Good morning, and good afternoon, and evening to those calling in from abroad. This is Paxonghan, the Head of IR at SK Hynix. Welcome to the SK Hynix 2018 First Quarter Earnings Release Conference Call. Before starting the conference call, allow me to introduce the executives present here with me today. First, Executive Vice President in charge of Corporate Support And CFO, Yimmyoong.
Vice President, Kim Hoop in charge of DRAM Marketing Group And Vice President Kim Jong Pei in charge of NAND Marketing Group. Let me issue a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we will now begin SK Hynix 2018 first quarter earnings release conference call. Let me now turn over to Executive Vice President, Kim Young, to present the 1st quarter earnings and the company's plan and market outlook for this year. Good morning.
This is Emil Young in charge of SK Hynix corporate support. Let me begin with a review of our financial performance in the first quarter of 20 Favorable pricing conditions continued despite seasonal slowdown of demand. However, with DRAM and non bit shipments decreased, 1st quarter consolidated sales totaled 8.720000000000 and 1, down 3% from the previous quarter.
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Despite expanded bit shipment for server products on the back of continuous strong demand, DRAM bit shipments fell by 5% quarter on quarter due to mobile demand weakness and fewer production days. ASP rose by 9% quarter on quarter on par with last quarter's increase, rising across all DRAM products, including mobile.
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For NAND flash, bit shipment fell by 10% quarter on quarter. There was weaker demand for mobile products, and sales of some leading edge products had to be carried forward due to some customer's qualification schedule. Prices weakened in all product categories. However, price fall was minimal resulting in ASP fall of 1 For MCP, sales grew by 17% from the previous quarter, and its portion out of sales rose to 24% There was increase in both its price and shipment as Chinese smartphone makers continued to adopt higher density memory.
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Our operating profit in the first quarter was 4 point 367,000,000,000,000, down slightly quarter on quarter, following slower sales. Operating profit margin rose slightly to 50%.
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depreciation and amortization expense for the quarter was 1,446,000,000,000, up from the previous quarter. EBITDA was KRW 5,813,300,000,000,000 representing an EBITDA margin of There was a net non operating expense of KRW 77,000,000,000. Foreign current loss was reduced to around KRW 81,000,000,000, following the relative stability of the Korean 1 exchange rate.
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Corporate tax for the first quarter was KRW1.17 trillion, an increase from the previous quarter. There was increase in the statutory maximum corporate tax rate as well as recognition of the deferred tax asset of overseas subsidiaries in previous quarter, which ended the 1 off reduction effect in corporate tax. Our net profit after corporate tax for the quarter was 3.121 trillion with a net profit margin of 36%. Consolidated cash balance at the end of the first quarter was 8.266 trillion, a decrease of approximately KRW289,000,000,000 from the end of 2017. Our interest bearing debt stood at KRW3.867 trillion, a decrease by KRW 305,000,000,000, maintaining a net cash position of KRW 4,400,000,000,000.
Next, I would like to discuss the company's market outlook and plan. Demand growth for server DRAM continues from last year, and it is expected to keep driving the overall DRAM market growth not only this year but beyond.
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Globally, major IDC providers investment is expected to grow by 20% to 30% from the previous year as they keep focusing on expanding their data centers, 1st, in the North American market and now in the Chinese market. This trend is not likely to be temporary given the volume and growth in global data traffic and workloads, With the addition of new service infrastructure for AI and IoT and broader use of new server platforms, Adoption of high density server DRAM module is accelerating.
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In addition, demand for DRAM is gaining strength in non server categories as well. The decline in PC shipments has slowed down with pickup in demand for high performance gaming PCs and Chromebooks. Graphic DRAM demand is also expected to grow with higher demand for cryptocurrency mining and growing adoption of graphic processors for a big data processing in servers For smartphones, shipment growth will slow down as the market re maturation. However, camera performance keeps getting upgraded in pace with consumers' need to communicate through video and images while more smartphones are adding AI features, leading to continued increase in DRAM content per box. Given the above, demand for DRAM is expected to grow by low percent level this year.
Nano and continue to add wafer capacity by increasing investment. SST For the NAND market, the demand growth continues around SSD. Enterprise SSD in particular is expected to drive growth.
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Enterprise SSD achieved high growth in shipment and density as large IDC providers led the way in adopting them in servers despite deriving NAND price during last year. Growing production of 72 layer and 64 layer 3 d NAND products this year will lead to the launch and increased adoption of high density SSDs. Thus, the portion of enterprise SSD will increase to nearly half of Client SSD has relatively high price elasticity. Client SSD content per box is expected to grow as more supply grows with 3 d NAND production, which will lead to NAND pricing stabilization.
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mobile customers are continuing to aim for their better smartphone sales based on differentiation through higher NAND content. With 128 gigabyte NAND being adopted for not only the flagship UFS Smartphones, but also for mid end smartphones with EMCP. Following this trend, there will be continued higher adoption of high density 3 d NAND for smartphones. Although some uncertainties remain due to the 3 d transition in the NAND industry, NAND Flash supply growth is expected at mid-forty percent for the year, With the industry going into mass production in earnest with 72 layer and 64 layer products, demand growth is expected to be in line with supply growth, easing tight supply in demand market compared to previous year.
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The recent memory demand environment led by server DRAM and enterprise SSD is certainly a big opportunity for memory makers. But there is also higher demand for quality and integrity coming from customers. SK Hynix will strive to provide customer satisfaction through technological development as planned and
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First, for DRAM, the company plans to speed up migration to 1x nano. Following the PC and mobile products, we will also start sales of server and graphic products with 1x nano technology in the second quarter. We will also expand supply of the server DRAM for which demand remains strong, and thus respond to the PC OEMs and Chinese mobile customers demand for inventory buildup.
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For NAND, the company plans to grow sales of 72 layer 3 d NAND products used for high density mobile UFS products as well as client SSD with different interfaces and form factors. Particularly for our plan to enter the enterprise SSD market, we will start supplying in the 2nd quarter PCIe based products that have been recently qualified by an IDC customer. It will enable the company to establish itself as a significant player in the fast growing and surprise SSD market and diversify our product portfolio.
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At the same time, the company will move ahead as planned with the new construction at M15 Changzhou Plant and expansion of the Wuxi Fab to serve as the basis of our future growth and to enable us to meet market demand in a timely manner. The company's shipment growth plan for this year is in line with market growth for both DRAM and NAND. For the second quarter, shipment growth for DRAM is planned at mid 10% level and NAND at high 10% level. Such plan is based on the projected production increase in the second quarter based on higher use of next generation processes and the best and the base The current data driven technological development is bringing about faster and Customers are placing greater importance on the role and value of memory semiconductors. Given this trend, SK Hynix will focus on improving our memory technology and product quality based on our understanding of the technologies and industries of the future.
We will work towards sustainable growth by providing unique yet core values to customers. Thank you very much for your attention. And with that, we are now ready to take your questions.
In order The first question will be provided by Riquiza from HSBC. Sir?
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I have two questions regarding NAND. First, now in the first quarter, it appears as if the NAND price had remained more robust, robust and market concerns. So could you explain the background that made it possible per application? And then second is, we see that for, so across the, all the NAND suppliers, It seems as if the bid growth is falling short of the initial plan, I mean, in the early part of this year, So perhaps this is due to the difficulties in upgrading to the 72 layer and the 64 layer. So what is the if you could give us an update on Hynix, And do you believe that you will be able to achieve your bit growth guidance for this year?
I will answer the question about the NAND price first. Now for the channel market, there has been increased in the supply, meaning that the price was slightly so the price slightly fell then now for the OEM market, which is the bigger part of the market, for the solutions market, the supply and demand dynamics improved slightly. So for the applications in this field, the price also fell. So across the OEM market, so thanks to the stability in the OEM market, the market also So there was also stability across the market as well. But then we believed that for by supplier, there would also be some differences depending on the application.
And then regarding your second question about the 72 layer, Now, it is true that there is some delay in the customer qualifications as well as securing the yield. Now with regards to your question about the 72 layer, it is true that there has been some delay in qualifications and also in difficulties in securing the yield because of the increasing process complexity as the number of But then for SK Hynix, the validation for the 72 layer as well as the portion out of the production are moving as scheduled and we believe that we will be able to achieve the EBIT growth plan for this year.
The following question will be presented by Marcus Shin from Mizuho Securities. Please
I also have two questions. First is about DRAM. Now across the industry, we see that the migration to finance technology is slowing down considerably. So I would just like to get an update on SK Hynix. So example, your migration to 1x nano.
So what is the current update and also what is your target for this year? And then also in terms of the cost reduction What is your plan for the percentage of the cost reduction? And then second question is about NAND. So for hyperscale, we see that there is growing demand for self built SSD, for a low NAND. And then so this means that So this probably means that this is a good opportunity for SK Hynix to diversify its customers, but then also at the same time, this could also be a threat for NAND makers to create new value.
So what would be your view regarding this trend?
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Now first, for the SK Hynix 1x DRAM. Now starting late last year for PC and then also early this year for mobile, we see that there is a spread of qualifications and volume production for server and graphics as well. So we are moving on schedule for both the production as well as the yield up. And at this pace, we believe that by the end of this year, the 1x nano out of the total DRAM will take up over 1three. And thanks to this, we believe that costs would also fall to an
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Now regarding your second question about NAND, In terms of the demand growth for the self built SSD at hyperscale, now on one hand, it is positive because it is stemming from the growth for ESS the enterprise SSD. But then at the same time, it is also difficult to tell. So it's too early to tell whether it is going to be a threat or opportunity because there is going to be different types of collaboration or competition to unfold in this sector. Now for SK Hynix, we are trying to expand our presence in the enterprise SSD market. So our focus for now is to continue to develop module products and increased
The following question will be presented by Peter Lee from Citigroup Market Securities.
I also have two questions about DRAM. First, as you have mentioned earlier, there seemed to be a lot of changes on the server and the graphic side. And then now in the 4th quarter and the second quarter. So what would be your demand forecast for each application of DRAM? And then second is Now recently, there is increase in the DRAM capacity across the industry, causing some concerns of possible oversupply in the second half of this year or next year.
So what would be SK Hynix's view regarding this?
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So I would like I would take your question about the second quarter and the second half demand. First, when we look at the market, then it is true that in the first quarter, the Chinese market was a bit slow. But then, we when we look at the big 4, including Huawei or Xiaomi, we can see that the daywords are performing quite nicely. So for the smartphone market in general, then it is likely that the growth in the set is going to stagnate a bit. But then when we look at the Chinese VIQ4, then we believe that the content per box will continue to grow, meaning that for the demand for both the NAND and DRAM, we believe that it is going to remain robust into the second half.
And then next is about the graphics market. Now it is true that up until recently, the graphics market was quite hot due to the demand for for mining for cryptocurrency. But then in the second half, it's expected launch of the ASIC minor for Ethereum, It is likely to balance out the demand for graphics. Then last, for the server market, now the ID see providers not only in the U. S, but also in China, so represented by the VAT, they are all increasing their investment this year coming.
And also with the appearance of the new SoC with the memory content per server keeps increasing Now for with most of the server IDCs, we have 1 year locking deal, but then in the first half, we have also received some additional upside volume request, but then there was not enough supply. And we believe that this trend will continue into the 2nd half. I would like to take your second question about the capacity increase across market and the concerns for oversupply? Starting from last year, there has been limited bit growth in DRAM supply because of the continuing take migration. And as a result, although the demand has grown considerably because of the limited bid growth coming from the tech migration that demand growth has not been fully met.
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And again, when we look at the demand, so customers demand, then we can see that, of course, for the smartphones, although growth is limited, but we are still seeing some growth. And then very rapid growth in other apps locations. So given such demand growth that we see these days, it's simply not enough to fulfill such demand growth using only tech migration.
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So this means that, to meet the demand growth, and it is almost unavoidable that we increase capacity by increasing investments So consequently, we believe that for the suppliers, they will have to meet the demand growth by increased wafer capacity by Then now from the market, there are some concerns about the supply as the capacity continues to increase growing investment. But then as I mentioned earlier, because the bit growth is slowing down from the tech migration, for the suppliers, I believe that they will be able to make some adjustments based on their, investment or capacity increase. So I believe that thanks to this, the demand and supply dynamics in the market will remain favorable.
The following question will be provided by Jong Woo from Korea Investor And Securities. Please go ahead sir.
Now I have two questions. First is about the server DRAM. We see that the price increase continues for server DRAM, and it was mentioned recently that there is no resistance coming from the buyers despite the price increase. And how long do you believe that this is going to continue? So what is the company's view on this?
And the second question is about the company. Now the server DRAM price is, I understand, higher than the competitors. So by a bit, the portion of the server DRAM is expected to exceed the mobile DRAM soon, likely this year. So when do you foresee the server DRAM outnumbering mobile DRAM this year. And also as the server DRAM continues to rise in portion, do you believe that this is going to affect the demand, meaning that do you believe that this will cause any changes in the demand?
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Now for server DRAM pricing, actually for the 2nd quarter, have already completed the price negotiation with the major server DRAM customers. And basically as the shortage continued. The tight supply continued. The customers were focusing on securing the needed volume.
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And then unlike smartphones, which are, ordinary consumables, consumer products, the servers now, they are more production, so used for production, So in terms of the TCO for data centers and in terms of the server machines apportion, as well as the server components portion, we believe that the investment into them will continue for some time. Now regarding your second question, now in the market by bit, mobile is so large that for a long time, the mobile portion But now for the company, for us, the server portion is quite large. And we have a large market share the server side. So already this year, the difference between the mobile and server portions has been really reduced. And we believe that as early as next year, the server bit is going to be going to outgrow the mobile bid?
And last point, now the server market's growth rate has outpaced the DRAM growth rate and we believe that this trend will continue into the next 2 to 3 years. So given this, then, for SK Hynix to keep increasing its server portion and to keep increasing the market share, We believe that things bode well for us.
The following question will be presented by Financial Investment. Please go ahead sir.
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Now I also have two questions. First is about your NAND competitiveness. Now I understand that SK Hynix has recently launched the enterprise SSD, which is going to have an impact on the productivity and profitability of your NAND products and also for the 72 layer solution business, what is your, if you could give us an update on the business development for the 72 layer solutions? And then second question is about the memory semiconductor industry overall. So you have already given some hints about your view on the supply and demand dynamics for the second quarter and the second half.
But then if you could give us some more specific view or guidance for the DRAM pricing in the second quarter and second half? I would take your first question about the 72 layer business. Now regarding the enterprise SSD, we have already completed the validation. And so for both the enterprise SSD as well as across all applications, And then currently, we are trying to get additional validation for the applications. So based on this, starting from the third quarter of this year, we are going to have the 72 layer as our mainstream product for the enterprise SSD as well as all other applications in continue to increase sales.
And so based on that, we believe that by the end of this year, the 72 layer will be about half Then now regarding your second question about the NAND market outlook. Now for the in the second quarter and the second half, be there is going to be, so based on the qualifications and the increase in the share of the 72 layer and the 64 layer, we believe that there is also going to be increase in the supply, but at the same time, due to the seasonality, driving for the demand as well as the increase in the content per box, we believe that overall, there's going to be a balance in the supply and demand. And because of this, there is not going to be much a price volatility that could come from imbalance in the supply and demand, but then there could be some, gradual pricing adjustment for some of the high density products. And then it could also depend on the app So in terms of the addition as well as the price elasticity. And then regarding the DRAM pricing, now into the second half of this year, Although, it is going to ease a bit, we believe that the tight supply will continue.
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This is also the view that is shared by the customers, and that is why they were focusing on securing the volume for the second half of this year. And as a result, we believe that the pricing in the market will be determined based on these circumstances.
The following question will be provided by from NH Investment.
I also have two questions. First, I see that in your first quarter financial performance, there have been some changes in the inventory. So has there been increase in the inventory of the DRAM and NAND? And what is your outlook regarding the inventory in the future? And then second question is about the new fab completion, so the completion schedule as well as the schedule for moving in the equipment.
Have there also been changes? First, about the inventory for DRAM. Now for DRAM compared to last year, there has been almost no increase in the first quarter either. So it remains at, early, so low, a 1 week level. And then as the tight supply continues, we believe that this level will also continue until the end of this year, meaning that the inventory level is not likely to increase by much or it could actually fall slightly.
And then for NAND, compared to last end of last year, there has been increase in the inventory in the first quarter from 2 weeks to 4 weeks. And this is because, 1st of all, ramp up in the 72 layer production, and we need to hold some volume before the qualifications are completed. Then also in the second quarter, the inventory will still remain a bit high because you also have to be ready for the mobile demand in the third quarter. That is why we believe that up until the second quarter of this year, the inventory for NAND will remain at about 4 weeks level. But then afterwards, in the 3rd 4th quarters, it is going to fall to 2 weeks level again.
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And then about our schedule for the new fab, Now the M15 in Chengdu and the fab expansion in China, now for both, it had the has not been finalized yet. So we are still making some adjustments and trying to coordinate between the different teams. Having said that, it is likely that for the Chengdu M15, the clean room might be opened slightly earlier than we had initially scheduled. So perhaps a bit earlier than the end of this year, but then for the fab expansion in China, it is likely to move as scheduled, meaning that to be completed by theendofthisyear. We will take one last question.
The last question will be presented by Nicholas Godawa from UBS. Please go ahead sir.
First of all, could you comment a little bit on your CapEx? I mean, if you look at the level in Q1 twenty eighteen, that increased quite significantly Q over Q. And in the context about do you still expect over CapEx to be up about 30% year over year? Would you have to make adjustments to these also regarding what you just said for M15. And second question is more for clarification.
For DRAM, you gave us some idea about the 2018 expected bit demand growth in below 20s. And you said supplies would not be enough and headaches are going out of the market. So all in all, what would they expect Escharinix to grow in terms of bit shipments visavis vector market growth, which I suspect will be a little bit lower than the demand growth you gave.
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Now first about the CapEx plan. Now for this year, as was explained earlier, because we have not finalized the completion for the new fab as well as the schedule for moving into equipment, we have not been able to finalize the overall CapEx amount yet. But then one thing is for sure is that there is going to be at least 30% increase to the TRY 10,300,000,000,000 CapEx of last year. And aside from this, there is increase in the, process complexity, meaning that there is also increase in the R And D investment as well as increase in the investment for package and testing. So, when I say a 30% increase, you see the minimum level, and potentially there is a very likelihood of an upside to the CapEx increase.
And then also for the fab, now if the clean room is ready much earlier than we had initially scheduled, meaning if it can be opened much earlier than in the end of this year to receive the equipment, then it is also likely that the investment for the equipment that we had planned next year would be pulled
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And when you look at the cash flow for the first quarter, in terms of the cash out from the investment spending, then it was about KRW 4,400,000,000,000. And this is because there has been simultaneous ramp up for both simultaneous ramp up for the new technologies of 1x as well as the NAND D72 layer in the first quarter. And so basically this means that there has been a big increase in the investment into equipment in the first quarter. And then based on this, we believe that in the 2nd quarter, the bit growth is going to be much higher, but then a bit growth will slow down afterwards in the 3rd and the 4th quarters. So for the year, we expect the DRAM bit growth to be on par with the market at low 20% And this concludes the SK Hynix 2018 first quarter earnings release conference call.
Thank you very much for your participation.