TDK Lifts FY3/2027 Guidance on AI Data Center Pull, Earmarks JPY 100 Billion for TMR Sensors and Eyes a UPS Battery Business Near JPY 100 Billion
Second-quarter earnings call, October 30, 2026
TDK reported record first-half results and raised its full-year forecast, but the more consequential news for investors lies in where the incremental capital is going and how fast AI-related demand is outrunning the plan the company set in April. Net sales in the first half rose 31.9% to JPY 1,560.6 billion and operating profit increased 41.0% to JPY 208.2 billion. Net profit climbed 58.4% to JPY 176.4 billion. Foreign exchange contributed roughly JPY 134.4 billion to sales and JPY 19.9 billion to operating profit, so the underlying growth is lower than the headline, though still strong. Management now guides full-year sales of JPY 3.55 trillion, operating profit of JPY 365 billion and net profit of JPY 280 billion, using an exchange rate assumption of JPY 157 per U.S. dollar for the full year versus JPY 150 previously.
AI ecosystem growth is running well ahead of plan
CEO Noboru Saito said sales tied to what TDK calls the AI ecosystem grew about 1.7x year on year in the first half, against an initial full-year expectation of about 1.2x. AI data center passive component sales, which were expected to roughly double this year as of April, are now tracking to about 3x, within a plan that targets roughly 10x over the medium term. Saito said full-year AI ecosystem growth of 25% to 30% is being revised upward, while the fiscal 2031 targets are being maintained for now, with the company saying it will "aim to grow the top line as much as possible" as it sees next year's trajectory.
Passive Components operating profit rose 2.7x year on year to JPY 39.6 billion on sales of JPY 358 billion, up 25.3%. CFO Tetsuji Yamanishi said the segment's operating margin should reach double digits this year, against 7% last year. Pricing is also turning. Saito said that for some AI data center customers, supply is now tight enough that TDK is moving from a bidding format toward negotiated pricing, with talks for the next fiscal year starting at year-end. He did not expect significant price movement in the second half.
Capacity commitments: TMR sensors, thin film inductors, aluminum capacitors
TDK announced several large capacity decisions. The company will invest about JPY 100 billion to expand the Shinanogawa Techno Plant in Niigata, which it described as the largest such investment domestically. Together with the Asama plant in Nagano, this doubles TMR sensor capacity and creates a two-site production system. The scope covers front-end wafer processing and back-end wafer-level packaging. The executive in charge of the business said a large volume of sensors began shipping this year, that volume should be larger still in three to four years, and that "we are getting big inquiries" that require the investment. Applications cited include joint angle and tactile sensing in humanoid robots, smart glasses, and high-precision current sensors for data centers. Management noted that current sensor frequency requirements are moving from about 5 megahertz toward 10 megahertz and above 20 megahertz, and that it believes TMR technology can meet them.
In thin film inductors, TDK will spend about JPY 40 billion to roughly double supply capacity. Saito tied this to a shift in GPU and CPU power delivery from voltage regulators placed beside the chip to a vertical scheme beneath the substrate. In his words, placing regulators on the side "lengthens the power supply, resulting in heat generation and losses," whereas vertical delivery shortens wiring, suppresses resistance and improves efficiency by about 70%. The approach requires very low-profile inductors that can be embedded in substrates, where TDK argues its plating technology, derived from HDD heads, is a differentiator. MLCC capacity is to rise about 20% toward next fiscal year, and aluminum electrolytic capacity is targeted to double annually, reaching 7x by March 2029. Full-year capital expenditure was raised by JPY 30 billion to JPY 400 billion, mainly for HDD head and suspension capacity, and the depreciation forecast rose JPY 10 billion to JPY 250 billion.
UPS and BBU: a potential JPY 100 billion business, with a BBU delay
In response to analyst questions, Fumio Sashida said TDK plans to double UPS battery shipment capacity next fiscal year and is targeting a 30% to 40% share of the market it serves, with products delivered on a cabinet basis. When an analyst suggested this implies a business at the JPY 100 billion level, Sashida replied that this was "a reasonable image." Management did not give a formal forecast.
The battery backup unit story is less advanced and has slipped. TDK has won approval from major hyperscalers, but shipments originally planned for the third quarter will now begin in the fourth quarter, and no BBU revenue is expected this fiscal year. Sashida said mass production tied to 800-volt DC architectures is expected to start in 2027 and declined to give volumes.
HDD heads and suspensions carry the profit upgrade
Magnetic Application Products is the largest driver of earnings growth. First-half sales rose about 1.5x to JPY 176.9 billion and operating profit increased 2.8x to JPY 33.1 billion. In the second quarter alone, head volumes increased 17% sequentially and suspension volumes 9%, and operating profit rose about 2.5x from the first quarter. Yamanishi attributed the improvement to volume, higher wafer output, utilization and what he called appropriate pricing under the current supply-demand balance. First-half segment margin was 18%, and management expects the second half to be higher. Full-year segment operating profit is forecast at about 2.5x last year's level. The nearline HDD production forecast was raised to 79 million units.
Capacity is not seen as a constraint on heads, where wafer investment is complete and output is ramping. Suspension capacity is up about 20% this year, and the additional JPY 30 billion of capital expenditure will contribute from next fiscal year. Saito indicated that heads, still classified as a business under improvement, will be moved to the profit base category. Asked about media reports concerning the head business, he said the reports did not come from TDK and declined to comment. Saito also confirmed that TDK is in discussions with Taiyo Yuden on a passive components business partnership, citing the need to strengthen and accelerate growth for the AI ecosystem, and said details would be disclosed at the appropriate time.
Smartphone weakness and the second-half profit step-down
The offset is the ICT market. Tight memory supply and higher memory prices are depressing device production. TDK now expects 2026 smartphone production to fall a further 5 percentage points beyond the roughly 10% decline assumed in April, which put production at 1.112 billion units, taking it below 1.1 billion units. Small battery shipments are projected to fall about 10% sequentially in the third quarter. Sashida said the original plan assumed small battery volume down about 7% for the year, and that the outlook has deteriorated since. Segment sales are now expected to be up about 2% for the year, helped by price revisions and a better mix from new launches. He said difficult conditions in small batteries are likely to persist into next fiscal year, and that TDK intends to defend margins through cost reduction and share gains, with medium-capacity batteries for industrial and data center uses providing growth.
The guidance implies a sharp drop in profit. First-half operating profit of JPY 208.1 billion compares with a second-half forecast of JPY 156.9 billion, a decline of about JPY 50 billion. Yamanishi named Energy as the biggest factor, with lower battery volume and reduced utilization around the Chinese New Year in the fourth quarter. Sensors will also decline with smartphone volumes. Passive Components profit will be roughly flat but absorbs JPY 5 billion in restructuring costs, and fixed asset tax adds around JPY 5 billion in the fourth quarter. Asked whether the guidance is conservative, Yamanishi said risks are included where volumes are visible, but that the fourth quarter is not fully visible and battery volumes are being treated with some conservatism. On cobalt, Sashida said falling spot prices have not yet filtered through, because TDK holds previously purchased inventory and customer price talks lag the market.
Cash flow, portfolio management and governance
Cash generation is the weak spot. First-half operating cash flow fell JPY 110.8 billion year on year because of one-off withholding tax payments and working capital growth. Free cash flow was negative JPY 23 billion, including the acquisition of Linergy, and the full-year free cash flow forecast was cut sharply to negative JPY 50 billion on strategic M&A. Management said this will not materially change the medium-term capital allocation plan. Structural one-time expenses were raised from JPY 6 billion to JPY 11 billion, yet the company still expects to meet the final-year medium-term targets for operating margin and ROIC. Expected ROIC for the year improved to 9.7% from 8%. The interim and year-end dividends were each raised from JPY 20 to JPY 25 per share.
On portfolio management, two of five businesses under discussion, both flash memory applications, moved to the improvement category, bringing that group to 15 from 13. A decision on the three remaining businesses is due by the end of this fiscal year. TDK also announced a move from a Company with an Audit and Supervisory Board to a Company with Three Committees, intended to separate supervision from execution. Medium-term targets remain ROE of 15% or more, ROIC of 12% or more and an operating margin of 15%.