Financial Summary

Recent Updates

Highlights

On January 30, 2011, Anritsu announced Q3 FY03/12 results, upwardly revised its FY03/12 forecast and announced a hike in its forecast year-end dividend payout: click here to go directly to the Q3 FY03/12 results section.

(For original Japanese-only release in PDF format of earnings results please click here.

For original Japanese-only release in PDF format of earnings and dividend payout forecast revision click here.)

For corporate releases and developments more than three months old please refer to the News & Topics section

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Trends & Outlook

Quarterly Trends

Q3 FY03/12 Results (Announced on January 30, 2011, please refer to table above)

The company announced an upward revision to its forecast FY03/12 earnings and dividend payout at the same time it released Q3 FY03/12 results.

Cumulative Q3 sales were up 22.4% YoY at 66.0 billion yen driven by favorable demand for mobile measurement equipment, while operating profit rose 135.0% YoY to 10.1 billion yen.

The company made the following comments on its various business segments:

Test and Measurement (Cumulative Q3 FY03/12 Sales: 50.8 billion yen (+34.2% YoY); Operating profit: 10.2 billion yen (+181.7% YoY))

LTE (Long Term Evolution) related demand for chipsets, manufacturing testing equipment for cellphones, and conformance testing systems for use in LTE-network interoperability and certification testing was solid driven by the North American and Japanese markets. Sales of manufacturing testing equipment for multi-function handsets, such as smart-phones and tablets, also grew propelled by Asian demand. Construction and maintenance testing equipment sales for network infrastructure likewise remained steady.

Industrial Machinery (Sales: 9.9 billion yen (+17.0% YoY); Operating profit: 269 million yen (+11.1% YoY))

• While demand for food-testing equipment was strong in the US, Asia and the domestic market, the strong yen intensified the impact of price competition in the space.

Information and Communications (Sales: 1.5 billion yen (-11.2% YoY); Operating loss: -580 million yen (vs. 640 million operating loss in previous YoY period)

• Business from public bodies and public investment budgets was sluggish (demand is normally concentrated in Q4).

Others (Sales: 3.8 billion yen (-35.4% YoY); operating profit: 612 million yen (-57.3% YoY))

• Domestic demand YoY for devices targeting the video delivery market was weak following strong demand in the previous year.

The company upwardly revised its full year FY03/12 forecast (see below for details). While the Eurozone debt problems and exchange rate moves have heightened uncertainty about future prospects, the outlook for mobile measurement equipment demand remained solid and hence the company upwardly revised its FY forecast. In addition to the earnings forecast revision Anritsu also revised its forecast per share dividend payout to 15 yen per share from 10 yen per share (the interim dividend was 5 yen per share).

FY03/12 Forecast

• Sales: 91.5 billion yen (vs. previous forecast of 87.5 billion yen forecast)
• Operating profit: 14.2 billion yen (vs. previous forecast of 11.7 billion yen)
• Recurring profit: 12.5 billion yen (vs. previous forecast of 11.7 billion yen)
• Net income: 9.5 billion yen (vs. previous forecast of 7.0 billion yen)

1H/Q2 FY03/12 Results (Announced on October 27, 2011, please refer to table above)

The company announced an upward revision of its FY03/12 forecast at the same time it released 1H FY03/12 earnings.

Sales increased 21.9% YoY to 44.6 billion yen in 1H driven by favorable demand for mobile measurement equipment, while operating profit came in at 6.4 billion yen, a 126.8% YoY rise.

The company made the following comments on its various business segments:

Test and Measurement (1H FY03/12 Sales: 34.0 billion yen (+34.5% YoY); Operating profit: 6.4 billion yen (+192.4% YoY))

The sales composition breakdown in Test and Measurement was as follows: mobile measuring equipment was around 47% (+89% YoY), network infrastructure equipment about 39% (+7% YoY), and electronics approximately 24% (+8% YoY). The company noted sales for mobile measuring equipment grew at an extremely rapid clip, while sales in the other two sectors were also strong.

Mobile market

LTE (Long Term Evolution) development related sales (such as conformance testing systems for use in LTE-network interoperability and certification testing) grew driven by North American and Japanese demand. Sales of manufacturing testing equipment for multi-function handsets, such as smart-phones and tablets, also grew propelled by Asian demand.

The company cited the following key steps for increasing its share in manufacturing testing equipment:

• Investing in handset manufacturing testing equipment that is cross-compatible for 2G, 3G, 3.5G, and LTE protocols. For example, even if a customer initially intends to use the equipment for 3G the equipment can then be switched to LTE etc. in the future, as opposed to being limited for use with only one protocol.
• Providing enhanced customer support.
• Shortening delivery times, which the company noted was an increasingly important differentiating factor.

In Q1 the company received a large order from a leading (Tier 1) handset vendor. The company had dealt with the vendor in the past, but these orders related to development testing equipment only. This time, the company received orders for manufacturing testing equipment. In addition, with the emergence of new vendors in China and efforts to target these vendors, the expansion in sales for manufacturing test equipment was getting traction.

Network Infrastructure

North American and Asian demand for construction and maintenance testing equipment for network infrastructure remained steady contributing to the higher top line figure.

Electronics

Increased demand for the company’s products appeared to be driven by:

• A recovery in post-Lehman customer demand
• An increase in mobile-data traffic as the LTE protocol has developed and been commercialized. Additionally, wireless communication systems have diversified—as exemplified by multi operation platforms including non-cellular protocols, such as Wi-Fi and WiMAX.

The company noted that it was looking to create a platform whereby a single measurement device can respond to both cellular network systems (2G, 3G, and LTE) and non-cellular ones as a way to capture future demand for measurement equipment for non-cellular systems.

The company observed while it was difficult to make short-term projections for manufacturing test equipment demand, it was expecting sound mid to long-term demand in the segment driven by the transition to 3G from 2G.

Industrial Machinery (Sales: 7.2 billion yen (+14.4% YoY); Operating profit: 346 million yen (-21.8% YoY))

• While demand for food-testing equipment was strong in the US, Asia and the domestic market, the strong yen intensified the impact of price competition in the space.

Information and Communications (Sales: 978 million yen (-4.5% YoY); Operating loss: -477 million yen (vs. 570 million operating loss in previous YoY period)

• Business from public bodies and public investment budgets was weak (demand is normally focused in Q4).

Others (Sales: 2.4 billion yen (-39.5% YoY); operating profit: 385 million yen (-61.4% YoY))

• Domestic demand YoY for devices targeting the video delivery market was weak.

The company upwardly revised its full year FY03/12 forecast (see below for details). While a global economic slowdown has raised uncertainty about future prospects, the outlook for mobile measurement equipment demand is solid and the company upwardly revised its FY forecast for sales and operating based off it 2H results. However, the outlook for recurring profit and net income was left unchanged, as were assumptions for the exchange rate.

FY03/12 Forecast

• Sales: 87.5 billion yen (vs. previous forecast of 86.5 billion yen forecast)
• Operating profit: 11.7 billion yen (vs. previous forecast of 11.0 billion yen)
• Recurring profit: 10.0 billion yen (unchanged)
• Net income: 7.0 billion yen (unchanged)

The full year company forecast simply incorporates the better than expected 1H results; the original 2H forecast figures were unchanged. Robust 1H figures, meanwhile, were driven by aggressive capital investment by terminal vendors and electronic manufacturing services in expectation of increased smartphone demand during the Christmas sales period, coupled with a greater-than-expected increase in demand related to LTE development in 1H. 2H’s unchanged projection was due to the company's expectation that similarly large demand would not be repeated in 2H.

Another factor behind the unchanged forecast was while demand for manufacturing test equipment was solid, customer demands for shorter delivery times made it harder to project actual demand over the immediate future. Demand for smartphone manufacturing test equipment, which was growing mainly due to Asia, was hard to project for similar reasons. However, LTE chipset and handset development test equipment demand had been relatively stable and therefore easier to project.

The company held its FY03/12 Q2 results meeting on October 28, 2010. Selected comments made by management at the meeting are summarized below:

• Japanese network operators, who have been latecomers in LTE-related investment, began to invest in the technology, which contributed to increased demand for development test equipment.
• Regarding the October 2011 flooding in Thailand, the company’s Industrial machinery subsidiary in Bangkok was affected to a limited extent; in Bangkok, where many of its suppliers are located, the company was working to restore its supply chain.
• In the US there has been increasing new demand for optical interconnects. In 2010, the company launched a new product for optical interconnects, which has been selling well.
• The company is carrying out basic development of LTE Advanced (next generation LTE, which is expected to be rolled out from 2015 onwards) equipment.

Q1 FY03/12 Results

Anritsu released Q1 FY03/12 results on July 28, 2011 (see table above). It also announced an upward revision to its 1H and full-year FY03/12 forecast as well as raising its dividend forecast.

Sales were up 16.0% YoY at 19.5 billion yen driven by favorable demand growth for mobile measurement equipment. Operating profit was up 144.6 % YoY at 2.2 billion yen. Actual sales were considerably higher than the company’s initial forecast due to very strong performance from the mobile measurement equipment segment. Moreover, by improving its product mix the company’s operating margin rose to a particularly high 11.4% (vs. 5.4% for Q1 FY03/11).

The company made the following comments on its various business segments:

Test and Measurement (Q1 FY03/12 sales: 15.1 billion yen (+27.7% YoY); Operating profit: 2.4 billion yen (+254.2% YoY))

In the measurement equipment business sales were up substantially, rising 27.7% YoY driven by high order volume, which was up 44.0% YoY. Looking at the sales composition mobile measuring equipment was responsible for about 41.0% of sales (a 66.0% YoY increase); network infrastructure equipment drove approximately 30.0% of sales (up 2.0% YoY), and electronics was responsible for around 29.0% of sales (up 25.0% YoY).

Mobile Market

LTE (Long Term Evolution) development related sales, such as conformance testing systems for use in LTE-network interoperability and certification tests, grew driven by North American and Japanese demand. Sales of manufacturing testing equipment for multi-function handsets, such as smart-phones and tablets, also grew propelled by Asian demand.

Expansion of sales for manufacturing testing equipment has been one of the company’s core FY03/12 measures. About 80% of global handset subscriptions are for 2G devices; a market in which the company is not a player and a major reason behind the company’s low share for manufacturing testing equipment. On the other hand, the company views the increasing penetration of smart-phones (the proliferation of 3G devices) of late as an opportunity to fully enter this market, and intends to grow sales in the space in the following two ways:

• Investing in handset manufacturing testing equipment that accommodates 2G, 3G, 3.5G, and LTE protocols. For example, even if a customer initially intends to use the equipment for 3G the equipment can then be switched to LTE etc. in the future, as opposed to being limited to use on only one protocol.

• Providing enhanced customer support.

In Q1 the company received continued orders from Asian Electronics Manufacturing Services (EMS) companies. Some progress was also made in terms of growing the company’s sales for manufacturing testing equipment: the company received a large order from a leading (Tier 1) handset vendor. The company had dealt with the aforementioned handset vendor in the past, but these orders related to development testing equipment only. This time, the company received orders for manufacturing testing equipment.

Network Infrastructure

Sales of construction and maintenance testing equipment grew in North America and Asia.

Electronics

Enhancement of this area was one of the goals in Anritsu’s midterm plan. While FY03/11 didn’t have a good finish, FY03/12 was off to a good start. Increased demand for the company’s products appeared to be driven by:

• A recovery in post-Lehman customer demand

• An increase in mobile-data traffic as the LTE protocol has developed and been commercialized. Additionally, wireless communication systems have diversified—as exemplified by multi operation platforms including non-cellular protocols, such as Wi-Fi and WiMAX.

Industrial Machinery (Q1 FY03/12 sales: 2.8 billion yen (+8.7% YoY); Operating loss of 50 million yen (vs. 18 million yen operating profit in previous YoY period))

• Demand for food-testing equipment was strong in the US, and Asia as well as the domestic market.

• The precision measurement business was weak (this business was reclassified under the Industrial Machinery segment from the Others segment from FY03/12).

Information and Communications (Q1 FY03/12 sales: 491 million yen (-6.0% YoY); Operating loss: -279 million yen (vs. 243 million operating loss in previous YoY period)

• Business from public bodies and public investment budgets was weak (demand is normally focused in Q4).

Other (Q1 FY03/12 sales: 1.1 billion yen (-40.3% YoY) and Operating Profit: 248 million yen (-56.2% YoY)

• Domestic demand YoY for devices targeting the video delivery market was weak.

The company upwardly revised its forecasts for 1H and the full-year FY03/12, and hiked its forecast dividend to 10 yen per share (including an interim dividend of 5 yen per share) from 8 yen per share (including an interim dividend of 4 yen per share). The upwardly revised forecasts were as follows:

1H FY03/12

Sales: 43.0 billion yen (vs. previous forecast of 36.5 billion yen)

Operating Profit: 5.5 billion yen (vs. previous forecast of 1.5 billion yen)

Recurring Profit: 5.0 billion yen (vs. previous forecast of 1.1 billion yen)

Net income: 3.5 billion yen (vs. previous forecast of 600 million yen).

FY 03/12

Sales: 86.5 billion yen (vs. previous forecast of 80.0 billion yen)

Operating Profit: 11.0 billion yen (vs. previous forecast of 6.2 billion yen)

Recurring Profit: 10.0 billion yen ((vs. previous forecast of 5.5 billion yen)

Net income: 7.0 billion yen (vs. previous forecast of 3.8 billion yen)

The company cited a significant increase in orders, expectation of future strong demand, and favorable Q1 results for its Test and Measurement segment (strong sales and operating profitability) as reasons behind its upward forecast revision.

Full Year (FY03/12) Outlook

The company’s initial FY03/12 sales and operating profit forecasts were conservative (it was expecting a 2.8% YoY increase in sales to 80.0 billion yen and an 11.4% YoY decrease in operating profit to 6.2 billion yen). However, the company then upwardly revised FY03/12 forecasts when it announced Q1, 1H/Q2 and Q3 FY03/12 results – the table above reflects the latest updated figures.

The upward revision resulted in the company FY03/12 forecast exceeding the FY03/13 targets it had set in its midterm plan (sales: 90.0 billion yen; operating profit: 9.0 billion yen; net income: 4.5 billion yen).

Breaking it down at the segment level, the upward revision was made only to the Test and Measurement segment with its sales forecast revised upwards to 68.0 billion yen from 56.5 billion yen, and operating profit to 13.0 billion yen from 5.0 billion yen. Meanwhile, the company’s initial forecast for other segments remained unchanged.

Longer Term Outlook

On April 28th, 2010, the company presented its midterm plan, “GLP2012.” The main figures were as follows:

The midterm plan includes FY03/13 and sets milestones toward achieving its vision for FY03/15 (Anritsu120, the 120th anniversary of the company). Sales projections for the Test and Measurement segment for FY03/13 are 61 billion yen (a yearly growth rate of about 8%), and projected operating profit is 6 billion yen (a yearly growth rate of about 38%). The company intends to increase the global market share of the Test and Measurement segment and set a pace of revenue growth that exceeds the industry's growth rate.

Nonetheless, if the company hits its FY03/12 forecast, it will have realized its midterm management plan's operating profit target a year early. For this reason, the company has said it plans to refresh its midterm management sometime during 2012.

The main driver behind the prospect of the company achieving its midterm management plan ahead of schedule is strong performance in the Test and Measurement segment, due to:

• Greater-than-expected demand for LTE-related development
• Increased demand for manufacturing test equipment owing to the spread of smartphones.

Although a detailed demand forecast should be released when the revised midterm management plan is unveiled, the company has released a diagram of how it views medium and long-term demand playing out in its results' presentation materials (please refer to the Test & Measuring Equipment Business Demand graph). This graph indicates the company believes mid to long-term demand in the Test and Measurement segment should remain high. For example, between 2011 and 2014 development testing equipment demand, such as for chips and handsets, is expected to be led by LTE-related development demand. In addition, demand for manufacturing testing equipment is expected to be high driven by the transition to 3G from 2G over the next five years. It is also expected demand for LTE-related manufacturing testing equipment will take off from around 2013/2014 onwards.

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Business

Business Description

Anritsu designs and manufactures testing equipment. Testing equipment is used to evaluate products in the R&D, manufacturing, and performance testing stages. The company has prioritized testing equipment used in the development and manufacture of communications devices.

The company has four business segments: Test and Measurement, Industrial Automation, Information and Communications; and Others.

Main Business Segments

Test and Measurement (68.7% of FY03/11 sales; 72.2% of operating profit)

This is the company’s main business there are three main products categories for Test and Measurement equipment according to client type and target market:

• Network Infrastructure market (approximately 36% of segment sales in FY03/11)
• Mobile market (approximately 34%)
• Electronics market (approximately 30%)

Test & Measurement Business: Customers and Market Position

Source: Company presentation materials

Network Infrastructure market

The main customers are telecom companies, telecom-related construction companies, and telecom device manufacturers. Sales share broken down by device/service in this segment were as follows:

Sales (FY03/11)

• Base station testing devices - approximately 35%
• Optical/digital/IP test equipment - approximately 45%
• Service assurance - approximately 20%

Handheld testing devices for testing transmission quality are the main product used for base station testing. The majority of these devices are sold outside Japan. According to the company, its handheld testing devices for base stations occupy 70% plus of the global market (FY 03/11), meaning the company was globally competitive in this sphere.

Optical/digital/IP test equipment is used for telecom infrastructure equipment, including the development of ultra-fast and optical-fiber related devices.

Service assurance involves the monitoring and analysis of entire telecommunications’ networks to ensure quality of service. The business model requires providing data collection hardware and software to clients and also generates a continuous revenue stream from telecommunications company clients once a monitoring service contract has been signed.

Mobile market

This market includes testing devices for mobile phone handsets. Customers include chipset and mobile phone handset manufacturers, IT service providers, and telecom companies. The company’s main products are testing devices for the development, approval, and manufacture of mobile phone handsets.

Testing equipment for development also includes devices used by mobile phone handset and chipset manufacturers for R&D. Testing equipment for manufacturing includes devices used in factory production of mobile phone handsets. Demand is driven by mobile phone handset manufacturers setting up new production lines.

The sales mix between development and manufacturing devices fluctuates according to the production cycle. Generally, when new telecom protocols are introduced for mobile phones R&D for handsets and chipsets first occurs, followed by increased manufacturing and sales of the handsets. Thus, usually during the early stage of the cycle there is demand for development testing devices, which is then followed by demand for manufacturing testing devices.

As of FY03/11, demand for 3G/3.5G development testing devices was nearly through its cycle with the main demand having shifted to manufacturing testing devices. The company believed demand for manufacturing testing equipment based on 3G/3.5G technology was likely to increase going forward driven by demand from smartphone technology and emerging markets. Moreover, the company believes demand for development and authentication testing equipment for the TD-SCDMA platform (the Chinese telecommunications protocol) will gain momentum. Regarding LTE, demand is primarily driven by development testing equipment, but demand for manufacturing testing equipment is finally picking up. (See the Core Technology Focus section for details: click here to go to the section).

It is SR Inc.’s understanding that in the mobile market the company has enjoyed a large market share in development testing equipment (according to the company, its 3G/3.5G mobile phone development testing equipment had approximately 70% global market share and its LTE mobile phone development testing equipment approximately 50% as of end-FY03/11). However, its market share for manufacturing testing equipment has lagged approximately 10% behind the competition (such as America’s Agilent Technologies Inc. (USA A) and Germany’s Rohde & Schwarz Gmbh & Co. (unlisted)).

Globally around 80 % of mobile phone subscribers use 2G platform handsets, a protocol that the company does not offer products for, which is a major factor behind its low level of market share for manufacturing testing equipment. On the other hand, the company views the recent rise of smart-phones and multi-use mobile devices (due to the spread of 3G) as an opportunity to enter the market for manufacturing testing equipment. As of FY03/11 the company was doing this by investing in manufacturing testing equipment compliant with 2G, 3G, 3.5G and LTE protocols (for example, a customer currently using equipment for 3G can then switch over to LTE in the future rather than being limited to equipment for use with only one protocol) and enhancing customer support for clients.

Electronics market

This market includes general purpose testing equipment for mobile phones, such as signal analyzers and signal generators. Beyond mobile phone-related devices, this segment encompasses a wide range of other general purpose testing equipment used in development and production for base stations, communications components and modules, automobiles, home appliances and smart grids.

While the company is well-positioned in the mobile-market for measuring equipment, demand is highly dependent on handset development cycles and so demand also tends to be highly cyclical. Thus, the company is targeting a wider range of markets and aiming to increase its share in the general purpose testing equipment market, where demand is more stable. The company wants to make its earnings base more stable; this was a key element of the mid-term business plan released in April 2010.

Although competitors in this segment tend to create universal equipment that can be used by and sold to a wide arrange of customers, Anritsu decided to focus product development for niche applications to meet specific needs. For example, a manufacturer developing an integrated home networking gateway (combining TV, telephone, Internet, wireless, etc.) would typically need several devices to test each component and then as a complete system. Anritsu’s response would be to develop a specialized test solution combining different communications modules and software applications, and sell the test setup as a pre-packaged solution.

The advantage for the manufacturer is reduced testing complexity (fewer devices to manage and integrate during test planning and execution) and lower costs. Anritsu plans to grow the business appear to be based on its ability to create simple products at attractive prices, that other competitors would find “too niche” (given their wide array of generic equipment) or would be unable to develop without cannibalizing existing offerings.

Industrial Automation (15.8% of FY03/11 sales; 9.4% of operating profit)

This segment is focused on production control and quality assurance systems for the food, cosmetics, and pharmaceuticals industries. The company develops, manufactures, and sells weighing equipment (high-precision weighing devices for items transported along high-speed food production lines), automated electronic scales, and food contaminant detectors (high-precision contaminant detection and removal devices for food production lines). As of FY03/11 more than 80% of sales in this segment were to the above industries.

This segment does not contribute much to overall sales, but demand in the main industries – food, cosmetics, and pharmaceuticals – is stable. The segment has historically been focused on the Japanese market, however, in FY03/09 the company added a manufacturing base in Thailand and since then has begun looking overseas for business opportunities.

Information and Communications (5.3% of FY03/11 sales; 1.0% of operating profit)

The main devices offered in this segment are network monitoring and management equipment (network switches, traffic smoothing routers), and video surveillance and other communications systems. The target customer base is Japanese national and municipal authorities for the company’s telemetering systems for utility services, and video systems for monitoring rivers, installations etc. Among the private sector telecom operators and Internet service providers are the main customers purchasing video distribution equipment and bandwidth controllers from the company.

Others (10.2% of FY03/11 sales; 23.6% of operating profit)

Non-core businesses such as optical devices, precision measurement systems, sheet metal processing, real estate investment, facility management, logistics, etc. are captured under this segment.

Main Facilities

Anritsu has R&D facilities in Japan, the US, and Europe. Most R&D is performed in Japan and the US.

Manufacturing facilities are in Japan, the US, and Thailand. Additional manufacturing capacity is available through electronics manufacturing service (EMS) companies in China.

Sales by Geography

Japan has historically been the company’s key market, however overseas sales in FY03/07-FY03/11 have been the main component of consolidated group sales. Sales of Test and Measurement equipment in Japan were about 26% of total sales in FY03/11.

As of FY03/11 a one yen decrease in the value of the dollar translates into to a loss of 100 million yen (at the operating level), and a one yen decrease in the value of the euro translates to a loss of 20 million yen.

Business Model

Anritsu’s Test and Measurement equipment sales are the main component of group revenue. The product range spans from handheld units to larger rack-mounted equipment. Products include both general purpose testing and specialist equipment. As part of the sales process, the company produces demonstration units (booked as CoGS), an expensive exercise due to non-recurring expenses (NRE) associated with development and production; the company tries to sell these units as quickly as possible. In early FY03/11, the company said that it was trying to reduce the number of demonstration units used.

Prices range from 100,000 yen (approximate price range for handheld or easily portable systems used in the field) to over several hundred million yen (for complex customized systems). Prices paid by customers can be affected by discounting (when time to market isn’t a factor), usually depending on expected volume or the importance of the total business relationship.

The product mix (lower vs. higher margin units) is dependent upon customers’ capex and product development schedules. When mobile phone chipset manufacturers are in the R&D phase, testing needs differ from when the finished chipset goes into production. Early-stage equipment is the most expensive, but also has the highest profit margins (operating profit margins of approximately 20%).

Anritsu orders parts typically 6 months in advance of production, and uses some of the components to create work in progress which can be further customized to specifications (for example, a rack-mounted unit can have specific protocol boards, etc. added for a specific order). The lead-time for inventory (6 months) vs. order delivery (delivery typically 1-1.5 months after orders are received) creates inventory risk. Anritsu marks inventory down by 50% after 12 months, and 100% after 24 months.

When Anritsu’s sales peaked in FY03/08 (new development of 3G was nearing an end), other businesses in the company were unable to offset the slowdown in total sales, which lead to a painful restructuring during FY03/09, similar to the IT bubble collapse in FY03/03. The company has been taking steps to develop general purpose testing equipment product lines to offset lumpy demand patterns from mobile carriers.

Cost Structure

The two largest cost components are R&D and labor. Some R&D is included in cost of goods sold, others in SG&A.

Labor and R&D costs seem to SR Inc. high as a percentage of sales, and are relatively fixed. This has necessitated significant one-time restructurings during industry downturns. Following the IT bubble collapse in 2001, the company reduced staff from about 6,000 to 4,000 and changed the ratio of contract vs. full-time employees (adding more contract labor which is easier to cut than full-time workers). During restructuring in FY03/08, Anritsu consolidated manufacturing (closing two facilities) and streamlined its supply chain (sharing purchasing across businesses) and rationalized other non-core services. As of FY03/11, Anritsu employed approximately 3,600 employees and commented that the headcount reductions in FY03/08 removed all excess labor capacity. Headcount would have to be increased in order to meet higher demand.

Profitability Snapshot, Financial Ratios

Operating profit margin has been volatile in part due to the fixed nature of costs for labor and R&D.

Comparative Analysis of ROE

Using accounting relationships, ROE can be split into two factors: ROA and leverage (assets / equity). Although Anritsu’s median balance sheet leverage was higher than Agilent during 2005 to 2010 the stand-out factor is ROA – Agilent’s is greater in each period. Agilent’s business is arguably defined by mass-producing general purpose test equipment, which suggests that it can achieve economies of scale in production, lowering per-unit costs. Anritsu experienced similar demand (strong appeal for specific devices) in FY03/01 when SDH/SONET (optical/digital network) was launched and ROA was significantly higher than in other years. SR Inc. believes that building a business foundation that would allow for consistently higher returns is an important task of the current management team.

Strengths, Weaknesses

Strengths:

• Dominant position in certain markets. Anritsu is the recognized leader in 3G development test equipment in Japan and worldwide (it estimates its share at about 70% globally). This provides the company with two key advantages: one is the advantage over competitors when there is a technological shift to next-generation standards from the company having very close relationships with its present customersand the other is it has the reputation needed to open up new test equipment market opportunities (electronics, automobile components, etc.).
• Sense of urgency. Since conducting wide-ranging restructuring in FY03/09 the company has been refining its competitive strategy and increasing focus on bottom-line financial results. The accounting background of president Hashimoto, appointed in FY03/10, should help focus the company on financial results vs. engineering goals.
• Proven ability to change with the times. The company’s history illustrates that it can adapt to meet the challenges of a changing market. The R&D cycle for test and development is becoming increasingly short and devices more complex; the ability to react quickly to customer needs and market trends is an option frequently unavailable to larger and more bureaucratic organizations.

Weaknesses:

• Swimming against the current in general purpose devices. Anritsu’s focus on general purpose devices means that the company will have to develop the market for these devices from scratch while competing in the core test and measurement market for specialist equipment. While the general purpose testing equipment market is large, rivals already claim large market share in this space. Thus, it is unclear how much market share the company can take there. Essentially, the company has to simultaneously compete in two different markets. This could place strains on managerial and financial resources.
• Uneven strength in sales channels. The company has been so far unable to duplicate its dominant domestic position internationally. Anritsu was successful in Japan and the US partly due to experience gained from working with NTT DOCOMO’s roll-out. The company’s weakness in GSM technology has prevented it from successfully taking share in Europe. Going after the general purpose market will require building entirely new sales channels and that may prove a significant challenge.
• Business dominated by telecommunications industry spending cycles. The company’s core business is mostly reliant on a single industry, telecommunications. This has historically meant substantial earnings volatility and higher business risk. The competitors appear to have more balanced exposure to a number of client industries which offsets the volatility in telecommunications capex cycles and reduces risk.

Group Companies

As of FY03/10, the Anritsu group was comprised of 35 subsidiary companies. Major subsidiaries include:

Japan

• Anritsu Industrial Solutions Co. – involved in the Industrial Automation business
• Tohoku Anritsu Co. – manufacturing subsidiary
• Anritsu Customer Services Co., Ltd.
• Anritsu Devices Co.
• Anritsu Networks Co. – Information and Communications subsidiary
• Anritsu Engineering Co.
• Anritsu Precision Co.
• Anritsu Kousan Co.
• Anritsu Real Estate Co.
• Anritsu Techmac Co.
• Anritsu Pro Associe Co.

USA

• Anritsu Co. – manufacturing subsidiary
• Anritsu Instruments Co.

UK

• Anritsu EMEA Ltd. – manufacturing subsidiary

Italy

• Anritsu S.p.A.
• Anritsu Solutions S.p.A.

Denmark

• Anritsu A/S

China

• Anritsu Co. (HK)
• Anritsu Electronics Co. (Beijing Representative Office)

Taiwan

• Anritsu Co.

South Korea

• Anritsu Corp.

Group Strategy

Anritsu spun off non-core businesses into separate subsidiaries in FY03/09 to make individual companies directly responsible for profitability and made Anritsu responsible for the testing and measuring segment.

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Market & Value Chain

Market Overview

The most important markets for Anritsu are mobile phone and specialized general purpose equipment. The size of the mobile phone test device market is driven mostly by capex schedules of device manufacturers and network operators.

For mobile phone test equipment, most spending occurs when carriers deploy new networks protocols (from 2G to 3G, for example). Depending on the network equipment, per-carrier investments can range from changing certain network components (base stations and little else, for example) to a complete overhaul of the network infrastructure (3G was such an advancement over 2G that deployment typically required massive upgrades to carriers’ networks).

As of early 2011, the most important development in mobile communications was the deployment of LTE (Long Term Evolution, or 4G).

Core Technology Focus – 3G/LTE Communications

The company lagged behind competitors in GSM protocol testing devices, which was a previous global standard. However, its technical expertise in 3G was a new strength for the company, developed in part through a relationship with NTT DOCOMO. Before 3G was developed, Anritsu was strongest in physical layer technology. Anritsu worked closely with DOCOMO’s R&D teams and benefitted substantially from being in on the “ground floor” of a major technological development for Japan’s mobile phone industry. Anritsu became the de-facto choice for 3G test equipment in the global market (the company estimates that it has about 70% of the 3G-related market globally as of FY03/11).

Unlike earlier technology, 3G protocols are more complicated due to the increased bandwidth and additional services provided (earlier protocols limited the wireless link to one service at a time - applications such as video conferencing, which uses voice and video channels simultaneously, were unavailable; 3G provides this). Anritsu’s early involvement with 3G meant that the company developed capabilities above the “physical” layer of the communication stack. (A stack is refers to different layers of logical connections between devices: from physical layers such as radio or fixed-line up to applications that use the connections. Applications only “see” application data from the other end, unaware if the actual link is wireless or wired; the details are handled by lower/higher layers in the stack.) Experience with higher-layer protocols in 3G provides directly transferrable knowhow to LTE (LTE is discussed below).

As of June 2011, demand in the 3G/3.5G sector was not driven by development test devices, which is the company’s forte, but mainly by manufacturing test devices. Agilent Technologies and the German firm Rohde & Schwarz have high market share in this space; SR Inc. believes the company’s market will remain around 10%. The company attributes its low market share to it lagging behind competitors for GSM protocol devices. However, the company’s prospects for manufacturing test devices for 3G/3.5G devices are arguably quite good considering demand for manufacturing test equipment for 3G/3.5G devices is expanding due to growing worldwide popularity of smartphones and increasing popularity of mobile phone handsets in developing nations. The transition to 3G/3.5G from GSM may also drive demand as new clients shift to the company’s products.

3G in China

There may be significant opportunities in China as the proprietary 3G technology used by the country’s mobile network operators, TD-SCDMA, expands its network service area and services. Launched in 2009, TD-SCDMA is a new technology compared to other 3G protocols and is still in the developmental stage. TD-SCDMA is used almost exclusively in China (its development was sponsored by the Chinese state). However, there are few compatible handsets and devices, as well as few compatible network testing devices; as of March 2011 there were just 26 million TD-SCDMA users among the 700 million China Mobile subscribers, indicating that the market was only just getting traction.

LTE

LTE (Long Term Evolution, 3.9G)-related business is expected to be the company's growth driver going forward, and warrants additional discussion.

LTE, a next-generation wireless communication service, has three particular characteristics:

• In response to 3G and its predecessors having their own specific protocol, LTE uses IP (Internet Protocol), meaning that it can be used through the Internet over network devices.
• It is considered an ultra high-speed data communication link, boasting a 100 Mbp downlink/50 Mbp uplink communication rate. The combination of IP technology and high-speed communication means carriers can offer users a broadband-level, high-functionality, high-speed handset that far surpasses the concept of a telephone.
• Standards up to 3.5G were largely divided into GSM and CDMA. Most of the world's telecommunications carriers, however, have adopted LTE, increasing the probability that a unified standard will emerge.

It is important to note that Anritsu’s LTE-related business extends beyond the handset. It is a business related to demand for production and maintenance of base stations and particularly high-speed, high-capacity mobile backhaul links (connections from base stations to the main network) due to insufficient communication capacity.

Many of the company's test and measurement subsegments also enjoy this demand, not just the division's mobile subsegment (test equipment for the development and manufacture of handsets) but also network infrastructure (test equipment for base stations) and electronics.

Looking at recent trends, the company has a high market share for testing equipment used in mobile handset development and manufacturing, base station construction and maintenance, and wireless telecom manufacturer construction and maintenance. Its market share for telecommunications devices and the optical fiber sector though is low. It remains to be seen whether the company will be able to improve upon these low market share figures.

Competitive Environment

The company’s strength is its ability to offer a range of measurement solutions, from wireless measurement instruments to optical-related wired measurement instruments. It is trying to bring these diverse capabilities together to make a “killer app” for LTE test equipment.

As of June 2011 Rohde & Schwarz was the company’s main competitor in the LTE space. However, since Rohde & Schwarz only offers testing equipment for wireless devices, and thus is in competition with the company only in the field of development testing equipment for mobile phone handsets.

Agilent Technologies has maintained its strength in the general purpose testing equipment sector. Thus, its ability to enter the LTE market, in which specialized devices are mainly in demand, was limited as of June 2011. The company believes that when general purpose testing equipment takes over as the main type of equipment in demand, Agilent Technologies will be able to make a full-scale entrance into this market. In general, when protocols reach a mature stage of development, demand shifts from specialized testing equipment to general purpose testing equipment.

The company has suggested the possibility that JDS Uniphase may become a competitor in the future; having acquired Agilent’s wireless measurement unit JDS now has both a wireless and fixed line testing equipment business.

Source: Company processed by SR Inc.

LTE Market Prospects

In contrast to the network carrier-led investment in fiber networks during the IT (Information Technology) bubble, the shift toward LTE platforms has been spurred by an attempt to meet consumer demands for enhanced services and applications on networks. The roll-out of LTE has progressed from an initial focus on faster handsets to strengthening of mobile backhaul networks, and onto bolstering the speed and capacity of metro networks.

Capacity investment in LTE platforms though has been subdued because ARPU (Average Revenue Per User) for many developed market telecommunications carriers are off peak levels and have been trending lower.

Investment cycles of network operators across nations are another important factor worth monitoring. For example, in response to NTT DOCOMO (Japan) and Verizon’s (US) roll-out of LTE in 2010, AT&T (US) is introducing LTE in 2011, while Softbank and European operators (Vodafone, etc.) are aiming to introduce LTE platforms during 2012. Emerging market operators are expected to follow later.

Unlike investments during the IT bubble, which were concentrated over a short period, carriers have taken a more restrained approach preferring to spread their LTE investment out over a wide time-frame so while the amounts likely to be spent are lower than the IT bubble the spend is likely to spread evenly out over a longer period.

T&M Business Opportunities

Source: Company processed by SR Inc.

The company believes demand for testing equipment for use in both development and manufacturing of handheld devices will probably see an increase in vendor-related investment out till at least 2012/13 following NTT DOCOMO and Verizon's rollout of LTE in 2010. Indeed, given other carriers will adopt LTE later, development-phase demand should even continue out past 2013.

The company believes demand for measurement instruments used in handheld device manufacturing will begin to surface in FY03/11. However, demand initially will be driven by wireless Internet card equipment manufacturers and demand for equipment used in manufacturing of actual handheld devices is not expected until after FY03/12. The company sees demand for test equipment used in base station construction and maintenance gradually beginning from FY03/12 onwards as well.

SR Inc. thinks that out until FY03/16, the bulk of the company's LTE-related sales will be from equipment used in handheld device development.

The charts below show the company's core products and demand forecasts for each customer segment based on its assessment of its areas of specialization.

Source: Company processed by SR Inc.

LTE-related sales in FY03/10 were 4 billion yen from one particular model alone. In addition, LTE-related sales in FY03/11 for several devices totaled approximately 10 billion yen (mobile segment only). The midterm plan released in 2010 called for increasing LTE sales to 20% of total sales of all measurement instruments (LTE related sales are part of the mobile subsegment).

Given the entire testing equipment business was forecast to generate 61 billion yen for FY03/13, LTE sales should therefore come in at around 12-13 billion yen. The company noted, however, LTE-related inquiries at end March 2011 were stronger than its mid-term plan had anticipated.

Investment for 3G (W-CDMA) measurement instruments in the early 2000s mostly targeted mobile handset development, from FY03/06 demand then surged for manufacturing equipment. Sales for 3G mobile equipment peaked at approximately 25 billion yen in FY03/06.

Anritsu’s close ties with NTT DOCOMO (who rolled out the world's first 3G network) allowed it to dominate sales of test equipment used in 3G development, however, this time round NTT DOCOMO is not the leader in LTE development. Therefore, unlike the 3G-related space where the company estimated it had a 70% global share, Anritsu’s target for LTE development test equipment market share is a lower 50%.

Test & Measuring Equipment Business Demand

Source: Company Presentation Materials

Some 3G development test equipment can be upgraded to support LTE, so customers may not need to buy new equipment. As a result, demand may be smaller than during the 3G era. The table above shows the planned introduction of LTE by Japan's telecommunications carriers. NTT DOCOMO announced in July 2010 it would spend approximately 300 billion yen in LTE investment by the end of FY03/13 out of an originally planned 343 billion yen of capital earmarked for LTE investment out till FY03/15: compared against the total 4 trillion yen spent to roll-out 3G this is a small sum.

Given this, SR Inc. thinks that even at its peak, Anritsu's LTE-related sales from the test and measurement mobile subsegment will not reach the 25 billion yen mark seen for 3G.

Compared to the 3G development era, the company now has an opportunity to provide customers with solutions that were not possible then, and meet demand from industries other than telecommunications.

For example, with 3G Anritsu sold measurement equipment for use with W-CDMA, which was incompatible with the alternative CDMA 2000 platform used by Verizon, as a result, Agilent Technologies and Rohde & Schwarz were the sole suppliers of Verizon's test and measurement equipment. However, with Verizon’s LTE rollout Anritsu now stands on equal footing with other suppliers to supply test and measurement equipment to Verizon and its vendors.

Finally, as mentioned above, because LTE uses IP, LTE-compliant products are not limited to cellular phones but can also encompass tablets, game consoles, and automobiles, which means the company could potentially offer solutions to industries outside of telecommunications.

Barriers to Entry

Very high. The most substantial barrier to entry is technological expertise required to create precision measurement equipment. Potential entrants need R&D related to specific measurement applications and also capabilities in precision manufacturing. More specialized measurement areas can require significant amounts of technological knowhow to compete with established players. In the area of networks and communications, developing sufficiently robust R&D capabilities can take years to accomplish, especially when considering the multi-functional nature of emerging technologies (devices are becoming increasingly complex).

Competition

Global competitors include:

• Agilent Technologies Inc. (USA A)
• JDS Uniphase Corp. (USA JDSU)
• Rohde and Schwartz GmbH & Co. (unlisted)
• Tektronix Inc. (unlisted)

Anritsu identified Agilent as the global sales leader in test equipment, estimating that Agilent held approximately 30% of the communications test equipment market as of calendar 2010. Main product categories: life science and chemical analysis (medical and chemical analysis instruments, etc.), electronic test and measurement (oscilloscopes, signal generators and analyzers, communications network testing equipment, etc.). Anritsu’s assessment of Agilent’s competitive strength was its ability to make broad product line-up and competitively priced products for the mass-market without sacrificing quality.

Substitutes

Practically speaking, there are no substitutes for test equipment devices. Alternative options to purchasing test equipment would be to use in-house development, but this could introduce other risks. For example, in communications technology, manufacturers’ final products must interoperate with other compliant products. If a product is tested against an internally-developed test tool, ensuring interoperability is more difficult. Third party test equipment therefore removes uncertainty in product development: manufacturers focus only on the product, not the protocol implementation of test equipment.

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Strategy

Anritsu’s competitive strategy is to use its capabilities in communications technologies to exploit niche markets for test equipment. The company seems to recognize that direct head-to-head competition for general purpose testing equipment with larger competitors would be expensive, risky, and difficult. Instead of staying in markets that are intensely competitive, Anritsu is exploring less congested areas.

Additionally, the company is shifting towards a more comprehensive “business focus” for product and business development rather than just focusing on developing technologically impressive devices. The company began eliminating unprofitable products in FY03/08 and to push its corporate overhaul forward, company leadership changed in 2010 - long-time CFO Hirokazu Hashimoto was appointed to the President’s role (see Top Management section).

Part of the renewed focus on profitability is earnings volatility. Anritsu’s net income history tracks the boom and bust of the IT bubble and management has stated it wants to get off the rollercoaster. Doing so won’t be easy. The relationship with NTT DOCOMO meant that sales were all about making quality, technologically-advanced products. But the market has changed since DOCOMO was leading with most advanced technology. New technological developments and more aggressive competitors are shrinking the playing field and shortening the product cycle. Anritsu is discovering that for it to compete globally, it needs to beat or at least stay on par with global firms who have significant resources (financial and technological) at their disposal. To adapt to this new reality, Anritsu has taken a sober stock of both strengths and limitations and realized that the only viable option is to create markets where competitors aren’t.

To build the specialized general purpose device business, Anritsu is developing new distribution channels (increasing the importance of resellers). The company’s strategy to win customers in the segment is to focus on industries where established relationships are vulnerable (for example during the upgrade cycle of Japanese communications component manufacturers). Anritsu has had success with forging ahead in niche markets in the past, such as handheld testers in the US. SR Inc. feels however that such success has made limited contributions to the development of the group overall.

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Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Fiscal Year (for reference purposes)

FY03/11 Results

The company announced FY03/11 results on April 27, 2011.

The mobile communications market, including measuring equipment for manufacturing and LTE development rebounded, resulting in gross profit margin expansion and improved profitability, which was also helped by cost controls (including reducing fixed costs and targeting key performance indicators).Consequently, sales increased 5.9% YoY to 77.9 billion yen and operating income grew 52.6% YoY to 7 billion yen.

Operating profit exceeded the company forecast of 6.5 billion yen. The primary factor for the better-than-expected performance was solid demand for measuring equipment for LTE handset development and measuring equipment for 3G smart-phone manufacturing.

Production facilities at Tohoku Anritsu Co. (based in Koriyama, Fukushima Prefecture) were temporarily shutdown due to the effects of March 2011’s Tohoku Earthquake. In addition, some equipment at the plant was damaged. Repairs were expected to cost approximately 200 million yen but the overall impact on the factory was not significant. The Koriyama factory had already resumed production as of end-March 2011.

The company made the following comments on conditions at its business units:

Test and Measurement (FY03/11 sales: +10.8% YoY, operating profit: +124.3% YoY)

Increasing production for smart-phones has been driven by the ongoing development and demand for these types of handsets and ongoing construction for next generation LTE base stations. At a regional level, customers in Japan continued either to delay or spend modestly on capex while North American and Asian demand for measurement equipment was robust. Sales increased 10.8% YoY to 53.5 billion yen, operating income was up 124.3% YoY at 5.1 billion yen.

Test and Measurement sales breakdown was as follows: the mobile market accounted for approximately 34% of segment sales (sales were up 15% YoY), the network infrastructure market for approximately 36.0% (sales were up 5.0% YoY), and the electronics market for approximately 30.0% (sales were up 6.0% YoY).

Mobile Market

Performance in this sub-segment was largely the reason that sales exceeded the forecast. According to the company, sales in the mobile market were comprised of approximately 10.0 billion yen in LTE-related sales and approximately 8.0 billion yen in smart-phone-related sales.

Network Infrastructure

The sales breakdown was as follows: handheld measuring equipment accounted for 35.0% of sales in the sub-segment (sales were up 15% YoY), optical and IP network measuring equipment 45% (sales were up 5% YoY), and service assurance for 10% (sales decreased 5% YoY). Sales of handheld measuring equipment for LTE base stations and other types of base stations were robust. As transactions for these products are often dollar-denominated the volume growth rates were actually greater than the numbers above indicate. Service assurance-related transactions are often euro- denominated or done on a local currency basis, and results here exceeded company forecasts.

Electronics

This sub-segment includes general-use measuring equipment. Investment demand from Japanese manufactures for this type of measuring equipment was still lagging, so results in this sub-segment were poor.

Information and Communications (FY03/11 sales: -22.4% YoY, operating profit: -51.7% YoY)

This segment saw losses due to budget cuts at public agencies, which have historically represented about 80% of segment sales.

Industrial Machinery (FY03/11 sales: +5.9% YoY, operating profit: +8.0% YoY)

Demand for testing equipment in Asia was robust resulting in higher sales and profitability.

Other (FY03/11: -4.6% YoY, operating profit: -26.5% YoY)

Q3 FY03/11 Results

On January 27, 2011, the company released FY03/11 Q3 results. Simultaneously, the company released an upward revision to its FY03/11 earnings forecasts and expected dividend payment. As a percentage of the full year revised company estimates, cumulative FY03/11 Q3 results were as follows:

• Sales: 70.0% (vs. FY estimate of 77.0 billion yen)
• Operating profit: 66.3% (vs. FY estimate of 6.5 billion yen)
• Recurring profit: 60.7% (vs. FY estimate of 4.8 billion yen)
• Net income: 72.9% (vs. FY estimate of 3.0 billion yen)

Anritsu indicated that the reasons for the upward revision were twofold. First, the mobile communications market, including measuring equipment for manufacturing and LTE development, had recovered resulting in an improvement in gross profit margin. Secondly, profitability improved due to controlling costs and investments (including reducing fixed costs and managing for key performance indicators).

Test and Measurement (Q3 sales: +10.5% YoY, operating profit: +297.4% YoY)

Mobile Market

Performance in this sub-segment was responsible for the upward revision. Demand for equipment used in the development of chipsets and handsets was stronger, mainly in overseas markets like the US and South Korea. In North America, LTE-related purchases were made earlier than expected. Also, measuring equipment demand for handset manufacturing recovered. The company commented that the reason behind this is that their products are attractive because individual pieces of equipment can be used to test multiple transmission protocols, including LTE. Anritsu thinks that their customers know the product they purchase will be compatible with future LTE systems.

Anritsu has enjoyed a large share of the mobile market with its measurement equipment used in R&D. However, the company has lagged behind competitors for measurement equipment used in manufacturing, with only about a 10% share. In response to this, the company is relying on its multi-protocol test devices to increase market share for measurement equipment used in new product manufacturing.

The company thinks that demand for measurement equipment used in manufacturing LTE handsets will grow in the latter half of FY03/12 after Verizon Communications Inc. (USA VZ) and others release handsets.

Network Infrastructure

Demand for handheld measuring devices for base stations, for both LTE and other types, is growing. However, sub-segments such as measuring equipment for optical and IP networks and service assurance are not expanding at the same rate as the mobile market.

Electronics

Demand among Japanese manufacturers for general-use measurement equipment is still lagging, causing poor performance in this sub-segment. According to Anritsu, present production levels of Japanese manufacturers have returned to pre-Lehman shock levels, but this has not yet translated into a sense of need for more equipment. The company’s share in this sub-segment is not large, but increases in capital investment by Japanese manufacturers should jumpstart Anritsu’s efforts to increase share. The company commented that judging from its current sales related to smart phones and tablets, demand among Japanese manufacturers should recover in FY03/12.

Information and Communications (Q3 sales: -20.5% YoY, operating profit: 6 million yen loss)

This segment saw losses due to budget cuts at public agencies, which have historically represented about 80% of segment sales.

Industrial Machinery (Q3 sales: +5.6% YoY, operating profit: -13.0% YoY)

The drop in operating profit is partially due to an accounting effect (recognizing revenue when equipment is installed), but the company commented that demand for testing equipment in Asia, North America, and other places is strong.

Other (Q3 sales: +4.1% YoY, operating profit: -19.8% YoY)

The revised FY03/11 forecast was as follows:

• Sales: 77.0 billion yen (unchanged)
• Operating Profit: 6.5 billion yen (vs. previous forecast: 5.6 billion yen)
• Recurring Profit: 4.8 billion yen (vs. previous forecast: 4.0 billion yen)
• Net Income: 3.0 billion yen (vs. previous forecast: 2.5 billion yen)

The company explained that sales forecast was unchanged due to the following situation: although sales in the Test and Measurement segment were strong (+10.5% YoY through Q3), sales in the Telecommunications segment were weak (-20.5% YoY through Q3). According to the company, strong sales of Test and Measurement segment were due to LTE-related demand and the weak sales in the Telecommunications segment was due to decreased public investments. The company revised operating profit up, and commented that the change was due to strong sales in Test and Measurement and an improvement in the GP margin (45.5% through Q3 FY03/11 vs. 41.8% through Q3 in FY03/10).

In light of the full year revision, the company increased its expected FY03/11 dividend to 7.0 yen per share (vs. an earlier estimate of 6.0 yen per share).

Q2 FY03/11 Results

On October 27, 2010, the company released FY03/11 Q2 (1H) results. At the same time, the company released an upward revision to its FY03/11 earnings forecasts and expected dividend payment. As a percentage of the full year revised company estimates, FY03/11 Q2 (1H) cumulative results were as follows:

• Sales: 47.6% (vs. FY estimate of 77.0 billion yen)
• Operating Profit: 50.3% (vs. FY estimate of 5.6 billion yen)
• Recurring Profit: 43.9% (vs. FY estimate of 4.0 billion yen)
• Net Income: 38.9% (vs. FY estimate of 2.5 billion yen)

Both sales and operating profit exceeded the revised company plan announced July 28, 2010. Sales exceeded the budget by 1.6 billion yen and operating profit was 2.0 billion yen higher than earlier estimates. The company mentioned that stronger than expected LTE-related demand and cost controls were behind the 1H performance.

The revised FY03/11 forecast was as follows:

• Sales: 77.0 billion yen (unchanged)
• Operating Profit: 5.6 billion yen (previous forecast: 3.8 billion yen)
• Recurring Profit: 4.0 billion yen (previous forecast: 2.5 billion yen)
• Net Income: 2.5 billion yen (previous forecast: 1.5 billion yen)

The company explained that the change in forecasts (unchanged sales with higher operating profit) was due to the combination of factors: the stronger than expected yen meant overseas sales during the year would have a reduced impact on total sales, but better than expected 1H results improved profitability. Accordingly, the company changed its dollar-yen assumption to 85 yen (vs. original assumption of 90 yen). The company also commented that spending on R&D would be higher than in its original budget.

In light of the full year revision, the company increased its expected FY03/11 dividend to 6.0 yen per share (vs. an earlier estimate of 4.0 yen per share).

Selected comments made by the company management during the results meeting on October 28, 2010 are summarized below:

• Orders in 1H FY03/11 decreased 1% YoY mainly due to sluggish performance of the Information and Communications segment. The company suggested that delays in public investments were behind the slowdown.
• Reported orders in the Test and Measurement segment during 1H FY03/11 seemed low due to the stronger yen vs. the US dollar and Euro. The company commented that on a local currency basis, Test and Measurement orders actually increased YoY.
• As of 1H FY03/11, labor costs increased as planned and other costs were under control.
• In the LTE space, handset development has been at peak levels, and handset mass production seems to have begun ahead of schedule. The company mentioned that end users have been generally receptive of its LTE products.
• Cetecom, a company that provides independent wireless service verification, had selected Anritsu as a supplier of LTE test solution for device certification and conformance testing on October 2010. The company commented that this development helped Anritsu secure business with Verizon.
• Update on overseas expansion (a key part of its mid-term plan): the company began operations in Romania in October 2010. The Romanian office is the fourth office in Europe.

Test and Measurement (Q2 sales: +9.8% YoY, Q2 operating profit: +712.6% YoY)

LTE-related

Anritsu projected LTE-related test and measurement sales for FY03/11 at between 9 billion and 10 billion yen. Sales reached approximately half that amount during the 1H. The domestic market in Japan remains difficult, but inquiries from handset and chipset vendors in North America and South Korea, and other customer development, is better than expected. For example, handset and chipset R&D is progressing, and some vendors have begun development of the actual handsets for sale to consumers. Additionally, it seems that development of consumer-ready handsets may be earlier than expected.

Carriers at the forefront of LTE deployment are Verizon and NTT DOCOMO. Verizon first planned to offer handsets in the 2H 2011 (data transfer card sales were expected earlier, in the middle of 2010), but they have sped up the plan with deployment for mid-2011 instead. This means that there will likely be increased demand for test and measurement equipment. Anritsu continues to compete with Rohde & Schwarz for market share in test and measurement equipment used in handset and chipset R&D. Agilent Technologies, which earlier sold a wireless test and measurement business to JDS Uniphase, re-entered the R&D test and measurement equipment market in September 2010, and Anritsu said it will watch to see what happens. Anritsu commented that because vendors appear to be scrambling to get to market as quickly as possible, the quality of R&D test equipment seems to be a more important factor than price, so competitors might lose their weapon of lower prices in the fight for market share.

Anritsu expects an increase in LTE-related demand during FY03/12 due to many factors. In terms of handset acceptance tests for telcos, the demand for conformance and interoperability tests will increase as operators increase services and application offerings. Also, demand for testing equipment used in manufacturing will increase in response to the expected mid-2011 handset sales campaigns by major carriers. Anritsu expects a gradual increase in demand for base station construction and maintenance test equipment, based on anticipated increases in coverage area during FY03/12 and FY03/13. (See the “Business” section for detail).

Other test and measurement equipment

Increasing its market share of generic test and measurement equipment is one of the goals in Anritsu’s midterm plan. Demand for base station manufacturing test and measurement equipment by overseas vendors has offset the weak domestic demand from Japanese manufacturers, and Anritsu has thus far been unable to realize market share growth in the market.

Telecommunications (Q2 sales: -6.6% YoY, Q2 operating profit: 570 million yen loss)

Public works investments by the Ministry of Land, Infrastructure, Transport, and Tourism are slightly late and government demand is sluggish. However, the market for bandwidth control devices, especially those used by financial organizations, is solid.

Industrial machinery (Q2 sales: +7.6% YoY, Q2 operating profit: +34.3% YoY)

Equipment investments from domestic small to medium-sized manufacturers are slightly subdued, but business in ASEAN countries and North America is offsetting the effects of the domestic market. ASEAN food exports to Japan are strong, which in turn means increased demand for food testing equipment. Demand for food testing equipment from North America is finally beginning to increase, and Anritsu expects continued development of this market.

Other (Q2 sales: +6.2% YoY, Q2 operating profit: -22.2% YoY)

Profits through Q2 exceeded expectations, but Anritsu commented that beginning Q3 profits may be in line with initial expectations because optical device capex related to the switch to broadband has ended.

Q1 FY03/11 Results

On July 28, 2010, the company released Q1 results for FY03/11. As a percentage of the 1H company estimates, the results were as follows:

• Sales: 48.1% (vs. 1H estimate of 35.0 billion yen)
• Operating Profit: 114.1% (vs. 1H estimate of 800 million yen)
• Recurring Profit: 252 million yen (vs. 1H estimate of zero yen)
• Net Income: 89 million yen (vs. 1H estimate of -300 million yen)

Orders received increased by 6.1% YoY, and sales increased by 17.6%, mainly due to steadily growing demand for LTE-related (long-term evolution) equipment used in the R&D phase of network development. Additionally, higher sales meant that operating profit was a positive figure vs. last year's 867 million yen loss.

Details of the revision:

• Sales: 35.0 billion yen (unchanged)
• Operating Profit: 800 million yen (vs. forecast of –200 million yen)
• Recurring Profit: zero yen (vs. previous forecast of –800 million yen)
• Net Income: –300 million yen (vs. previous forecast of –1.3 billion yen)

According to the company, the upward revision was due to earlier than expected LTE investments by some Test and Measurement customers. Gross profit margin improved by about 8% in Q1 driving an improvement in operating profitability.

There was no change in the full year forecast.

The LTE-related business is progressing through sharing the product development road map with customers. The company commented that both demand and its progress to the full year were shaping up close to initial expectations.

The company changed its exchange rate assumptions going forward to euro-yen at 110 given the actual exchange rate in Q1 vs. original assumptions (dollar–yen at 90, and euro-yen at 125). The company's sensitivity to exchange rate fluctuations is a loss of 70 million yen for each one yen appreciation against the dollar and a 30 million yen loss for each one yen appreciation against the euro. Assuming the dollar-yen exchange rate at 85 yen and the euro-yen at 110, this would imply a total loss of about 800 million yen (350 million yen from the dollar, and 450 million yen from the euro). Although SR Inc. feels there could be more upside than the company forecast, it does not appear that results will significantly exceed the company forecast.

FY03/10 Discussion

FY03/10 results were a substantial improvement compared to the challenges of FY03/08-FY03/09. While sales declined, earnings recovered following FY03/09 restructuring.

Difficult market conditions continued; Test and Measurement sales (the core business) declined approximately 16% YoY. The company indicated that although demand in the US had shown signs of improvement and LTE-related orders were becoming increasingly noticeable, China 3G test equipment demand was slower than expected.

Operating profit margins grew (6.2% vs. 1.1% in FY03/09), partially due to temporary wage cuts in the US and Japan and R&D spending lower than the initial budget (9.4 billion yen vs. 9.8 billion yen). OPMs were also helped by cost cuts over what had been initially budgeted for Q4, and some earlier than expected sales for LTE-related equipment.

Anritsu recognized a net profit for the year vs. a loss in FY03/09. Net profit margin was lower than historical ranges in part due to payment for accrued tax payments. Earnings before tax were up significantly (+26.2%) from FY03/07 (vs. net losses in FY03/08-FY03/09).

Income Statement

Volatility in the company’s sales is due to fluctuations in industry-wide capex trends for end-customers. Sales in FY03/00-FY03/02 were driven by strong sales of equipment related to SDH/SONET (optical/digital) network deployment globally. YoY sales declines in FY03/03-FY03/04 were in part due to the relatively sluggish market appetite for 3G, but also due to the global contraction in IT-related spending (the collapse of the Internet bubble). Sales recovery through FY03/08 was largely due to early-stage customer spending related to NGN and infrastructure growth.

Operating profit growth in FY03/01 was a result of strong sales related to SDH/SONET – after recovery of fixed costs, incremental sales boosted overall profit. Operating losses in FY03/03 were largely due to the combination of substantial sales declines and fixed costs (sales fell sharply YoY, SG&A / sales rose). OPM compression in FY03/09 was due in part to a decline in gross profit (inventory devaluation and changes in accounting standards increased CoGS).

Extraordinary losses in FY03/01 were related to accounting changes involving retirement benefit plans (approximately 11.2 billion yen). Extraordinary losses in FY03/03 related to restructuring costs (11.3 billion yen) and inventory write-downs (14.8 billion yen). Extraordinary losses in FY03/09 related to restructuring costs (2.2 billion yen; headcount was reduced, an overseas factory was closed) and inventory write-downs (1.4 billion yen).

Historical Performance vs. Estimates

Anritsu’s sales estimates in FY03/03 and FY03/09 were materially different from results mainly due to economic conditions (IT bubble collapse in FY03/03, financial crisis in FY03/09).

Operating profit in FY03/06 was below initial estimates due to operating losses in the Information & Communication segment and the acquisition of NetTest. Restructuring charges impacted FY03/08 and FY03/09 results. Actual operating profit in FY03/10 included both the results of previous cost controls and earlier than expected LTE-related sales.

Recurring profit in FY03/05 was below initial estimates due to lower operating profit and inventory write-downs of approximately 1.5 billion yen. The recurring profit shortfall in FY03/08 was mostly due to a 5.6 billion yen charge for inventory devaluation and disposal. Significantly lower operating profit in FY03/09 resulted in recurring profit beneath estimates. Recurring profit in FY03/10 was above initial estimates due to stronger operating profit than initially expected.

Net income in FY03/10 deviated from initial estimates due to the reversal of deferred tax assets.

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Balance Sheet

Assets

Assets have been dominated by current assets related to working capital. Volatility in the working capital needs (accounts receivable and inventory, less payables) have largely been driven by changes in inventory and the geographic mix of sales (receivables customs vary by region, and the company has significant overseas sales – see Geography of Operations). Anritsu commented that inventory related to demonstration equipment for Test and Measurement can have a substantial impact on working capital and cash flow; inventory risk is also higher for demonstration equipment vs. standard product sales.

Fixed assets on the balance sheet from FY03/00-FY03/11 have been mostly buildings and equipment related to production (buildings and land, net of depreciation, the larger component vs. equipment). Total fixed assets have declined from FY03/00-FY03/11, related to factory closures (in Japan and overseas).

Liabilities

Liabilities have typically been evenly split between short and long term obligations from FY03/00-FY03/11. The largest account in current liabilities has been payables, which has exhibited volatility partially due to declining sales (less inventory) and improving supply chain management. Anritsu commented that materials prices have generally been in decline and that the company has shortened the quantity of inventory kept on-site (delaying purchasing until materials are needed).

Shareholders’ Equity

Changes in shareholders’ equity have been predominantly impacted by net income and dividend payments. The company recognized a substantial valuation charge to equity in FY03/09 (approximately 10.3 billion yen) - related to amortization of goodwill from the Wiltron acquisition (8.3 billion yen) and R&D assets of NetTest (about 2 billion yen).

Potential Dilution

• Potential dilution from the convertible bond outstanding as of end-FY03/11 (10 billion yen) was approximately 12.4% (conversion price of 629 yen).
• The company has a poison pill provision triggered at 20%. The plan involves dilutive issuance of shares (free purchase options) for shareholders in the event of a hostile or otherwise undesirable major shareholder purchases.

Per Share Data

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Cash Flow Statement

Operating Cash Flow

Anritsu’s operating cash flows are heavily impacted by changes in working capital. Working capital needs can be influenced by inventory requirements for demonstration and evaluation equipment (see Business Model).

Operating cash flow used in FY03/03 was related to net losses and restructuring costs (severance payments, etc.).

Investment Cash Flow

The 10.9 billion yen cash outflow in FY03/06 was related to the acquisition of NetTest to enter the service assurance business (approximately 7.9 billion yen); other investment cash flows have mostly been for capex, although the company has made occasional minor investments in securities.

Financial Cash Flow

Anritsu’s financial cash flows from FY03/00-FY03/11 have largely been due to bond issuance and redemption.

Simple Free Cash Flow

The company’s simple free cash flow have been largely determined by net income (or losses) and changes in working capital. Changes in working capital requirements are driven by customer demand patterns (demonstration units, etc. – see Business Model).

Cash Conversion Cycle

Anritsu’s cash conversion cycle has improved from FY03/00 to FY03/11. Days payable have increased, and inventory requirements have declined. Although inventory requirements reflect overall sales levels (sales have declined in FY03/09, FY03/10), Anritsu has implemented streamlined purchasing following a group restructuring in FY03/08 aimed at reducing inventory requirements.

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Other Information

History

Corporate Timeline:

March 1931 - Anritsu was created from the merger between Annaka Electric and Kyoritsu Electric

April 1961 – the plant in Atsugi was built

October 1961 - listed on the second section of the Tokyo Stock Exchange

August 1968 – listed on the first section of the Tokyo Stock Exchange

May 1978 – wireless device manufacturing was moved to Atsugi

March 1985 – establishment of a production subsidiary

October 1985 – the company name changed to Anritsu Corporation

February 1990 – acquired the Wiltron Company (a US-based company with a key strength in wireless test equipment)

August 2005 – acquired NetTest, a Danish firm focused on service assurance (network monitoring, packet-level billing, etc.)

The origin of Anritsu can be traced back to 1895, the founding of Sekisan-sha (which would later become Anritsu). The company merged with Abe Electric Wire in 1908, and assumed the name Kyoritsu Electric. The company was renamed Anritsu following the merger with Annaka Electric in 1931 (founded in 1900; successfully demonstrated wireless technology in 1903, produced a wireless phone in 1912 and commercialized it in 1916 – the world’s first wireless phone service). Anritsu delivered Japan’s first TV broadcast transmitter in 1933, and developed Japan’s first automatic telephone in 1939 (when it also developed Japan’s first early prototype of tape recorders).

In 1950, the company developed its first major testing device: the ARM-6074 field strength meter for ultra-short wave electric fields. The company entered the industrial automation instruments business in 1962, beginning production of electronic micrometers (a precision measurement device) and adding automatic weighing devices in 1964.

The company listed on the 2nd section of the Tokyo Stock Exchange in 1961.

The company listed on the Tokyo Stock Exchange 1st Section in 1968.

Anritsu began marketing optical communications equipment in 1977, the same year that the company developed 2GB/s ultra-high-speed error detectors. The company developed the first approved terminal connecting ships at sea with INMARSAT (a satellite communications network system initially created for maritime use) in 1982. Anritsu developed a 5GHz pulse pattern generator for fiber optic communications systems in 1986 (the device was equipment that helped research and development of fiber optic systems and ultra-high-speed logic elements).

The company acquired US-based Wiltron Corporation in 1990, a developer of wireless equipment and related test devices, adding manufacturing capabilities and Wiltron’s midrange frequency expertise.

In 2001 the company developed the world’s first 43.5 GHz 4-channel ultra high-speed error detector, and developed the Signaling Tester that conformed with 3G mobile phones, which would be followed up in 2003 by approval of the company’s Conformance Test System for mobile terminals.

The company acquired NetTest (a Danish provider of network test and monitoring solutions) in 2005, enhancing capabilities in service assurance. The acquisition was intended to open up new markets for the company (bundling the service with other products sold to network operators) and increase sales channels into Europe for the company’s main equipment businesses. Overall, expected benefits from the acquisition have yet to materialize as of FY03/10: Japanese carriers perform service assurance (network monitoring, per-packet billing, etc.) themselves, and overseas demand has been less than originally expected as a result of reduced capex plans and industry consolidation.

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News & Topics

October 2011

On October 26, 2011, Anritsu announced 1H/Q2 FY03/12 results and also upwardly revised its FY03/12 forecast: click here to go directly to the 1H/Q2 FY03/12 results section.

(For original Japanese-only release in PDF format please click here.)

July 2011

On July 28, 2011, the company released Q1 FY03/12 results.

(For original Japanese-language only release, Please click here.)

The company also announced an upward revision to its 1H FY03/12, full FY03/12 and dividend forecasts at the same time.

(For original Japanese-language only forecast and dividend revision release, please click here.)

April 2011

On April 27, 2011, the company released FY03/11 results.

(For original PDF announcement in Japanese language only please click here.)

March 2011

On March 28, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

The condition of Anritsu's Koriyama plant and Tohoku Anritsu Co. (in Koriyama, Fukushima prefecture):

• Completed servicing production lines and manufacturing has resumed.
• Direct shipping and supply logistics have been arranged for Koriyama.
• Water service, electrical equipment, and IT systems are operating at near normal levels, and employees from all departments have resumed work.

On March 23, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

The condition of Anritsu's Koriyama plant and Tohoku Anritsu Co. (in Koriyama, Fukushima prefecture):

• On March 16th, the company resumed shipping goods finished before the earthquake struck.
• Inspections of production lines are proceeding, and maintenance is being completed one line at a time.

On March 14, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• Tohoku Anritsu Co. acts as the production hub for the Tohoku region of northeastern Japan.
• The ceiling and some pipes on the third (i.e., top) floor of the facility were damaged. However, the condition of the building and ancillary structures does not present much of a problem for continued operations. Recovery efforts began immediately after the earthquake, and some operations resumed on March 14th.

On March 2, 2011, the company announced the sales price for the stock sale by existing shareholders announced on February 23, 2011.

• Sales price: 725 yen (3.1% discount from the closing price on March 2, 2011).

February 2011

On February 23, 2011, the company announced a stock sale by existing shareholders.

Details were as follows:

• Number of shares: 19,200,000
• Selling shareholders: Japan Trustee Services Bank, Ltd. (NEC Corporation, Retirement Benefit Trust Account Re-entrusted by The Sumitomo Trust & Banking Co., Ltd.)
• Sales price: Undecided

January

On January 27, 2011, the company released FY03/11 Q3 results. At the same time, the company released an upward revision to its FY03/11 earnings forecasts and expected dividend payment.

October 2010

On October 27, 2010, the company released FY03/11 Q2 (1H) results. At the same time, the company released an upward revision to its FY03/11 earnings forecasts and expected dividend payment.

September

On September 8, 2010, the company announced the conversion price of the convertible bonds announced on September 7, 2010. Details were as follows:

• The conversion price for the convertible bonds was set at 629 yen (21.9% above the closing share price on September 7, 2010)

The potential dilutive impact of the bonds is about 12.4% of shares outstanding on June 30, 2010 (SR Inc.’s calculation resulted in 128,038 thousand shares upon full conversion). Although the dilution impact could be relatively large, SR Inc. thinks that the conversion price is set high enough above the closing price of the company’s shares to minimize the possibility of equity dilution.

On September 7, 2010, the company announced an issuance of convertible bonds maturing in 2015. Details were as follows:

• Issue amount: 10 billion yen
• Closing date and issue date for the bonds: September 28, 2010
• Offer price: 102.5% of the principal amount of each bond
• Conversion price: not included in the original announcement
• Coupon: no coupon
• Redemption of the bonds upon maturity: par value

Callable feature: If the company’s stock price stays above 130% of the conversion price for 20 consecutive business days after September 28, 2012, the company may, having given notice to bondholders, redeem all of the bonds outstanding at par value.

The company plans to invest the proceeds in the following areas:

1) R&D investment in LTE and other growth areas (4 billion yen)

2) General capital expenditures for the business (2 billion yen)

3) The remainder would be used to repay interest-bearing debt – although the company commented any impact on repaying interest-bearing debt from the bond issuance would be minimal.

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Top Management

The company announced a change in management March 2010. The new company President is Hirokazu Hashimoto. Hashimoto’s educational background is engineering, but previous roles with the company have included significant accounting experience (appointed as a Senior Manager in the Accounting department in 1998).

Previous positions include:

• April 1998 Senior Manager, Accounting and Control Dept.
• June 2002 Director, Senior Manager, Accounting and Control Dept., Vice President
• April 2004 Director, Senior Manager, Accounting and Control Dept., Senior Vice President
• June 2006 Director, Executive Vice President
• June 2007 Representative Director, Executive Vice President
• April 2010 Representative Director, President

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Employees

Anritsu employed 3,614 employees at the consolidated level as of FY03/11 (825 at the parent).

Parent company employees’ average age was 40.6, earning an average salary of 6.53 million yen, and has been working with the company for 16.5 years.

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Major Shareholders

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Dividends and Shareholder Benefits

The company pays an interim and yearly dividend, and doesn’t have additional shareholder benefits.

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Investor Relations

Anritsu holds quarterly results presentations in Tokyo and maintains IR information in both English and Japanese (including presentation materials, financial statements, annual reports, and webcasts of results meetings).

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By the Way

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Latest Q&A

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