Advantest : Integrated Annual Report 2023

ADVANTEST Integrated A nnual Re por t 2 023

Contents

01 Contents

02 Editorial Policy

Summary

04 Group CEO Message

09 Welcome to Advantest

1. History
2. Advantest's Market Environment

14 "Grand Design" Mid/Long-Term Management Policy

16 Second Mid-Term Management Plan (MTP2)

19 Risk Management

21 Consolidated Financial and Non-Financial Highlights

Value Creation

1. Value Creation Process
2. R&D Capital: CTO Message

27 Customer Relationship Capital: CCRO Message

29 Human Capital: CHO Message

31 Financial Capital: CFO Message

33 Manufacturing Capital: CPO Message

Sustainability

1. Message from Advantest's Director of Sustainable Management
2. Further Enhancement of ESG Initiatives

41 Environmental Initiatives

48 Social Initiatives

55 Corporate Governance

63 Board of Directors, Skill Matrix

1. Messages from Newly Appointed Outside Directors
2. A Conversation with Directors

Information

71 Our Business Segments & Flagship Products

73 Our Technology In-Depth: Semiconductor Test Systems

1. The Devices We Test
2. 11 Year Financial Highlights
3. Sustainability Accounting Standard Board (SASB) Reporting

79 External Recognition

1. Corporate Overview / Stock Information
2. Our Global Network

1

ADVANTEST Integrated A nnual Re por t 2 023

Editorial Policy

Advantest's Integrated Annual Report presents information that is important to understanding our value creation initiatives, spanning our financial performance, management philosophy, business model, strategy, and governance, in a format that embodies our integrated perspective on corporate value.

It aims to provide content useful to a wide range of stakeholders, including shareholders and investors. The 2023 edition of the Report is structured as follows.

Summary	Reporting Guidelines, etc. Consulted for This Report
This section covers basic information essential to understanding the Advantest Group, including a	· International Integrated Reporting Framework of the International Integrated Reporting Council (IIRC)
message from our Group CEO, an organizational overview, our history, and our market	· GRI Standards
environment. It also provides detailed information on our Grand Design and Second Mid-Term	· TCFD Recommendations
Management Plan (MTP2), which form the backbone of our business strategy.	· SASB (US Sustainability Accounting Standards Board) Standards

Value Creation

This section describes our value creation process and an overview of our financial and non-financial capital. In depicting the value-creating power of non-financial capital, such as relationships with customers and new technology development, we have attempted to give readers the sense that they are right there on the front lines of our business.

Sustainability

This section introduces our ESG Action Plan 2021- 2023 and the progress of the initiatives we have launched within its framework. It can be read in conjunction with our Sustainability Data Book which provides more detail on our sustainability efforts.

(https://www.advantest.com/sustainability/report/)

Information

This section provides useful information about Advantest, including our products, semiconductor test technology, and key financial data over the past 11 years. Starting this year, we now also provide a .csv file of SASB standards data.

Reporting Period & Scope

This report covers the period of FY2022 (April 1, 2022 to March 31, 2023). However, it also refers to earlier and later dates as necessary. Unless otherwise specified, all data are drawn from consolidated financial statements.

Disclaimer Regarding Forward-Looking Statements

This report contains forward-looking statements that are based on Advantest's current expectations, estimates and projections. These statements include, among other things, the discussion of Advantest's business strategy, outlook and expectations as to market and business developments, production and capacity plans. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "anticipate," "believe," "estimate," "expect," "intend," "project," "should" and similar expressions. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause Advantest's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking statements.

2

Summary

Contents

04	Group CEO Message	14	"Grand Design" Mid/Long-Term Management Policy
09	Welcome to Advantest	16	Second Mid-Term Management Plan (MTP2)
11	History	19	Risk Management
12	Advantest's Market Environment	21	Consolidated Financial and Non-Financial Highlights

A DVA N T E S T Integrated A nnual Repor t 2 023

Contents ▶

Group CEO Message

Representative Director, President, Group CEO

Yoshiaki Yoshida

Summary

Value Creation

Sustainability

Information

4

A DVA N T E S T Integrated A nnual Repor t 2 023

Contents ▶

Group CEO Message

Summary

Value Creation

Sustainability

Information

A Look Back at FY2022

2022 was a year of sweeping change. Amidst the digital transformation accelerated by COVID-19 measures during the pandemic, customers actively invested in test systems for high-performance smartphone and HPC semiconductors in the first half of the fiscal year. However, when inflation soared worldwide due to the impact of the situation in Ukraine on energy and food prices, Western countries took the lead in hiking interest rates, exacerbating global recessionary concerns. Markets for consumer electronics such as smartphones and personal computers were hit particularly hard, and manufacturers of semiconductors for these final products began to adjust inventories and review their investment plans.

On the other hand, the growing trend toward electrification of automobiles and industrial equipment buoyed semiconductor demand from these sectors, which remained firm throughout the fiscal year. As semiconductor applications have become ubiquitous in our lives and industries, the semiconductor market has come to resemble a mosaic of stronger and weaker demand, rather than declining across the board under economic stress. In the semiconductor test system market (hereafter referred to as the tester market), unlike in past adjustment phases, business sentiment varied throughout the fiscal year depending on the application and device type. We leveraged our broad customer base and product portfolio to compensate for the decline in weaker sectors by winning business in stronger sectors, and achieved record-high net sales and net income for the third consecutive year.

Our Outlook for FY2023

As of the end of July 2023, the global economy is returning to

1. post-pandemicnormal, but the outlook for the global economy in FY2023 remains uncertain. There is considerable volatility associated with inflation and geopolitical risks, and the semiconductor market as a whole is still in an adjustment phase. In particular, the continuing slump in smartphone shipments, which greatly affect semiconductor demand, is impelling manufacturers of related devices to adjust production and restrain investment. We expect the tester market to shrink from US$5.2 billion in CY2022 to around US$4.1-4.6 billion in CY2023. Regarding our own business performance, we expect net sales of ¥480.0 billion in FY2023, a 14.3% year-on-year decline from net sales of ¥560.2 billion in FY2022.
   However, I believe the diversification of applications will prevent any major overall decline in the semiconductor market. Expectations for widespread implementations of generative AI are extremely high, and Net Zero policies continue to spur strong demand for semiconductors with excellent power efficiency. Our customers have not slowed down their investments in advanced semiconductors, and I am confident this will eventually generate new tester demand.
   Above all, the increasing demand for higher semiconductor functionality and reliability is qualitatively changing the tester market. New architectures and process nodes present numerous technical issues, and customers actively employ test systems to solve these problems and quickly raise yields. More transistors per device means greater test complexity.

Semiconductors that must deliver high performance and be extremely reliable, such as those used in data servers and automobiles, have to be tested multiple times under different conditions, such as different temperatures, so that defects do not go undetected. I believe these trends will contribute to tester market growth that equals or outstrips the growth of the semiconductor market.

The tester market relies heavily on customer investment cycles, so cycles of boom and bust are inevitable to a certain extent. The decline that started in the second half of FY2022 is expected to continue for now, but the market will eventually recover and rebound to a high level in CY2024.

P.12 Advantest's Market Environment

Reflections on the Progress of Our 2nd Mid-Term Management Plan

When we announced our second mid-term management plan in May 2021, we set a three-year average (FY2021-2023) sales target of ¥350.0 billion - ¥380.0 billion as a management metric. Since we had just surpassed ¥300.0 billion in sales for the first time, posting sales of ¥312.8 billion in FY2020, this target appeared ambitious at the time. However, our actual sales in FY2021 were ¥416.9 billion, and provisional sales figures for FY2022 exceed ¥500.0 billion. Therefore, in May 2022, we reviewed this metric and raised our target significantly, to a range of ¥480.0 billion - ¥520.0 billion.

Part of the reason for this revision was that semiconductor technology had evolved and spread faster than we expected, and the tester market itself had expanded. But more

5

A DVA N T E S T Integrated A nnual Repor t 2 023

Contents ▶

Group CEO Message

Summary

Value Creation

Sustainability

Information

	MTP1 Results	FY2021	FY2022
	Avg. of FY2018-20
Sales	¥290.4B	¥416.9B	¥560.2B
Operating Margin	22.3%	27.5%	29.9%
Net Income	¥60.1B	¥87.3B	¥130.4B
ROE	29.1%	30.4%	39.3%
EPS*	¥77	¥112	¥175
	(¥309)	(¥450)	(¥697)
Tester Market Share (Source: Advantest)	50%	47%	57%

*Advantest has changed its previously announced values due to a 4-for-1 stock split of shares of common stock, effective October 1, 2023 (values in parentheses are those before the split).

Toward Sustainable Growth

"Further enhancement of ESG initiatives" is one of the five strategies set forth in our "Grand Design" mid/long-term management policy. We are executing this strategy by promoting initiatives aimed at business growth and the creation of a sustainable future for humanity. In recognition of these efforts, in 2022 Advantest was selected as a constituent stock of the Dow Jones Sustainability Asia/Pacific Index (DJSI Asia Pacific)*1 index for the first time, and in 2023 the MSCI ESG Ratings*2 upgraded our rating to AA.

importantly, we capitalized on this market expansion to increase our market share. As semiconductors come to play an ever more important role as social infrastructure, our strategy of developing solutions for a wide range of applications, expanding our customer base, and growing our business is bearing fruit. In addition, the expansion of applications and our successful wooing of new customers has stabilized our performance despite the cyclical nature of the semiconductor test business.

In the future, our business environment will change dramatically, just as it has in the past. Even if the market resumes expanding, I do not by any means take for granted that we will be able to continue growing during the period of our third mid-term management plan, which is scheduled to start in FY2024. Now that semiconductors are positioned as a strategic commodity with a place in economic security strategies, competition may intensify, including emerging players from China and other countries and regions. New

technological innovations may also change the tester market itself. Rather than resting on our laurels as the dominant market player, we must anticipate possible changes in the semiconductor industry as well as society and change ourselves accordingly to achieve growth. We must strengthen our marketing and R&D capabilities, evolve our customer support and production systems, and further improve operational efficiency. In addition to investing in growth, including through M&A, we will also focus on securing and training the needed human capital to support our business, with sustainable growth as our watchword.

P.14 "Grand Design" Mid/Long-Term Management Policy

P.16 Second Mid-Term Management Plan (MTP2)

*1 The Dow Jones Sustainability Indices (DJSI) are composed of companies selected for their excellent sustainability performance on both general and industry-specific criteria.

*2 The highly-regarded MSCI ESG Ratings "aim to measure a company's management of financially relevant ESG risks and opportunities," according to MSCI. Through analysis of environmental, social, and governance initiatives, companies are ranked as leaders (AAA, AA), average (A, BBB, BB) or laggards (B, CCC).

Governance is the foundation of business sustainability. In particular, I consider the effectiveness of the Board of Directors to be highly important. By allowing directors with diverse backgrounds to spend time exchanging opinions, the Board can steer management from a broader perspective. We survey our directors about the effectiveness of the Board of Directors every year, and have received positive evaluations of the Board's diversity. In addition to non-Japanese directors, we have also appointed executive officers from various parts of North America, Europe, and Asia. Our global management

6

A DVA N T E S T Integrated A nnual Repor t 2 023

Contents ▶

Group CEO Message

Summary

Value Creation

Sustainability

Information

system enables us to offer tailored support for the globally far-flung semiconductor value chain.

In order for a company to grow sustainably, I believe it is necessary to fully recognize that corporate value is a multifaceted concept. Through our measurement technology, we support the technological evolution of semiconductors and contribute to the safety, security, and comfort of people worldwide. While doing business, we have a duty to meet environmental and social needs by measures such as reducing the environmental impact of our production activities and products, and focusing on work environments and human rights, including at our suppliers. Our employees' awareness of environmental and social issues is increasing year by year. We are also in the process of reducing our Scope 1+2

emissions (CO2 emissions from our own industrial processes and externally purchased power) by sourcing energy from renewables, and reviewing our product architectures to reduce the environmental impact. We believe that these attitudes and initiatives are essential for us to work together with our suppliers and customers for sustainable growth.

P.37 Further Enhancement of ESG Initiatives

Advantest's Culture of INTEGRITY

Given the global reach of our customers, global teamwork is essential for our employees around the world. By clarifying the values that Advantest considers important, and sharing them

company-wide, we have unified the aspirations of our global team members and helped them to strengthen their teamwork with colleagues at home and abroad. In addition, we believe employees can justly take pride in the fact that our company's products contribute to the common good. This motivates them and helps them to feel engaged with their work, leading to better results and retention rates.

Our INTEGRITY core values function as a shared mindset for all our employees around the world to work together and grow together with colleagues, customers, and suppliers, and contribute to global sustainability. The word INTEGRITY expresses Advantest's stance in relation to all stakeholders. To further instill INTEGRITY throughout the company, we continue to carry out activities such as workshops for all

I

N

T

E

G

R

I

T

Innovation is our

Number one is our

Trust is our

Empowerment is

Global is our Reach

Respect is our

Inclusion and Diversity

Teamwork is our

Lifeblood

Aspiration

Foundation

our Motivation

Heart

is our Commitment

Approach

Y

Yes is our Attitude

We challenge the	We earn our leadership
status quo.	position in our business
We embrace	fields every day.
technologies and	We establish an
entrepreneurship to	impeccable standard of
create superior	excellence.
customer value.

We are a trusted,	We are empowered to	We embrace a world of	We respect different
collaborative partner.	make decisions with an	constant change.	cultures, customs, and
We have confidence in	owner's mentality.	We are always ready.	laws.
each other's capabilities	We own Advantest's	Anytime. Anywhere.	We never compromise
and intentions.	success.		on our ethical
			standards.

We are proud of and appreciate the range of different backgrounds that our talents represent.

We believe that strength can come from differences as well as similarities.

We work smart and best utilizing our talents across teams and regions to do extraordinary work.

We inspire each other, encourage openness, and recognize team results.

We deliver on results promised to each other.

We recognize that impossible is an opinion, and with imagination, we can change the world.

7

A DVA N T E S T Integrated A nnual Repor t 2 023

Contents ▶

Group CEO Message

Summary

Value Creation

Sustainability

Information

employees, leadership training, the appointment of INTEGRITY ambassadors, and the INTEGRITY Awards, which recognize teams that have made outstanding contributions. Today, our nine INTEGRITY core values (Innovation, Number One, Trust, Empowerment, Global, Respect, Inclusion and Diversity, Teamwork, Yes) are frequently mentioned in our company activities and are established at the roots of our corporate culture.

The semiconductor industry has been evolving faster and faster in the last few years, and it is difficult to predict what will happen in the future. That is why I believe it is essential for corporate sustainability that every employee should quickly perceive changes in our business environment, and demonstrate teamwork in constant communication with customers, suppliers, and colleagues. Our INTEGRITY core values, such as "Trust" of stakeholders and "Inclusion and diversity" of various viewpoints and abilities, are our compass in this era of rapid change.

P.29 Human Capital/CHO Message

The Risks and Opportunities of AI

With generative AI services such as Chat GPT attracting attention around the world, I have been asked many questions about the impact of AI on our business. I would like to close this message with some comments on that topic.

Generative AI still has many issues that need to be resolved, such as security and copyright questions, and countries are

no doubt working hard on laws and regulations to address th e s e i s s u e s . H oweve r, I b e li eve th at w i d e s p re ad implementation of this technology is inevitable and is sure to trigger explosive change. One certainty is that generative AI will increase demand for leading-edge semiconductors such as GPUs, CPUs, and high-performance memory devices. This plays to Advantest's strengths, as we hold a superior position in the tester market, and many of our major customers design and manufacture high-performance semiconductors. Considering that AI will likely spread not only to data centers, but also to servers and "edge devices" on the user side, we expect related semiconductor demand to grow rapidly, which should have a significant positive impact on our business performance.

However, I doubt that this will be the only impact of AI on our business. AI will also be introduced into factories. It is possible that all manufacturing processes will be revised with big data and machine learning, including in the semiconductor industry. The data generated and collected by our test systems can also create new value in combination with the data gleaned from manufacturing processes, as it will become possible to identify problems in design and manufacturing processes early on through data analysis, and use these learnings to guide improvements. We have already launched "Advantest Cloud SolutionsTM," a solution that converts test data into a format that can be used for real-time machine learning. I believe this business will play a role in the future of the semiconductor industry, but it will be a business we operate together with our customers and other partners,

rather than doing it on our own.

In general, big changes entail big risks. However, I believe that we can turn changes into opportunities by taking on new challenges as soon as possible. We will analyze the future of generative AI and consider the opportunities and risks for our company from various angles. It is the role of management to shape an organization that can respond quickly to social changes without being hindered by prior assumptions. This is the key to success in our unpredictable era.

8

ADVA NTE S T Integrated A nnual Repor t 2 023

Welcome to Advantest

Contents ▶

Summary

Value Creation

Sustainability

Information

Advantest's Value Proposition

Advantest is a company that uses electronic measurement technology to address industry issues. We were founded in 1954 as a developer and manufacturer of voltmeters and frequency counters, and grew in step with the Japanese electronics industry. At present our flagship products are test systems for semiconductors. These systems input test signals to semiconductors, and check the response signals to determine whether the semiconductors are good or defective. Our products are used by semiconductor companies around the world for design evaluation, manufacturing process evaluation, and inspection of mass-produced devices, supporting them by resolving issues, and helping them to deliver their products as rapidly as possible.

S e m i c o n d u c to r s a r e r e s p o n s i b l e fo r m a ny of t h e advancements in science and technology in modern times, such as high-performance smartphones, electric vehicles, and most recently, artificial intelligences. Since semiconductors are manufactured at the nanometer scale, they are prone to circuit breakage, short circuits, and variations in voltage and timing. To test dozens or even hundreds of advanced semiconductors simultaneously, Advantest's test systems need to be even m o re a d va n c e d . T h ey c o n tr i b u te to th e s a fe t y of semiconductors in various products and sectors, thus providing security and comfort to people worldwide.

incorporating the advanced technology and know-how of external suppliers is used in each process.

Test systems are mainly used at the end of the wafer production process and in the final inspection process, after packaging. In addition, tests are performed at pivotal points in order to maximize yield and reduce costs. Some state-of-the-art semiconductor volume production lines include as many as 10 separate tests.

Outside of volume production, test systems are also used for design evaluation and process development evaluation before

Wafer Process

Single Crystal Silicon Growth

Slicing	the Ingot		Circuit &	Pattern Design
Wafer	Polishing		Photomask	Making
					●MVM－SEM®
Oxidation
Photoresist Coating		Photolithography

production begins. Recently, in order to accelerate the introduction of new products to the market, semiconductor companies have increasingly tended to deploy a large number of test systems at these early stages.

Test systems are uniquely positioned to collect test data such as functions and specifications, which reflects many aspects of the manufacturing process and can be analyzed for design and process improvement. In 2020, we launched a new software platform, Advantest Cloud SolutionsTM, which proposes ways to use data to improve yields and production equipment utilization rates.

Package Process

Wafer Process

			Burn-in Test
			●Burn-in
Wafer Dicing	Test Systems
			Final Test/Reliability Test
Die Mounting	●Test Systems
●Device Interfaces
			●Test Handlers

Test in the Semiconductor Value Chain Semiconductor manufacturing includes hundreds of processes, starting with lithography and etching. The fundamental technologies required are diverse, including applied chemistry, material engineering, and electronic

Planarization

Loop

Oxidation/Diffusion/CVD/Ion implantation

Metal Deposition

Etching

Wire Bonding

Marking

Molding

engineering, and it is extremely difficult for a single semiconductor manufacturer to develop and deploy all of th e m s u c c e s s f u l l y. H e n c e, p ro d u c ti o n e q u i p m e nt

Wafer Testing		Package
	Process
●Test Systems
●Device Interfaces

Trimming & Forming	Finish
	Processes using Advantest's Products

9