Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2018 Second Quarter Earnings Results by SK Hynix. This conference will start with a presentation followed by a division of Q And A session. Now, we shall commence the presentation on the fiscal year 2018 2nd quarter earnings results by SK Hynix.
Good morning and good afternoon evening to those calling in from abroad. This is Songhan, the Head of IR at SK Hynix. Welcome to the SK Hynix 2018 Second Quarter Earnings Release Conference Call.
Marketing come down.
Before starting the conference call, allow me to introduce the executives present here with me today. 1st, Executive Vice President in charge of corporate support and CFO, Yim Yong Young, Vice President, Kim Fok, in charge of the DRAM Marketing Group, and Vice President Kim Jong Keay in charge of the NAND Marketing Group. Let me show a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances.
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With that, we will now begin SK Hynix 28 Second Quarter Earnings Release Conference Call. Let me now turn over to Executive Vice President, Yim Young, to present the 2nd Quarter Earnings the company's plan and market Good morning. This is Inion Young in charge of SK Hynix corporate support. Let me begin with a review of our financial performance in the second quarter of 2018.
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1st quarter consolidated sales totaled KRW10 1,000,000,000. And operating profit, 5 1,000,000,000,000, the highest ever for the company in
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Consolidated sales was KRW10.371 trillion, up 19% quarter on quarter. This shipment rose by a double digit for both DRAM and NAND as favorable market conditions continued in the 2nd quarter.
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Demand kept up solid growth, led by computing products to which the company responded actively ASP rose by 4% quarter on quarter, rising across all DRAM products as type supply continued despite the growing bid shipment.
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For NAND flash, pit shipment rose by 19% quarter on quarter. We met growing demand for a high density from our mobile customers ASP fell 9% from the previous quarter, weakening in all product categories as supply grew overall.
Anpyeong, MCPineon,
For NCT, sales fell from the previous quarter with its portion out of sales reaching 20%. There was sustained increase in MCT price as Chinese smartphone makers continue to increase memory content per box, but bit shipment fell on the back of seasonality and inventory management to prepare Our operating profit in the second quarter was JPY 5 point 574,000,000,000,000, up 28 percent quarter on quarter, following higher sales and cost reduction, operating profit margin Depreciation and amortization expense for the quarter was KRW1.572 trillion, up slightly from the previous quarter. EBITDA was KRW 7.1460000000000, representing an EBITDA margin of 69%. There was a net nonoperating profit of KRW330 1,000,000,000. There was foreign currency gain of around KRW 391 billion following the continued weakness of the corporate tax for the 2nd quarter was 1.575 1,000,000,000, an increase by KRW0.4 trillion from the previous quarter due to increase in net profit before corporate tax.
Our net profit after corporate tax for the with a net profit With cash outlays for TMC investment, payment of 2017 corporate tax and 2017 year end dividend payments all occurring in the 2nd quarter Consolidated cash balance at the end of the 2nd quarter was KRW 4,405,000,000,000, a decrease by approximately KRW3.86 trillion from the end of the first quarter. Our interest bearing debt stood at 5 point KRW 415,500,000,000,000, an increase by KRW 1,548,000,000,000. Next, I would like to discuss the company's market outlook and plan. Continuing from last year, favorable DRAM market condition was maintained in the first half as the continued strong demand for server DRAM more than offset slowing mobile
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With major ID providers in the U. S. And China of early adjusting their CapEx plans. And as the focus on expanding their data centers coincide with businesses worldwide transitioning to the cloud, we expect the strength in server DRAM demand will be been sustained for a prolonged time. In particular, we expect cloud service providers' investments in the server structure leading up to For the mobile market, the effects of new smartphones with higher content per box and seasonality will more clearly materialize Increasing the DRAM content per box in the mobile market is projected to continue as high end smartphones compete not only on play and camera, but also differentiation through memory content.
It is becoming an important consideration for consumers. Compared the first half pent up demand for high spec gaming PCs is being fulfilled as GPU prices are starting to fall. And some Chinese mobile customers already announced their plan to adopt 10 gigabytes or higher mobile DRAM on special gaming phones, leading to demand for gaming devices, making higher contribution to the DRAM Despite suppliers' continued attempts to increase wafer capacity production is not increasing fast enough due to growing complexity in tech migration, thus DRAM supply in the second half will still not be enough to ease the current supply shortage. Or the NAND market, content per box is expected to rise quickly across all solution products as supply growth accelerates with suppliers' continued transition to 72.64 layer, and as suppliers obtained customers qualifications.
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in SSDs, NAND content per box as well as SSD adoption rate is expected to grow continuously as supply increase for client SSDs as well as some low spec enterprise SSDs for which most buyers have completed qualifications.
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In the mobile market, increased supply of 3 d NAND is leading to wider adoption of 3 d NAND, not only in flagship smartphones, but also in mid and low end products, with smartphones adopting 128 gigabytes or higher NAND, reaching up to a mid 10% level, driving mobile NAND demand.
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Cardenio, Thus, in the NAND market, price decline is expected to continue into the second half, following supply growth due to higher inventory demand increase in the second half and given the high price elasticity specific to NAND, the lower price is expected to accelerate demand improvement, based on these market conditions, the company's bit shipment growth plan for the third quarter is high single digit percent for DRAM and mid-thirty percent level for NAND. For the year, it is planned that low 20% for DRAM and mid 40% for NAND. So.
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To that end, the company is focusing on Onex Nanotech Migration for DRAM. Technology was applied in all end by the end of the second quarter. And mobile products to reach around 1 third of total DRAM production by the end of the year.
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For NAND, we are focusing on accelerating respond to the high density mobile market and SSD demand in the second half. The company also plans to increase because This will bring the portion this year with SSD shipment in bit terms, reaching 30% level at yearend.
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We will also move ahead with the new fab construction on scheduled to secure the basis for future growth. The clean room will be completed in Chengdu M15 fab by the end of September. Accounting for the lead time for equipment installation, it should be ready to contribute to production from early next year. For the Wuxi fab expansion, the plan remains to complete the clean It appears that uncertainties over the global economy and concerns over the memory market will persist into the second half But SK Hynix will keep doing our best to provide differentiated core values to our customers by fulfilling the growing memory demand with Seasley technological development and investment. I ask for your continued encouragement in the second half.
This concludes my report. And with that, we are now ready to take your questions. Questions.
In order per each participant. The first question will be provided by Shimonu from Bank of America Merrill Lynch. Please go ahead with your question.
Yeah.
Okay. The Thank you and congratulations on the excellent performance. And frankly, I am quite amazed. Now I have two questions. First is Now because things are going go things are going so well, I would just like to point out some potential concerns.
So one is about the demand for the server DRAM going into the second half. And second is about the Chinese smartphones and memory content limitation. So the first question about the server DRAM, now in the second quarter, not only Hynix, but also other memory companies have seen their good shipment growth go up considerably. And that is probably because of the increase in the server DRAM inventory by the Chinese and the U. S.
Companies. Or, there has also been extensive investments by cloud companies like Amazon in the second quarter in terms of their CapEx. So now the concern is, in perhaps in the second half, there is not going to be as high a CapEx from the cloud companies and also because of the inventory build up so far, the server DRAM demand is going to fall in the second half. So what would you say to this kind of assessment? Yes.
Now regarding the question, now it is true that some institutes have made the projection that from the Chinese companies, the DRAM, the demand for the server DRAM in the Q3, there are some mixed signals for the service year end demand from the Chinese companies, but then they also said that this is likely to be short lived and there's going to be recovery in the 4th quarter. And in fact, what we have understood so far is that now from the server DRAM customers from China, What we have seen is that in terms of the inventory level between last month and this month, there is not much change. And then also in terms of the additional volume, actually, some of them are requesting that we pull ahead with the supply of the volume that they had planned for Q3 and Q4.
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Likewise, from the US side, the IDCs and the server set makers. Now in terms of their investment growth, or the demand, we do not see much changes. And also the volume coming from there is about a multiple times of that from China. So for the server DRAM, basically, our business is 90% based on 1 year LTA for both the Chinese and the US customers. And in the first half, the supply has been provided on schedule, and we do not foresee much major changes in the
the
And then my second question is for the Chinese smartphone makers, how much do they how much can they go in terms of the memory increase for the mid to low end smartphones. So for the mid to low end smartphones priced at with retail price at $100 to $200, we see that in many cases, their DRAM content has already surpassed out of Iphone going to 3 gigabytes or 4 gigabytes even. But then with the DRAM price remaining stable for these $100 to $200 phones, do you believe that they can keep increasing their memory to like 4 gigabytes and 6 gigabytes? So how far do you see them going? Now for the low end phones, yes, it is true that the DRAM demand is for 2 gigabytes and 3 gigabytes mostly, but then for mid end and also to the high end, like the flagship phones and the demand is for much higher content.
Marketing point.
Now the demand for the high density memory is it has both, in terms of the, so there is a real need for it as well as the marketing appeal. So on one hand, it is it has the marketing appeal to differentiate the product. But also at the same time, there's a real need as the hardware specifications keep getting upgraded and also as the applications keep getting higher and higher performance. So now we have the year and early next year, the demand for 10.12 gigabytes also.
The next question will be provided by Marcus Chin from Mizuh Securities. Please go ahead with your question.
Now I have two questions. First is about the LTA that you have mentioned earlier. So what we understand so far is that you have the LTA, so for the DRAM, both for the server DRAM, as well as for other applications, you have the LTA until the second half of this year. So I understand. So as you have mentioned, it has been supplied on schedule in the first half and also will be done so going into the second half.
So I wonder then, the question is, out of your total DRAM DRAM supply, how much is covered by the LTA? So what is the percentage of the LK out of the total DRAM supply? And also the same question for next year, And if you cannot disclose the specific numbers, then can you at least tell us the trend? And the second question is about the CapEx. So are there any changes to your CapEx guidance for this year Now in my response earlier, I did mention that for our server DRAM business, it's 90% LTA.
So when we look at the overall DRAM supply then it is lower than 90%. And then for next year, we are also having discussions with our customers about the LTA. And in terms of the customers wishing to have the LTA, the volume itself is quite large. But then in terms of the percentage, We believe that it is going to be more or less similar And next about our CapEx projection.
Now,
the CapEx spending in the first half of this year has been KRW8 trillion. And then in the second half, with the completion of the 15 as well as the equipment installation in the M15, we believe that the CapEx in the second half is going to be similar or slightly higher than Going into next year, we also need to have some CapEx for the Wuxi new fab. So we believe that it is going to be at a high level next year as well, although it is likely to be lower than this year.
The next question will be provided by from Citigroup Global Markets. Please go ahead with your question.
I also have two questions. One is a frequently asked question already, and that is about the server. So now then the 4 d server DRAM demand coming from China, so the China's IDCs So what is the, let's say, the portion of the server DRAM demand coming from the China IDCs out of the total server DRAM demand? Especially in comparison with the demand coming from the U. S?
And the second question is now we see some downward trend in the channel price recently. Believe that this is also going to have an impact on the fixed
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Now regarding your first question, now the server DRAM demand coming from the U. S. So from the, let's say, the top 4 IDCs for each of them, for each of them, the server Iran demand is 1,000,000,000 of gigabytes. Now looking at China, then China, the IDCs, for example, the VAT. So for these Chinese IDCs, their server DRAM is slightly less than 1000000000 gigabytes per IDC.
So in terms of the percentage, I would say that the volume from the U. S. Is about 2 to 3 times larger than that from China. Now I did mention the absolute numbers, but that is for the present. And when we story.
So the Chinese IDC's overwhelmed the IDC's in the Americas in terms of the growth percentage. So that was So in the past, and that is also the projection going forward. Now as for your second question pertaining to the channel price or the PC channel mark at price and also its relation to the fixed price. Now in terms of the PC channel market, the volume has become so small that we this as a completely different market So this means that the PC channel price has been decoupled from the PC OEM price, meaning that there is no impact from each other.
The next question will be provided by Riquiza from HSBC. BC.
Hi, Nick. The the dental margin, how can you say that you're expecting when you could you go? How about in the air a double digit, your mezzanine battery.
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Now I have some questions about NAND. Now the concern in the market is that there's a projection that the NAND price will keep dropping by double digits per quarter because of the supply growth. So this will continue. The projection is will continue into the early part of next year into the non because of the seasonality. And we do see that supply has been growing in reality.
Now then for Hynix, how do you what is your outlook So we see that yes, there has been a double digit drop in the price until the third quarter. But what do you see happening from the fourth quarter and on? So if you could give us some let's say, guidance in terms of the trend. And also looking at the second quarter, I see that the price drop was about 9%. So this was lower than what we had expected, but still perhaps this is the beginning of the decline in the NAND margin.
So in the second half, If the double digit price decline continues, and you believe that you will be able to maintain a surplus position. And also you had emphasized the 72 layer. So then if you are to transition from the 48 layer to 72 layer, or from 2 d to 72 layer, then how much do you expect in terms of the cost reduction? Maybe not the specific number, but then just the rough extent, And how much of an impact do you believe that this will have on the NAND margin? Do you believe that this will maintain the margin or so what do you see as a trend?
Now as the adoption rate of high density product increases, then it is bound to be accompanied by decline in the price. And that is what we have seen in the second quarter as well. So across most of the applications, we have seen the adoption rate go up and the price go down. But then in terms of the actual price decline per application, there were some variances depending on the level Now looking ahead to the second half, then we believe that the supply growth will continue for the 64 layer and the 72 layer. And also, we the new products to be launched.
And also with the seasonality, we believe that the adoption rate is also going to keep increasing but also because of the stable supply, the demand supply dynamics is going to remain stable. But then as I have mentioned earlier, the price decline variation per application is also going to continue depending on the level of competition. Now for Hynix, what we plan is to maintain the same level of profitability by keep reducing the cost and maintaining the optimal product mix. Now to be more specific, in the second half, we are going to try to increase the volume of sales as well as the percentage of the 72 layer out of the total sales. And also we would continue to try to reduce the cost.
And also we will be maintaining the product mix in accordance to the profitability and the sales volume to continue to maintain our profitability into the second half.
The next question will be provided by Claire Kim from Vision Securities.
Technology, umami Daseke and to try the Now I have one question for NAND, another for DRAM. Now for NAND, what was the percentage of the SSD out of the NAND sales. So what is the so has there been significant increase in the 1st portion of SSD in the 2nd quarter. And then also for the enterprise SSD. So can give us some guidance?
Half there has been significant increase in the shipment of PCs. So what is SKIN Hynix's strategy in line with the increase in the shipment? And also do you believe that this is going to increase the demand for the PC DRAM? First question about NAND. So in the second half, as we had explained earlier that we expect the NAND bit growth in the 3rd quarter to be 30% So we believe that overall in the second half, there is going to be about 20% bit growth.
To grow.
Then for the ESSD, Now we started the sales in the second quarter. And then since then, we have been trying to expand both the customer base and the product lineup. And based on these efforts, we are trying to pull up the portion of ESSD sales to high single percent level and to low 10% level by next ye/ar. Now then regarding the PC market, yes, there has been an increase in the percentage of the high spec gaming PCs in the PC market. And the overall, the PC performance was quite good in the first half.
So we believe that for the year, the PC set shipment is going be only slightly And in fact, for Hynix, we have also increased our shipment for PCs in the first half. Now then in the second half, in terms of our product mix by application, Of course, it will also be affected by the percentage of application in the market in general. As well as the customer's demand fulfillment rate by application. But having said that, we believe that there is going to be a heavier weight on the mobile and server than PC.
The next question will be provided by Nicolas Gadowa from UBS. Please go ahead with your question.
Yes, good morning. Thanks for taking my question. On the DRAM roadmap, firstly, you commented about 1x nanometer policy so far, which seems to be a little bit better than expected. Could you help us, clarify on when you expect 1 Y nanometer to actually kick in for mass production. And your initial view of the portion of 1x and 1y nanometer will provide next year.
And then I have a follow-up question.
1y Yes. So let me expound on the development status of 1x nano and 1y nano.
Or your
Now for 1x nano technology, by the end of the second quarter, it went slightly above 20%. And we believe that by the end of this year, it will be around 1 third or 33%. Then for 1y nano, our plan is to fleet internal development by the fourth quarter and start both the volume production and customer qualification from early next year.
1x
And as for the portion of 1x, and 1y nano next year, please understand that it is too early for us to tell because we still have to come up with the overall business plan for next year in the second half of this
year. Okay. Thanks. And then if I may, some clarification on your server DRAM business. Again, really two things.
I mean, number 1, just to clarify, but when you talk about long term agreements, you really refer to non binding long term agreements firstly. Secondly, those long term agreements, if you look at them in H1, would you say the actual volumes from hyperscale customers came in the middle of the expected volumes or had higher side And how do you see that changing into the second half of the year in terms of the actual procurement quantities falling especially for or you actually have visibility within the middle of the expected range or the higher or the lower than And as any of that changed at all on the social media side, I mean, obviously, you must be aware, but overnight, we had a fairly big miss from one of your key U. S. Customers in terms of advertising revenues and also customer addition. Thank you.
First of all, yes, it is true that the LTA is non binding, but then given that today's market is a seller's market, we see that the customers are fulfilling
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And then now in the second half, now actually the customers have asked for more than what we had committed in the LTA. So there has been an upside to the LTA commitments, but then because of the tight supply, we were not able to fulfill the upside.
Digits of ID.
And then now the 3rd point. So looking ahead to the second half of this year, then actually, we see that the IDCs in the Americas now in our discussions for the volume for next year, they are coming up with a volume that is much larger than this year. So we do not see any problems in moving
The last question will be provided
I have one question. Recently, the 42 hour work working limit per week has been a hot issue in Korea. So I believe that this would have no impact on the production because for the production lines, you have 14s in 3 shifts. But then for the R and D, where business continuity is important, potentially, it could delay the development time needed for new products and also potentially this could weaken your competitiveness especially at a time when China is very much committed to developing its semiconductor industry. So perhaps this will go this is going to give China some room to catch up.
So then for SK Hynix, I wonder whether you have any, let's say, plans ready to ease the concerns coming out of the market? Yes, it is true that as you have mentioned, the 52 hour limitation on the working week has gone into effect on July 1st this year. But then for SKHAN extends, it had already been noticed for legislation from early part of this year, we have been getting ready for this since the early part of this year. So we have already done some rehearsal and also preparation for each division. So over the past 6 particular, there are some programs where that allows some flexibility in the R and D activities.
So taking advantage of such programs, we believe that we will be able to make the adjustment with no major problems. This concludes the SK Hynix 2018 2nd quarter earnings release conference call. Thank you very much for your participation.