First of all, thank you all for joining this conference call. Now we will begin the conference of the fiscal year 2020 second quarter earnings results by SK hynix. This conference will start with a presentation followed by a divisional Q&A session. If you have a question, please press star one. That is star number 1 on your phone during the Q&A session. Now, we shall commence the presentation on the fiscal year 2020 second quarter earnings results by SK hynix. Good morning and good afternoon, and evening to those calling in from abroad. This is Park Seong-Hwan, the Head of IR at SK hynix. Welcome to the SK hynix 2020 second quarter earnings release conference call. Before starting the conference call, allow me to introduce the executives present here with me today.
Cha Jin-seok, CFO of SK hynix, Park Myung-soo, in charge of the DRAM Marketing, and Kim Jung-tae in charge of NAND Marketing. Let me issue a disclaimer that all outlooks presented by the company are subject to change, depending on macroeconomic and market circumstances. With that, we will present our quarterly earnings, future plans, and market outlook. Good morning. This is the CFO, Cha Jin-seok. I will first report on the company's financial performance in second quarter 2020. Consolidated sales in the second quarter was KRW 8.607 trillion, up 20% from the previous quarter. Despite the persistent COVID-19 related uncertainties in the business environment, demand stayed strong for server memory, and the overall price environment remained favorable in the memory market. SK hynix actively responded to demand for products which showed robust price conditions. DRAM bit shipment increased 2% quarter-on-quarter, slightly outperforming the guidance.
Weakness in demand for mobile products continued from the previous quarter, but was offset by increased sales of server and graphics products, where both demand and price remained relatively strong. ASP rose 15% quarter-on-quarter, with prices rising across all applications. NAND flash recorded a 5% increase in bit shipments from the previous quarter, which was below the original target. Although active response to solid SSD demand led to SSD sales mix close to 50% for the first time ever, the company engaged limitedly towards channel and certain mobile markets, which showed relatively weak demand and pricing conditions. ASP rose 8% quarter-on-quarter due to favorable price trends, especially from SSDs, of which we increased shipment. For MCP, revenue fell 1% QOQ, and revenue portion was 16%. Although the MCP prices also increased, there was a decrease in shipment due to overall smartphone demand slowdown.
단위당 원가 절감이 지속되며 모든 제품군의 수익성이 개선되었습니다. 이에 따라 2분기 영업이익은 전분기 대비 143% 개선된 1조 9,470억 원을, 영업이익률은 23%를 기록하였습니다.
The company's profitability improved across all applications as result of ASP increase and continued cost reduction per unit from increased portion of 1y-nm DRAM and 96-layer 3D NAND products, which have both reached mature yield levels. As a result, operating profit in second quarter was KRW 1.947 trillion, increasing 143% from the previous quarter with operating profit margin of 23%.
한편, 2분기 감가상각과 무형자산 상각비는 2조 4,050억 원으로 전분기 대비 소폭 증가하였으며, EBITDA는 4조 3,520억 원, EBITDA 마진율은 51%를 기록하였습니다.
Depreciation and amortization expenses in the second quarter increased slightly from the previous quarter to KRW 2.405 trillion. EBITDA was KRW 4.352 trillion with EBITDA margin of 51%.
영업 외 항목에서는 기말 원화 강세 영향으로 외환 관련 손실이 발생함에 따라 순 영업 외 비용은 2,200억 원을 기록하였습니다.
There was net non-operating expenses of KRW 220 billion in loss recognition from foreign currency related items following appreciation of the Korean Won at the end of the quarter.
세전이익 증가에 따라 2분기 법인세 비용은 전분기 대비 1,830억 원가량 증가한 4,630억 원이 발생하였고, 법인세 차감 후 순이익은 1조 2,640억 원, 순이익률은 15%를 기록하였습니다.
Corporate tax for the second quarter was KRW 463 billion, an increase by KRW 183 billion from the previous quarter due to increase in net profit before corporate tax. Our net profit after corporate tax for the quarter was KRW 1.264 trillion with a net profit margin of 15%.
한편, 2분기 말 전체 현금성 자산은 5조 2,650억 원으로 전분기 대비 약 5,220억 원가량 증가하였으며, 차입금은 2,750억 원 증가한 12조 6,900억 원으로 차입금 비율은 26%, 순차입금 비율은 15%를 기록하였습니다.
Consolidated cash balance at the end of the second quarter was KRW 5.265 trillion, up KRW 522 billion from the previous quarter, while interest-bearing debt was KRW 12.69 trillion, up by KRW 275 billion. Debt-to-equity ratio was 26% and net debt-to-equity ratio was 15%.
다음으로 시장 전망과 계획에 대해 말씀드리겠습니다.
Next is the company's market outlook and plan.
지난 상반기는 COVID-19의 영향으로 모바일 메모리의 수요는 당초 예상에 미치지 못한 반면, 서버와 PC 메모리의 경우는 비대면 니즈 확산 등의 영향으로 예상보다 높은 수요를 기록하였습니다. 더불어 IT 공급망에 대한 불안감이 확산되며 오히려 전반적인 메모리 가격 환경은 우호적인 흐름이 지속되었습니다.
In the first half of the year, while demand for mobile memory fell short of expectations due to COVID-19, demand for server and PC memory exceeded expectations, thanks to increased requirement for remote work and education, etc. Combined with growing anxiety over the IT supply chain in general, the overall memory price environment remained favorable.
하반기 들어서면서 주요 국가들의 경제 활동이 부분적으로 재개되고 일부 경기 지표들도 저점을 벗어나기 시작하고 있습니다. 아울러 공급망이 안정되기 시작한 스마트폰과 신제품 출시가 예정된 게임 콘솔 등 모바일과 컨슈머 제품을 중심으로 부품 수요가 개선될 것으로 기대됩니다.
As we enter into the second half, economic activities are partially being resumed in major countries, and some economic indicators appear to be over the trough. In addition, with supply chain beginning to stabilize for smartphones and new product launches planned for game consoles, we expect improvement of component demand, especially from mobile and consumer-related goods.
글로벌 팬데믹이 완전히 해소되지 못한 상황에서 빠르고 지속적인 경기 회복을 확신하기는 아직 이르고, 주요 국가 간 무역 분쟁에 따른 불확실성도 상존하고 있는 상황이지만, 중국을 중심으로 5G 스마트폰의 보급이 확대되고 있고, 비대면 업무와 온라인 교육 지원을 위한 서버향 수요의 견조한 성장세가 이어지고 있는 만큼 일부 고객들의 재고 수준은 연말로 갈수록 다시 낮아질 것으로 예상합니다.
Under the situation where the global pandemic persists, it is too early to be confident about rapid and continuous economic recovery, and uncertainties still remain over trade conflicts among major countries. As supply of 5G smartphones grows, especially in the China region, and demand for server products to support remote work and online education continues to grow, we expect some customers' inventory levels to become lower again by the year-end.
경기 회복에 대한 여러 변수가 있으나 올해 스마트폰 출하량이 감소한 영향으로 내년에는 본격적인 5G 스마트폰 확산과 함께 두 자릿수 이상의 스마트폰 출하량 증가율이 예상됩니다. 또한 신규 서버 CPU 출시가 상당한 서버 DRAM의 채용량 증가를 견인하는 한편, 정부와 기업체의 클라우드 시스템 구축 가속화로 서버향 SSD의 수요 성장도 가속화될 것으로 전망합니다.
Although there are many variables regarding the pace of economic recovery, smartphone shipments are expected to grow by more than double digits next year due to lower base shipment of this year, along with a more rapid uptake of 5G smartphones. In addition, the launch of new server CPUs is expected to drive significant growth in server DRAM adoption, and the speed up of cloud system deployment from governments and enterprises is also projected to boost demand growth for server SSD.
여기에 올해 하반기 중에 출시되는 신규 게임 콘솔의 DRAM 채용량은 최대 16GB로 기존 모델 대비 평균 약 40% 증가하고, 처음으로 HDD 대신 최대 1TB의 SSD를 탑재할 것으로 전해져 내년까지의 견조한 그래픽 DRAM과 NAND 수요를 견인할 것으로 기대됩니다.
Newly launching game consoles during the second half are expected to drive solid growth through next year in graphic DRAM and NAND demand. It's known to have an average 40% higher DRAM content than previous models, up to 16GB per box, and also to adopt SSD over HDD for the first time, up to 1TB.
2021년 메모리 수요는 올해보다 안정적인 성장세를 보일 것으로 기대하지만, 업계 투자가 지난 2년간 감소한 영향으로 공급이 빠르게 증가하기는 어려운 환경에서 내년을 맞이할 것으로 예상됩니다.
Memory demand next year is anticipated to show a more firm and steady growth trend than this year, but supply is not likely to chase up as a result of the industry's investment reduction over the past couple of years.
당사는 상반기 도전적인 경영 환경 속에서도 수요 변화에 유연하게 대응해 왔으며, 하반기에도 품질 경쟁력을 바탕으로 수익성 중심의 제품 믹스 운영에 집중할 계획입니다.
The company has been flexibly responding to demand changes even under a challenging business environment in the first half of the year, and we plan to focus on optimizing the product mix for profitability in the second half based on the company's quality competitiveness.
우선 DRAM은 증가세를 보이고 있는 5G 스마트폰 중심의 모바일 수요와 게임 콘솔향 신제품 수요에 적극 대응하겠습니다. 1y 나노미터 8Gb mobile DRAM 판매 확대로 수익성을 지속 개선하고, 채용이 본격화되기 시작한 12Gb와 LPDDR5 시장에 적기 공급하겠습니다. 또한 3분기에는 HBM과 GDDR6 판매를 더욱 가속화하여 그래픽 DRAM 중 이들 제품의 비중이 60%를 넘어설 것입니다.
For DRAM, the company will actively respond to growing mobile demand driven by 5G smartphones and demand for new game console launches. We will continue to improve profitability by expanding sales of 1y nanometer 8 gigabit mobile DRAM and ensure timely supply to the 12 gigabit and LPDDR markets, where adoption has begun in earnest. In addition, we will further accelerate sales of HBM and GDDR6 in the third quarter, and the portion of these products will exceed 60% of our graphics DRAM.
반면 상대적으로 고객들의 재고 운영이 보다 타이트해질 것으로 예상되는 컴퓨팅 시장에는 업계 최고 수준의 품질 경쟁력을 갖춘 1y-nm 16Gb 기반의 고용량 모듈 제품의 매출을 확대하고, 1z-nm의 양산도 차질 없이 진행하여 기술 경쟁력을 높이는 데 주력하겠습니다.
In the computing market, where customers' inventory is expected to be tighter, we will focus on expanding sales of 1y-nm, 16Gb-based high-density modules, which have the best-in-class quality competitiveness, and focus on enhancing technological competitiveness with smooth ramp-up of 1z-nm.
NAND는 하반기 스마트폰과 게임 콘솔 신제품 출시 수요 대응은 물론, 주요 모바일 고객의 제품 포트폴리오 변동에 따라 탄력적으로 제품 믹스를 운영할 예정입니다. MCP를 포함한 모바일 NAND와 Client SSD의 판매 비중이 상반기 대비 확대되겠으나, 고객 포트폴리오 다변화에 주력하여 서버향 비즈니스 역량을 더욱 강화할 것입니다. 특히 128단의 고객 인증을 하반기 적기 완료하여 모바일 NAND와 Client SSD의 수익성 개선이 지속되도록 하겠습니다.
For NAND, alongside demand support for newly launching smartphones and game consoles in the second half, we plan to operate a flexible product mix in reaction to a product portfolio change for a major mobile customer. Thus, sales portion of mobile NAND, including MCPs and Client SSDs, will increase compared to the first half. However, we will also strengthen our business capability for server products to diversify our customer portfolio. We will ensure that customer qualifications for 128-layer products are completed on time in the second half, so that profitability improvement can continue for mobile NAND and Client SSD.
3분기 DRAM은 지난 분기와 같은 수준의 출하량을 계획하고 있으며, NAND는 약 한 자릿수 후반%의 출하량 증가를 계획하고 있습니다. 고객들의 재고 확보 수요로 인해 상반기 출하량이 예상보다 높았던 영향으로 당사의 연간 출하량은 연초 COVID-19 이전에 제시했던 기존 전망치인 DRAM 10% 중후반과 NAND 40% 이상 증가 계획에 부합할 전망입니다.
DRAM bit growth in third quarter is planned to be flattish, and NAND bit growth is planned to grow at a high single-digit %. Given the higher than expected shipment in the first half with customers' effort to secure inventory, the company's annual shipment is expected to meet mid-to-high teen % for DRAM and above 40% for NAND, which was suggested early this year before COVID-19.
당사의 투자와 capacity 운영은 당초에 제시해 드렸던 보수적인 운영 기조를 그대로 유지하고 있으나, 향후 시장 상황에 따라 보다 신중하게 대응해 나가는 방안도 고려하여 볼 수 있다고 생각합니다. 또한 상반기 말 기준 당사의 DRAM과 NAND 재고는 모두 정상 수준에 도달한 만큼 이를 적극 활용하여 하반기 수요 변동에 대처하겠습니다.
The company's conservative CapEx and capacity plan remains unchanged from what we have already communicated. It is possible to consider more prudent responses depending on future market conditions. As our DRAM and NAND inventories both reached normal levels at the end of the first half, we will actively utilize this to cope with demand changes in the second half.
여전히 코로나19 재확산에 대한 우려와 경제활동 재개에 대한 기대감이 혼재되어 하반기 수요에 대한 가시성은 제한적입니다. 하지만 중장기적으로 코로나19 이후의 모든 생활 양식의 디지털 전환이 가속화됨에 따라 메모리 반도체의 중요성과 가치는 더욱 높게 평가될 것입니다. SK hynix는 올해 남은 하반기에도 대외환경의 변화에 유연하게 대처하며 지속적인 성장을 이뤄나갈 수 있는 바탕을 마련해 나가겠습니다. 감사합니다.
Still, demand visibility into the second half remains limited, with a mixture of both concerns over reproliferation of COVID-19 and expectations of resuming of economic activities. However, over the mid to long term, as digital transformation accelerates in every part of our lives post COVID-19, the importance and value of memory semiconductors will also be appreciated even more. SK hynix will stay flexible to changes in the external environment in the remaining half of the year as we continue to lay the basis for sustainable growth. Thank you.
그럼 지금부터 Q&A 세션을 진행하겠습니다.
With that, we will now begin to take your questions.
[Foreign language] Now Q&A session will begin. Please press star 1, that is star number 1, if you have any questions. Questions will be taken according to the order you have pressed the number star 1. For cancellation, please press star 2, that is star number 2 on your phone. In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions per each participant. [Foreign language] The first question will be provided by Lee Junhee from Goldman Sachs. Please go ahead with your question.
네, 좋은 실적 축하드리고 질문 기회 주셔서 감사합니다. 저는 두 가지 질문이 있는데요. 첫 번째는 재고 관련입니다. 1분기에 이어서 2분기에도 좋은 실적의 이유 중 하나로 고객사들의 재고 축적이 추정되는데요. 현재 고객사의 재고 수준은 어느 정도로 판단하고 계신지 언급 부탁드립니다. 그리고 이에 따라서 하반기에는 고객사들의 재고 조정 가능성을 어떻게 보고 계시는지, 성수기 수요 효과와 맞물려 하반기 수급을 어떻게 전망하시는지 코멘트 부탁드립니다. 그리고 두 번째는 5G 관련인데요. 업계에서는 5G 스마트폰 출시에 따라 메모리 탑재량 증가를 기대하는 시각도 있고, 한편으로는 5G가 중저가로 확산되면서 본코스트 부담으로 메모리 콘텐츠 증가가 더딜 것이라는 우려가 상존하고 있습니다. 저희 SK hynix에서는 5G 스마트폰 확산에 따른 모바일 메모리 수요 영향을 종합적으로 어떻게 판단하고 계시는지 코멘트 부탁드립니다. 감사합니다.
Congratulations on the good performance. Now I have two questions. First is about the inventory level. I believe that the continued good performance from the first quarter to the second quarter is largely due to the inventory build-up by the customers. What is the current inventory level among your major customers? Do you also believe that there is a possibility of the customers going into inventory adjustment in the second half of this year? Combined with that, how do you foresee the demand in the second half along with the seasonality? The second question is about the 5G smartphone and also the related memory increase.
Because of the increase in the 5G smartphone sales, now some in the industry expect that this is also going to increase memory content, while on the other hand, because of the rising BOM cost, they also point out that this is actually going to limit the increase in the memory content. What is the SK hynix's outlook on the 5G smartphones overall impact on the mobile demand?
질문 주신 내용에 대해서 답변드리겠습니다. 첫 번째, 고객 재고 관련된 질문을 주셨는데 NAND 상황이 아마 비슷할 것 같아서 같이 묶어서 말씀을 드리겠습니다. 상반기에는 앞서 실적 발표 내용에서도 언급이 있었지만, 일부 공급망 이슈들이 발생을 했다고 보고 있고요. 연초에는 고객들이 올해 시장 상황을 긍정적으로 전망을 해서 재고를 좀 높인 부분이 있고, 2분기 지나면서 COVID-19 이후에 공급망 리스크를 대응하기 위해서 재고 수준을 좀 높인 부분도 있다고 판단이 됩니다. 하지만 최근에 이 문제가 저희뿐만이 아니고 전체 인더스트리의 관심사다 보니까 다양한 채널로 공급망 점검이 이루어지고 있는데, 점점 이 빌드 활동이 다시 회복되면서 하반기를 지나면서 재고는 건전하게 소진이 돼 갈 걸로 전망을 하고 있습니다. 그래서 하반기 말 기준으로 전체적으로 고객들의 재고가 2분기 말보다는 조금 건전하게 될 것으로 전망을 하고 있습니다. 두 번째 질문 주신 부분은 5G 스마트폰 관련된 전망과 우려에 대한 질문이었는데요. 5G 스마트폰의 확산이라는 부분은 전체적으로 주요 업체들의 플래그십 확대와 더불어서 결국은 중저가 5G 폰의 확대가 중요하고 수반될 걸로 보고 있습니다.
이를 위해서 지금 다양한 애플리케이션 베이스 밴드의 통합 칩셋이 개발되고 활발하게 탑재되고 있는 걸로 평가하고 있고요. 결국은 이런 부분들이 전체적으로 5G 스마트폰, 특히 중저가 세그먼트의 원가 경쟁력 확보에 도움이 될 걸로 예상하고 있습니다. 메모리 관점에서 보면, 작년 대비, 그리고 올 연초 대비해서 지금 현 수준은 어느 정도 가격이 안정화되어 있다고 보이기 때문에 메모리가 크게 원가 부담의 요소로 작용하지는 않을 거라고 보고 있고요. 그다음에 수요 관점에서 보면, 특히 mid range 세그먼트에서 메모리 탑재량 증가가 end customer들의 value requirement와 맞물려서 필수 불가피하다고 판단을 하고 있습니다. 결국은 5G 폰에서 더욱 중요시되는 내용이 카메라, 비디오 처리 속도 이런 부분들인데, 이에 대해서 더 많은 DRAM 처리 용량과 저장 용량을 요구하게 되고, 이게 결국은 긍정적인 요인으로 작용할 걸로 판단합니다.
First question was about the customer's inventory, and since I believe that this is similar to the NAND situation, so I would like to respond to this question along with the NAND as well. In the first half, as was reported earlier, now it appears that there were some issues in the supply chain, but then now earlier, starting in the early this year, the customers went into inventory buildup because of the positive outlook that they still had at the time. Moving into the second quarter as there was the COVID outbreak, now the customers continue with the inventory buildup because there were some concerns about the supply chain risks.
Now more recently, because the supply chain is a concern not only for SK hynix but also to the industry overall, there have been a review and monitoring of the supply chain through various channels. Because of this, we believe that now since then, the build has been consistently done. We believe that in the second half of this year, the inventory will begin to be lowered. By the end of the second half of this year, compared to the end of the second quarter of this year, we believe that the customer's inventory will go back to a healthier level. Your second question was about the 5G smartphone, both the outlook as well as some concerns.
Yes, we see that the 5G smartphone is briskly increasing throughout the world, and that is mostly led by the flagship smartphones by the major companies, as well as the mid to low-end smartphones. For this, we see that there is growing requirement for app-based integrated chipset. We also see that they are being developed and also being adopted at a faster pace. Because of this, we believe that for the 5G smartphone, this is going to be favorable for the cost competitiveness as well. In terms of the memory, now compared to last year, and also even compared to the early part of this year, we believe that the price has stabilized quite a lot. This is not going to be an important factor in terms of the demand.
Looking at the demand itself, then now for the mid-range segment, the memory content is continuing to grow. Because of the value considerations coming from the industry as well as the customers, the memory content and the growth of the memory content is becoming even more important, especially because for the 5G smartphones, the important features are camera, video and processing speed. These are what the 5G smartphone users are looking for. Because of this, the DRAM content is continuing to grow, and we believe that this is going to be quite positive for the demand as well.
The next question will be provided by Marcus Shin from Mitsui Securities. Please go ahead with your question.
I have one question each for DRAM and NAND. First, about the DRAM. Some are predicting a drop in the DRAM price starting in the second half of this year. If that does happen, then how do you foresee the duration and the extent of the DRAM price adjustment? If you cannot give specific numbers, then perhaps a comparison with previous cycles would also work. The second question about NAND, and I see that in your recent performance, what stands out is the cost saving on the NAND product side. What is your current progress on the 96-layer and the 128-layer products? In the market, it seems as if there are growing expectations over the 128-layer products. How do you foresee the 128-layer product contributing to the company's growth in the SSD market share?
Regarding your first question about the price outlook for DRAM in the second half of this year, yes, as it stands now, it appears almost unavoidable that there will be some price adjustment or some adjustment to the ASP in the second half of this year. What is going to be different from the immediate past is that, now when we look at the period between 2016 to 2019, so for about three to four years, there have been some up and down adjustments in the demand and supply dynamics. Now we see that that has been just about completed by the end of last year. Because of that, and also at the same time, we believe that for the mid to long term, the growth in the memory demand is going to be quite solid and robust.
Unless there are some large external factors, for example, reproliferation of COVID-19, we believe that the adjustment in the DRAM ASP this time is going to be quite short-lived. Of course, I cannot specify the extent of the price adjustment, but it is quite likely that it is going to bottom out in the second half of this year.
NAND 관련해서 말씀드리겠습니다. 현재 96단은 현재 자사 주력 제품으로써 전 응용 분야에서 지금 경쟁력 확보하는 데 기여 중에 있고요. 96단과 128단은 비중을 좀 합쳐서 3분기에 60% 이상, 4분기에는 70% 이상 확보를 계획하고 있습니다.
For NAND, the 96-layer product is currently the company's flagship product, and we are trying to secure competitiveness in all applications. Combined with both the 96 and the 128-layer products, so these two products combined, we believe, will go over 60% in the third quarter, and in the fourth quarter, over 70%.
특히 128단은 주요 제품에 대해서 현재 주요 고객들에 대해서 인증 진행 중이고, 또 내부적으로 양산 안정화가 원활하게 진행 중에 있습니다. 그래서 3분기 말, 4분기 초부터 128단의 본격적인 판매 확대를 계획하고 있고, 이 128단을 통해서 SSD뿐만 아니고 모바일의 수요, 특히 고용량 제품들에 대한 수요에서 제품 경쟁력을 확보할 수 있을 것으로 생각하고 있고, 이를 통해서 자사는 이 적극적인 대응을 통해서 수익성 개선에도 크게 기여할 것으로 예상을 하고 있습니다.
Particularly for the 128-layer products, now the customer qualification is currently underway for major applications in major customers. We are also stabilizing the mass production process for the 128-stack product. By the end of the third quarter or the early part of the fourth quarter, we will be able to drive sales of the 128-layer product. We believe that it is going to be quite helpful in responding to the SSD, especially the mobile high content demand. This is also going to be quite helpful in improving the profitability.
네, 다음 질문해 주십시오.
[Foreign language] The next question will be provided by Choi Do-yeon from Shinhan Investment. Please go ahead with your question.
네, 안녕하세요. 신한금융투자 최도연입니다. 질문 기회 주셔서 감사합니다. 저도 두 가지 질문드리고 싶은데요. 첫 번째는 앞서 설명드린 재고의 흐름과 연관돼서 저희 회사의 재고 방향성을 여쭤보고 싶고요. 이미 이제 3분기에 대한 DRAM과 NAND 비트 그로스 가이던스를 주셨는데 이를 대입했을 때 2분기 대비 3분기 말에 저희 회사 재고의 방향성이 어떨지 말씀해 주시면 감사하겠습니다. 두 번째 질문은 이제 재고자산 평가손에 대한 내용인데요. 2분기에 NAND 재고자산 평가손 환입이 얼마나 진행되었는지, 그리고 또 3분기에는 추가로 환입될 수 있을지 궁금합니다.
I also have two questions. First is about the inventory, this time about the company. We have discussed the inventory level among the customers, I wonder what the company's inventory level is going to be by the end of the third quarter. You have also presented the bit growth outlook for the third quarter for both DRAM and NAND. In light of the bit growth outlook, where do you foresee your inventory level being at the end of the third quarter? The second question is about the inventory valuation reversal. There was some reversal in the second quarter of the NAND inventory valuation. What is the expectation in the third quarter? Do you believe that there's also going to be additional reversal?
네, 먼저 질문 주신 재고 방향성에 대해서 DRAM 먼저 말씀을 드리겠습니다. 현재로서는 하반기, 특히 3분기로 가면서 상반기 말 대비했을 때 재고 수준에 큰 변화는 없을 걸로 이렇게 예상을 하고 있습니다. 그리고 DRAM의 경우에는 응용 시장별 수요 회복세와 또 하반기에 계획되고 있는 신제품 출시들 적절히 연계해서 고객 실수요에 맞게 대응을 해나갈 계획이고요. 이를 통해서 제품 재고 변동폭을 최소화하고 시장 대응의 유연성을 확보하는 데 주력하고자 합니다.
In response to your first question about the inventory level, let me first explain about the DRAM. As it stands today, when we look toward the second half of this year, especially into the third quarter, we expect no major changes in the inventory level compared to the first half. For DRAM, we would have to respond to the actual demand coming from the customers in each application market. Depending on the pace of demand recovery and also launch of new products. We are going to make sure that there is going to be minimum changes or volatility in our product inventory level, so that we will be able to respond flexibly to the environment as well as the changes.
As for NAND, in terms of the sheer inventory level, then because of the lower shipments than planned, the inventory level at the end of the second quarter rose slightly compared to the first quarter. When we look at the days of inventory, then it has slightly gone down at the end of the second quarter. Likewise, when we consider the bit growth outlook for the third quarter, then we believe that by the end of the third quarter, there is going to be additional slight decrease in the NAND inventory level. Having said that, the inventory level remains quite stable, and we intend to maintain it this way.
We are going to make sure that we maintain the inventory level according to the profitability and the growth prospect of NAND, we will also be able to flexibly respond to the changing demand. About the inventory valuation reversal in the second quarter. In the second quarter, there was almost none. In terms of NAND, because of the rising ASP because of the improved yield coming from the 96-layer products, there was some reversal for 96-layer product. Because of the mass production beginning for the 128-layer product and because of the initial production cost, now in this case, there was some inventory valuation loss. There were some raw materials that had to be discarded. Overall, there were some pluses here and minuses there. Overall, the inventory valuation was almost net zero.
Looking toward the third quarter, now as we kick start the sales and mass production of the 128-layer products, so as we move on to the mass production by the end of the third quarter or the early part of the fourth quarter, then we expect that there can be some reversal coming from the inventory valuation.
The next question will be provided by Peter Lee from Citigroup. Please go ahead with your question.
I have two questions, one for next year and another for the longer term. What is the company's outlook for DRAM and NAND demand growth for next year, especially compared to this year? The second question is about the mid to longer term demand for servers, for the server memory, because more recently we see the spread of the multi-access edge computing, the MEC, and which is characterized by ultra-low latency and high efficiency. How do you foresee the uptake of the MEC affecting the server memory demand for the longer term?
Regarding your first question about the demand outlook for next year. Allow me to respond regarding the DRAM first. We expect that there is going to be some base effect coming from this year, and especially looking at the major markets, the server and the mobile side.
For the server side, we believe that there is going to be the new CPUs or eight channel-based new CPUs to be launched. The CPU solutions are going to become more important as they become the basis for competition, and we believe that this is going to further drive demand. Some other factors include the hyper cloud companies building up new data centers. This is also going to be a positive factor. Another is the major countries continuing to build up their IT infrastructure, which we believe will further drive demand for server. For the smartphone shipment next year, it is expected to grow by double-digit because of the decrease this year. With the increased use of 5G smartphones, the memory content in the smartphones is also going to grow.
This is also going to further drive up the content growth in smartphones. Also, there is expectations of new game console launches to come. Along with the 5G smartphones, we believe that this is also going to be a driving factor for DRAM. Overall, the DRAM bit growth next year is expected to be over 20% compared to this year. Similarly for the NAND demand, the positive factors include the smartphone and server, game consoles, as well as the base effect. After the high 20% bit growth expected this year, we expect that there is going to be a low 30% growth next year. Moving on to your second question about edge computing. What we are seeing today is an overall shift toward the 5G environment. Along with that, there is going to be a growth in connected devices.
Also for the edge server, now there is going to be a growth in the edge server as well as the micro data center servers. Some say that the average growth to come for some time is going to be over 50% per annum. They say that compared to the volume of data that is currently being generated in the IT environment, what is actually being processed and used by the business sector and the public sector is quite small. Down the road, there is going to be growing demand and actual use of more data processing and also more use of high performance computing, especially for example, deep learning. Because of this, we believe that there is going to be growing importance and growth of edge computing.
The next question will be provided by Yu Jong-woo from Korea Investment & Securities. Please go ahead with your question.
My first question is, we see that the U.S. sanctions against Huawei have become stricter coming to this year. I see that the company is also being affected by this. What is the company doing in response to the sanctions against Huawei so that we will be able to minimize the negative impact? The second question is, I see that the company has steadily increased the portion of its server DRAM business. On one hand, of course, this has served the company well. Also on the other hand, what we are seeing is there is much higher volatility in both the demand and pricing of server DRAM compared to other applications. Of course, this volatility then translates into the volatility in the company's performance. Such high volatility is not always a good thing.
I wonder how the company sees this volatility, and is there any plan by the company to try to minimize or address the volatility coming from the server DRAM side?
First, in response to your question about Huawei, please bear in mind that we cannot be specific about the situation. What I can tell you is that with the COVID outbreak in the early part of this year, the company has come up with a contingency plan which also reflects such risks. What we can tell you is that the risks are currently being managed quite stably without any major problems.
We will continue to manage the risks, but if the risks are to be prolonged, then, of course, we would have to make sure that they will not turn into major risks. For the second half of this year, we will be operating a product mix that is well related to the launch of new products by the major customers, and also make sure that we remain flexible in supply.
두 번째, 서버 시장의 변동성 관련된 질문에 답을 드리겠는데요. 사실 서버 비중 확대라는 부분은 시장의 성장과 맞물려서 저희가 중장기 계약 비중을 높이는 방향으로 전략을 실행해 왔습니다. 그래서 과거 대비해서 수요 변동성에 대한 영향은 상당히 적어졌다고 말씀을 드릴 수 있습니다.
Regarding the question about the volatility in server demand. Now, the company has grown the server demand business portion, that was in line with market growth. Our strategy, as the market kept growing, was to have a mid-to-long-term agreement as much as possible. Thanks to this strategy, I would say that the impact coming from demand volatility for server has been minimal.
아울러서 올해 조정은 앞서 말씀드린 것처럼 사이클이 그렇게 길지 않을 것으로 판단하고 있고요. 과거에 3, 4년간의 수급 및 가격 조정 폭이 크고, 또 길어지면서 결국엔 그 부분이 구매자나 공급자 모두 가장 중요한 점이 안정적인 수급 유지라는 쪽으로 인식이 되고 있다고 생각을 합니다.
I also did mention earlier that the adjustment cycle this year is not expected to be long. Over the past cycles, when the adjustment would last 3 to 4 years, and also in terms of the demand and supply dynamics, where the adjustment is lasting quite for a long time with steep extent. I think through these cycles, both the buyers and the suppliers have realized that what is very important for all of us is to make sure that there is stability and reliability in the supply and demand dynamics so that we can also maintain the pricing at a stable level.
그리고 변동성 대응에 있어서 가장 중요한 점은 결국은 질적 경쟁력 확보라고 생각하고 있고요. 당사가 현재 고객들로부터 best in class로 평가받고 있는 품질 수준, 그리고 고용량 제품 리더십을 지속 강화해 나가는 게 결국은 이런 변동성에 대응하는 방향이라고 생각합니다.
In terms of how the company is responding to the volatility, well, we believe that fundamentally, having quality competitiveness would be the best solution against that. The company is already recognized by the customers as having the best-in-class quality. Also, in terms of the high content products, the company maintains global leadership. We will make sure that we maintain such quality competitiveness down the road.
네, 다음 질문해 주십시오.
다음으로 질문해 주실 분은 NH투자증권의 도현우 님입니다. The next question will be provided by Do Hyun-woo from NH Investment & Securities. Please go ahead with your question.
네, 안녕하세요. NH투자증권 도현우입니다. 질문 두 가지 드리겠습니다. 첫 번째는 아까 일부 언급해 주신 점도 있는데, 하반기에 Sony의 PlayStation 5 같은 신규 게임 콘솔들이 등장을 합니다. 여기에 따른 메모리 수급 영향이 구체적으로 어떻게 되는지 설명 좀 부탁드리겠습니다. 두 번째로는 최근에 JEDEC에서 DDR5 표준 채택이 이루어졌고요. 연말부터 메모리 업체들의 양산이 시작될 거다라고 시장에서 일부 예측을 하고 있는데 DDR5 수요 전망과 우리 회사의 양산 스케줄에 대해서 답변 부탁드리겠습니다.
I also have two questions. First is, as was reported earlier, yes, there will be launches of new game consoles, including the Sony PlayStation 5 in the second half of this year. How do you see such new game consoles affecting the memory supply and demand in the second quarter? The second question is, recently at JEDEC, the DDR5 standard has been adopted. They say that the memory companies will now be starting to use this and the DDR5 by the end of the year. What is the company's outlook about the DDR5?
우선 하반기 게임 콘솔 전망에 대해서 간단히 말씀드리겠습니다. DRAM 부분에서는 신규 게임 콘솔들의 콘텐츠가 기존의 8GB 3스택에서 최대 16GB까지 증가가 됩니다. 이 부분이 결국은 상반기 대비해서 그래픽 시장의 하반기 비중을 50% 이상으로 이끌 수 있을 것 같고요. 이 부분이 전체적으로 저희가 하반기 판매 및 응용 시장별 믹스 밸런스 하는데 긍정적으로 작용할 걸로 기대합니다.
Let me briefly respond to your first question about the game console's impact in the second half. In terms of the DRAM, in the new game consoles, the content is going to grow by around eight gigabytes to as high as 16 gigabytes at most. This obviously is going to be a boon for the demand growth. Compared to the first half of this year in the graphics market, in the second half, the bit growth is expected to be about 50%. We believe that with the growing sales and also because of the characteristics of the different application markets, considering these, we will be running the optimal product mix in the second half. Now for demand, for the new game consoles, in terms of the SSD adoption, it is going to be as high as one terabyte.
Also the average content of the SSD in the second half for the new game consoles is going to be 800 gigabytes. Given that this is going to account for about 5% of the overall NAND demand in the second half, we believe this trend will be a driving factor in not only the demand for memory in SSD, but also in the overall NAND market. Your next question was about the current outlook for DDR5 market and the company's progress. Of course, we already had the press release as well, overall, the DDR5's biggest value would be, compared to DDR4, double the bandwidth effectiveness, as well as double the capacity support.
Given that the smart functionalities in both the related devices as well as the infrastructure will only continue to grow, there is going to be a growing need for on-site computation to support that, as well as growing need for lower latency. We believe that these are going to be a very strong driving factor for the DDR5 market's growth. Related to the market growth, it also depends on the CPU supply. By the second half of next year, when there is going to be increase in the supply of CPU to support DDR5, we believe that the DDR5 market growth is really going to take off sometime around next year, especially in the second half. Also, based on this growth, there is likely to be a crossover sometime in 2023 when the DDR5 goes over the 50% mark over the entire computation memory market.
The last question will be provided by Nicolas Gaudois from UBS. Please go ahead with your question.
Good morning. Thanks for taking my questions. First one will be on CapEx. You basically said that your overall guidance for this year is unchanged, but you did refer to potentially keeping some flexibility going forward. Does this imply any delays at all in the ramp-up of capacity this year, in particular for DRAM? How do you think about 2021 so far, in particular for the timing of starting to put in equipment for production for M16 on the DRAM side? Secondly, you provided some useful comments on DRAM pricing in the second half of the year and compared-prior cycles. Could you perhaps do the same exercise for NAND flash, in terms of whether you see any probability of any price decline later in the second half of the year? If so, how do you relate to that versus prior cycles? Thank you.
질문 기회 주셔서 감사드리고요. 저는 CapEx에 대해서 질문을 드리고자 합니다. 물론 앞서서 말씀하시면서 연초 가이던스 대비 큰 변화는 없다고 하시면서도 유연하게 운영을 할 가능성도 있다고 말씀하셨는데, 그러면 혹시라도 ramp-up 하는 데 있어서 지연이 발생할 가능성이 있다고 보시는지요? 특히 DRAM 쪽으로. 그리고 또 한 가지는 2021년 정도에서, 예를 들면 M16, DRAM의 생산에 대한 장비 입고 같은 것에 있어서도 혹시 영향을 미친다거나 지연이 발생할 수 있을 것이라고 보시는지가 첫 번째 질문이고요. 두 번째로는 앞서서 DRAM 관련해서 하반기 가격 조정 전망에 대해서 굉장히 잘 설명해 주셨는데, NAND에 대해서도 마찬가지로 설명을 부탁을 드립니다. 가격 조정의 가능성이 있다고 보시는지요?
첫 번째 질문 주신 CapEx에 대해서 말씀드리겠습니다. 아까 설명드리고 지금 질문 주신 분께서도 말씀해 주신 것처럼 저희가 기조적으로 가지고 있는 어떤 보수적인 CapEx 집행 policy는 유지하겠지만, 시장의 수급 상황을 감안해서 저희가 flexible하게 대응해 나갈 거고요. 지금 남아있는 여러 가지 스케줄을 봤을 적에는 시장 상황에 따라서 저희가 기존에 갖고 있던 계획보다는 조금 더 보수적으로 갈 수 있는 방향성은 가능할 수 있을 것 같습니다. 다만, 저희가 기초적으로 지금 인프라 투자에 더 집중하고 있고, 장비 투자는 기존에도 상당히 줄여서 가고 있는 점을 이해하시면 되겠습니다. 그리고 내년도 CapEx에 대해서는 아직 언급드리기는 좀 너무 이른 시점이어서 구체적으로 말씀드릴 수는 없겠지만, 전반적으로는 작년 대비 금년도의 CapEx level이 낮아진 것보다는 금년 대비 내년에 CapEx는 전체적으로 조금 올라갈 가능성은 있겠습니다만, 기본적으로는 큰 확대는 없을 것으로 예상하고 있습니다.
In response to your first question about CapEx. As was reported earlier, and as you have rightly observed, yes, there are no major changes to our conservative CapEx policy for this year. Having said that, yes, we also intend to be flexible depending on the changes in the market environment. Looking at the schedule today, looking at the market circumstances, it is likely, or it is probable that our CapEx operation might become a bit more conservative than was the guidance. What I can tell you and what is probably going to be helpful is, compared to the infrastructure investment, the equipment investment has become lower. As for the CapEx plan for next year, of course, it is too early to tell at this point.
The CapEx plan for this year was reduced compared to last year, but next year, there is likely to be increase compared to this year. The extent of the increase is not going to be large.
NAND 가격 관련해서는 NAND도 하반기에 들어오면서 전반적으로 조정되며 약간 약세를 보이고 있는 상황입니다. 중기적으로 보면 결국 테크놀로지가 좀 올라가고 고용량화되면서 기가바이트당 가격은 점진적으로 하락을 할 것으로 예상을 하고 있는데, 단기적으로 보면 이런 수급의 급격한 변동에 따른 가격의 급격한 변화는 제한적일 것으로 예상하고 있습니다.
About the NAND price outlook in the second half. As we moved into the second half, there has been some adjustment already, and we are seeing weaker pricing for NAND compared to the first half. Over the mid to long term, as the technology becomes more sophisticated and as the product becomes higher content, we believe that the price per gigabyte is going to gradually fall. For the short term, we do not expect there to be any large fluctuations in the pricing coming from fluctuations in the supply and demand dynamics. [Foreign language] That concludes the SK hynix 2020 second quarter earnings release conference call. Thank you very much for your participation.