid growing demand for enhanced performance, including higher resolution and lower power consumption,
as well as for flexible displays. In the field of OLED displays, which can meet these demands, needs
are emerging for more advanced etching, and the manufacture of flexible displays is expected tolead to the development of new etch processes. Tokyo Electron’s PICP etch systems, which offer
excellent processing uniformity, are seeing firm sales growth. Going forward, the Company will
adopt new platforms and introduce systems for new processes to leverage these expanding business opportunities and steadily realize growth.
Looking at large-sized panels for televisions, panels larger than 65 inches are expected to become
popular going forward. Accordingly, multiple manufacturers, mainly in China, are planning to invest
in equipment for generation 10.5 and 11 panels. Tokyo Electron will leverage its track record of providing coater/developers and etch systems used for mass production of generation 10 panels tobuild on the business it secured in fiscal 2017 and capture a large share of manufacturers’ plannedinvestment. Furthermore, to meet demand created by investment in high-resolution panels, including 4K and 8K, the Company is beginning to expand its PICP etch systems from small- and medium-sized panels, for which it has built a solid track record, to large-sized panels.
With an eye toward the establishment of a market for OLED televisions, Tokyo Electron has
introduced an inkjet printing system for manufacturing large-sized OLED panels and delivered units
to customers’ development lines. Compared with existing evaporation systems, this system offers
drastically improved material efficiency. Leveraging this strength, Tokyo Electron aims to build astrong position in this market.