Earnings Call: Q2 2019

Jul 31, 2019

Good morning. This is Robert Yi from Investor Relations. Thank you for joining our earnings call for the Q2 of 2019. With me representing each of the business units are Mr. Chun Zae Won, Executive VP of Memory Marketing Mr. Hou Gok, Senior VP of System LSI Lee Sang yeon, VP of Out Foundry Choi Kwon Young, VP of Samsung Display Lee Jong Min, VP of ITM Mobile Kim Won Hee from the Visual Display Business as well as Mr. Seobiong hoon and Kang Tae kyu, both from Investor Relations. I would like to remind you that some of the statements we'll be making today are forward looking based on the environment as we currently see it. And all such statements are subject to certain risks and uncertainties that may cause our actual results to be materially different from those expressed in today's discussion. The total revenue in the quarter decreased 4% year on year to KRW56.1 trillion as sales in the memory business declined due to weak market conditions. As forecasted in the previous earnings call, business conditions for the memory industry remained weak in the 2nd quarter, even though there was some recovery in market demand. Gross profit fell sharply year on year to KRW 20 200,000,000,000 with a corresponding decrease in gross margin, mainly due to the semiconductor business. Compared to last year, SG and A expenses had a small increase in both absolute terms and as a percent of sales. The operating profit in the 2nd quarter was KRW6.6 trillion, a significant year on year decrease, mainly based on challenges in the memory and mobile businesses. 1 off gain from display business is included in the earnings. Operating margin came in at 11.8%. A strong U. S. Dollar and euro against the Korean won in the 2nd quarter positively affected the operating profit quarter on quarter by approximately KRW0.5 trillion. I will now briefly review the performance of each business unit. In the memory business, as the effect of inventory adjustments by major data center customers in the previous quarters continued to cause weak market conditions and price decline, We placed a heavier focus on addressing demand in the mobile segment. For system semiconductors, earnings were lowered year on year despite growing demand for major products such as image sensors due to a decline in demand for cryptocurrency applications. In the display business, mobile panel earnings improved due to a one off gain and increased sale of rigid panels. The large panel business, however, recorded a slightly larger loss year on year as ongoing capacity expansions in the industry weighed on profitability. In the I'm business, our strong sales by the new mid and low segments devices helped increase overall smartphone shipments, but mobile profitability declined due to slower flagship sales, major spec enhancements of the new mid and low segment devices and an increase in marketing expenses. In the network business, earnings remained solid due to accelerated commercialization of 5 gs in Korea. For the CE division, earnings in the TV business fell slightly year on year amid aggressive competitor pricing, despite growing unit sales of premium models such as QLED and ultra large models. For Digital Appliances, earnings grew with the strong sales of new products, coupled with improved profitability of our mainstream products such as refrigerators and washing machines. I would like to share our business outlook for the second half of the year. In the semiconductor business, even though continued industry uncertainties are causing low visibility in the business, we do expect memory demand to grow on the strong seasonality and adoption of higher density products in major application areas. For system semiconductors, seasonality is likely to boost demand for mobile APs, image sensors and OLED DDIs among other products. In the display business, we expect earnings for mobile panels to improve, thanks to growing sales and a resulting rise in utilization rate led by launches of new products by our major customers. However, sluggish overall demand in the smartphone market may limit upside potential. The large panel business and the strong seasonality will focus on high end products for 8 ks and ultra large TVs rather than on volume expect competition in the second half to intensify with the market seeing many new devices being released, we will bolster our strategy product lineup and also expand sales of our new A Series in the low band to mid range market. We will focus on ensuring the successful 3rd quarter launches of the Galaxy Note 10 and Galaxy Fold as well as on improving profitability through improved operational efficiencies. The network business will continue to build a strong foundation for expansion in the global 5 gs market based on its leadership in 5 gs commercialization in the U. S. And Korea. For the CE division, in the seasonally strong second half, we will work to further solidify our lead in the premium TV market by expanding sales of QLED TVs and boosting sales of innovative products such as 8 ks and lifestyle models. For digital appliances, we will concentrate on sales of new products such as BestPoke refrigerators and cloth refreshers. We face various challenges from uncertain conditions, not only in our business areas, but also from growing global macro environment. Despite these current challenges, we will continue our efforts to secure mid to long term growth by strengthening competitiveness of our new business via delivering innovative component technologies and continuing our leadership as a 5 gs solution provider. In addition, investments in future technologies such as system semiconductors, artificial intelligence and automotive solutions will remain a key focus. Now I'll address capital expenditures. CapEx in the 2nd quarter was KRW6.2 trillion with KRW5.2 trillion allocated to semiconductors and KRW0.5 trillion to display. The total capital expenditure for the first half was KRW10.7 trillion with KRW8.8 trillion allocated to semiconductors and KRW800,000,000,000 to display. As we explained in previous calls, the main portion of our 2019 CapEx is earmarked for building infrastructure to address demand beyond 2019 and a large percent of this year's investment will be made in the second half larger percent, I'm sorry. The Board of Directors today approved a second quarter dividend of KRW354 per share to be paid in August for both common and preferred stock. As was the case in the Q1, the dividend payout for the 2nd quarter is KRW2.4 trillion or 1 fourth of the annual total of KRW9.6 trillion. Finally, I would like to talk about our shareholder return plan covering 2018 through 2020. Today, we had planned to provide an update to our shareholder return program based on the review of our projected free cash flow for the 3 year period through 2020. However, in addition to already high uncertainties caused by prolonged global trade conflicts and other macro risks, the external environment regarding our component business has recently come under significant new challenges. As a result, we no longer believe that it is possible to reasonably predict or forecast our free cash flow for 2018 through 2020. We have decided that it would be best to share our update for the shareholder return in early 2020 after free cash flow for 2019 is confirmed and when the business outlook for 2020 becomes more visible. Before we move on to presentations from each business unit, I would like to share several data points in key business areas. In the Q2, our DRAM bit growth came in mid teens increase. Our ASP declined low 20%. For the Q3, we expect the market demand for DRAM to grow mid teens and we expect to grow in line with the market. For 2019, for the whole year, we expect the market demand for DRAM to grow mid teens and RRP growth will be slightly higher than the market demand growth. For NAND flash, for the Q2, our bit growth came in around 30% and ASP declined mid teens. For the 3rd quarter NAND market growth, we expect to be high single digit and we expect to grow with the market. And for 2019, we expect NAND demand growth to be low 30s and we expect to outgrow that market growth in our bit shipment. Within display panel business, the OLED sales mix was high 70%. For mobile business, our total handset sales for the 2nd quarter was 83,000,000 units with about 5,000,000 of tablets. The blended ASP for the Q2 was about $2.10 and mix of smartphone within total handset was low 90%. For 3rd quarter, we expect our handset shipment to be similar to the Q2 as well as a tablet to be similar to. Our ASP for the handset is expected to increase quarter on quarter and the mix of the smartphone within total handset will be remain at low 90%. For our TV business, the LCD TV panel sales in the 2nd quarter declined mid single digit quarter on quarter, but in the Q3, we expect that number to increase low teens. And for the year, we expect our TV sales to increase mid single digit. Now, I'll turn the conference call over to the gentlemen from each business unit, starting with memory. Good morning. This is Xiaowen Zhen from the memory marketing team. In the Q2, overall demand increased due to the resumed purchasing from data center customers and their inventory levels started to be normalized and high density trend across overall applications. For NAND, overall demand showed solid growth, backed by the ongoing high density trend for smartphones due to the price elasticity and by the expansion of cloud infrastructure from several customers. While we're focused on demand for products that we have a competitiveness such as high density e storage with more than 128 gigabyte and high value added high density SSD with more than 2 terabyte. We actively respond to demand for wafer and component products as well, achieving result much higher than the previous guidance. For DRAM, although the overall market situation remained weak, demand increased from a resumption of purchase in data center customers and from a high density trend in mobile. Server demand has been recovered mainly for high density products, thanks to recovered purchasing after inventory adjustment, especially from data centers and newly launched server CPU. For PC, demand increased both for replacement to purchase considering Windows 10 from enterprise PC and for pre purchasing considering global uncertainties. For mobile, smartphone segment has recovered from Q1 and the portion of high density has increased in overall smartphone segments, resulting in a solid increase in demand. Our sales results exceed our previous expectations as we actively addressed the recovered demand for data center customers and high density trend for mobile. In the second half of this year, we expect the demand to increase due to seasonal effect, but the market situation is likely to remain volatile due to expansion of global uncertainties, which include export regulations in semiconductor materials. On end, as awareness of a bottom price among customers to expand, we think demand will continue to expand mainly for high density, high value added data center and mobile storage. And the industry will be stabilized gradually from the Q3. For SSD, adoption for high density, high performance SSD for data centers is likely to keep expanding. Moreover, both the high density trend and expansion of NVMe portion for client SSD are also expected to continue due to price decrease. Mobile demand is expected to increase due to the ongoing trend toward high density that has been driven by price declines, especially on the effect of launching high end smartphone with more than 128 gigabyte. We will focus on strengthening our competitiveness in the premium market by closely monitoring changes in demand across all applications and by actively responding to demand, both for all facial A conversions in the 10 ks HDD market. And for high density UFS regarding China's sand makers and flex motors. Also, we are mass producing 5th generation VNAND, mainly for brand SSD as planned, and we will enhance our technological competitiveness and strengthen our profitability based through the mass production of 6th generation green end within this year. For DRAM, although global uncertainty remain, overall demand is expected to increase due to a recovery of purchasing from customers as their inventory level normalized and seasonal effects. For server, we expect the demand to rise gradually, not only from customers resume purchasing as their inventory adjustment completes, but also from conversion to a new platform. For consumer product, TV and set top box demand is expected to increase by seasonal effects and high performance network memory demand is likely to expand among along with 5 gs expansion. For mobile, as major customers will launch the new smartphones, high density trend in overall segment is expected to drive the solid demand, such as adoption of mobile DRAM with more than 8 gigabyte for product differentiation in volume drawn. Under the current global uncertainties, we will actively address customer request through a flexible product mix and maintain our technical readership based on 1y nanometer product ramp up. In addition, we will focus on strengthening our market leadership of differentiated products such as 12 gigabit based LPDDR5 and HBM tool by the developing and mass producing in a timely manner. Thank you. Good morning. This is Ben Hur from the C300S business. In the Q2, as Chinese smartphone companies had intensified the competition for the camera specs, demand for multiple cameras in higher resolution, big pixel image sensors increased more and we have achieved solid results. In addition, we increased the supply of the 5 gs and the volume zone smartphone chipset solutions And we continued our efforts to expand the future SoC technology leadership by developing next generation 1 chip 5 gs SoC that integrated modem and processor. In the second half, we expect demand for mobile AP, image sensors and DDI products to grow seasonally as smartphones enter the peak season. Noticeably, demand for high value added products is also expected to continue to increase because customers still want to differentiate products by adopting the products such as 64 megapixel image sensors and EUV 7 nano 8 piece, etcetera. Looking ahead, we plan to expand our lineup of 5 gs chipset solutions and image sensors to address demand for the high specs in the smartphone market, and we will also expand our mid- to long term business scope by diversifying our product offerings through the development of the 3 d F4D sensors and automotive IoT chips. Thank you. Good morning. This is Sung Hyun, Ryan Lee from the foundry business. In the Q2, we have achieved solid results due to increased demand from major customers, 10 nanomobileAP and image sensors. In particular, due orders from existing major customers have expanded in 10, 14 nano process, and orders for new customers have also been awarded. By doing so, the business base for future growth has been further strengthened by diversifying the region from Americas to China, Europe, Japan, as well as the applications from mobile to HPC, IoT, automotive, network, consumer, etcetera. With the technical achievements, we have mass produced EUV 7 nanometer products for the first time in the industry, further strengthened our EUV process development leadership by completing the development of 5 nano process and preparing for production. Furthermore, we also distributed the world's 1st gate all around based 3 Nanoprocess Development Kit to our customers. In the second half, we anticipate continued earnings growth due to the expansion of AP, CIS, DDI orders as the mobile season enters. And the demand for HPCs, including cryptocurrency mining chips and due orders from network ADAS consumer will increase. Mass we plan to start mass production of EUV 6 nano process, which is an optimized process in terms of performance and price. We will also continue to secure advanced node competitiveness by completing the table of EUV 5 nanometer products and completing 4 nanometer process development and infrastructure. In addition, we will use our specialty process to take leadership in newly emerging areas such as 5 gs, AR and Automotive and expand our customer bases. Thank you. Good morning. I'm Kwon Young Choi from the business planning team of Samsung Display. In the Q2, total earnings for the display business improved quarter over quarter, led by a recovery in consumer demand and one off gain. To be more specific, mobile device earnings mobile display earnings increased quarter over quarter as utilization improved, thanks to expanded shipment of OLED panels, featuring new technologies such as fingerprints on display and whole display. As for the larger display business, despite a continued drop in ASPs, earnings increased slightly quarter over quarter, led by improved cost competitiveness and increased shipments of premium panels, including ones used in ultra large high resolution TVs and in COVID monitors. Next, I'd like to touch upon prospects and strategies for the second half of this year. In the mobile display business, earnings are projected to improve half on half and shipments and utilizations are expected to rise as major customers are planning to launch new products. In particular, we expect to see growing demand for OLED panels offering ultra slim design. 5 gs mobile phones require larger components and more of them, so the lack of space issue needs to be addressed. Therefore, we strive to improve our profitability by adding more variants to OLED panels and boosting yields. At the same time, we'll keep actively responding to demand from our customers. As the major IT customers are about to launch new laptops featuring our OLED panels, we'll add to our foundation too for sustainable growth by creating new markets in other non smartphone areas such as tablets and automotive to name a few. On the other hand, given the lingering concerns over mounting uncertainties and overall market slowdown caused by the global macro environment, we are closely monitoring the situation to minimize any potential impacts. Although the large display business expects to see growing demand for premium TV panels, such as the ones used in ultra large, UHD and 8 ks models. Capacity expansion in the LCD industry is likely to destabilize supply and demand and add more uncertainty in the market. In preparation for such conditions, we are striving to keep improving profitability. To that end, we are focusing more on premium TV panels and strengthening non TV business for monitors and public information displays. Thank you. Good morning. I'm Jong Min Yi from the Mobile Communication business. I'd like to share our second quarter results and the second half outlook for I'm division. In the Q2, followed by the relatively weak season period, overall smartphone demand decreased due to a number of global macro variables. On a quarter on quarter basis, our smartphone shipments increased as new A3 models, including the A50 and A70, showed stronger sales performances than their previous models. However, the sales volume of flagship models, including those of the S9 and Note 9 decreased quarter on quarter as the launch of effect of S10 became weaker and the demand for premium segment was shrunk. Profit also decreased quarter on quarter because of increased cost associated with intensified competition in the mass market and inventory adjustment of older models. In our network business, our performance improved quarter on quarter, thanks to 4th scale commercialization of 5 gs in South Korea and continued expansion of LTE networks in overseas markets. Now moving on to the outlook for the second half of this year. Although the mobile market in general is soon to face a period of strong seasonality, demand is expected to keep trending down due to growing global macroeconomic uncertainties. We will focus on not only enhancing our flagship lineup, but also expanding sales of our new mid low segment models as well. Also, we will respond quickly to any changes in the global business environment such as trade restrictions or changes in the competitive landscape. Furthermore, we will strive to secure profitability through improving the efficiency of our operations in all aspects from R and D to manufacturing and marketing. In the Q3, we are going to focus on ensuring successful launches of Galaxy Note 10, the Galaxy Fold. The Note 10 will be officially rebuilt at our unpacked event this August 7 in Europe. It will offer improved productivity, best in class performance and differentiated design compared to its previous model. Galaxy Ford, which will be available to customers from September, has improved design and construction to provide the best experience for our customers. We will begin an entirely new mobile category based on our accumulated flexible display technology. And we expect that Galaxy Fold will give our customers a completely new experience and create endless possibilities. Along with these innovative products, we aim to strengthen our 5 gs leadership by expanding our 5 gs product portfolio to meet the commercialization schedules in each region. For mid to low end smartphones, most regions are already showing higher sales, which is clearly due to the impact from the changes in our lineup earlier this year. To keep the momentum going, we are going to expand overall sales volume, releasing new highly competitive A Series models in the second quarter and efficiently leveraging the seasonality in all regions. For the network business, based on our leadership in 5 gs commercialization in South Korea and the U. S, we will do our best to keep adding to our foundation for global 5 gs business expansion. Thank you. Good morning. I'm Kimo Nishangmu from Visual Display Sales and Marketing. Let me start with current market conditions and our results for the Q2 2019. The overall TV market declined quarter on quarter due to weakened consumption caused by unfavorable exchange rates in emerging markets. In terms of year on year growth, however, it is equivalent to that of last year, thanks to economy recoveries in developed markets. For Samsung, TV profits slightly decreased both year on year and quarter on quarter caused by intensified price competition in the market. However, we improved product mix through OLED launches of new models and expanded sales portion of strategic products such as QLED TVs and super large screen products. In particular, the QLED TV has solidified its position as an industry leading premium product in terms of both awareness and sales. We will further strengthen our technology leadership with QAD 8 ks TVs launched in the first half. For the digital appliances market in the second quarter, demand in developed markets such as North America and Europe have been stagnant, but global demand slightly increased backed by a steady growth of emerging markets like India. We expanded the sales of premium products in new models and had strong sales of wind free air conditioner during the peak season. Our profits have also greatly increased year on year with the help of our main products, such as refrigerators and washing machines. Now I will share market prospects for the second half twenty nineteen. The TV market is expected to be equivalent to that of last year despite risks such as unfavorable exchange rates in some emerging markets and increase of protective trade practices. We will maximize on year end peak season sales by cooperating closely with partners and we'll make a stable high profit structure by expanding the sales portion of high value added products such as QLED TVs and super large screen products. Moreover, we will solidify the message that Samsung is the leader in 8 ks by mainstreaming QLED 8 ks TVs in the market and take the lead in establishing the 8 ks ecosystem at an early stage. Also, we will explore sales opportunities by strengthening the lineup of lifestyle products, which will add additional value to consumers' life. This way, Samsung will achieve high profitability and expand sales by continuously leading the premium TV market. For the digital appliance business, Samsung will focus on marketing and expanding sales of new products for our consumers' improved lifestyle, such as bespoke and hairdresser. Also, we maintain solely growth by continuously strengthening our B2B business, which includes built in appliances and system air conditioners. Thank you. Thank you. This completes our part of the presentation. And now we will turn to questions and answer session. I have two questions. The first question is about the recent measures that are being announced by the Japanese government regarding the key components that are used for display and semiconductor industries. Does the company see any potential impact of this measure to the company's business? And if so, how is the company preparing internally? 2nd question is tied to this. Actually, since this Japanese government plan was announced, there has been some increase in spot prices for both legacy and new products. And there seems to be some restocking demand happening. Do you also see this restocking demand by your long term contract customers? For example, are you getting, for example, some rush orders or your long term contract customers seeking to get more volume? To answer your first question from the IR team, even though the recent measures by the Japanese governments do not ban the export of materials, we are facing difficulties due to the burden of this new export approval process and the uncertainties that this new process would bring. So the visibility is low. However, our executives and the relevant business divisions are dedicating their utmost efforts and deriving solutions to minimize any potential negative impact these new measures may have on our manufacturing process. Regarding your second question, it is true that there has been observed some increase in the spot market prices recently. We read this as a combination of mainly 2 factors. 1 is actually a fundamental side where there is seasonality kicking in with a strong second half. At the same time, we also read that there were some concerns of future supply stability due to the recent announcements. But given the fact that the recent increase in spot prices is actually a combination of various internal and external prices. The next questions will be presented by Mr. Nicolas Cordova from UBS. Please go ahead, sir. Good morning. Thanks for taking my questions. The first one is on memory. You have considered earlier converting Line 13 from DRAM to image CMOS sensors. As the DRAM down cycle continues for now, is this actually back on the agenda? And if so, in which time frame would you execute the conversion? And secondly, for the mobile business, you confirmed you're relaunching the Galaxy Fold very soon. What would be now your volume expectations for the Galaxy Fold in 2019? And as you alluded earlier, you seem to expect to use foldable displays across several products. Can you confirm this is for 2020 and that to be 2 or more products? Also, could you give us a little bit more clarity on the no tail expectations this year, in particular, your shipment forecast? Thank you. To answer your first question, currently, we don't have any decisions regarding the Line 13 conversion to LSI. And as we have always mentioned, basically, our line operation strategy considers not only memory business, but also system and we try to find a strategy that would optimize our overall semiconductor line efficiency. So any future decisions would take into account comprehensively various factors, including the DRAM business cycle, mid- to long term image sensor demand forecast as well as line efficiency. To answer your question on the mobile side, the Galaxy Fold, which is an innovative product that adopts new technologies, new materials and displays, we are planning to supply that this year in limited countries in limited volume. However, the foldable category itself is something as a new form factor that we have been preparing for a very long time. And going forward, we will continue to expand the foldable lineup with various forms. Regarding your question about the Note 10 new model that will be launched, the new Note 10 will even further upgrade the unique values of the Note series, especially it would feature an S Pen experience that is even more intuitive and is more rich and expanded. Some of the highlights of the Note 10 would be the more powerful performance, also more enhanced productivity related functions and also an optimized multimedia experience for the 5 gs network. Even though it's early for us to present any specific volume targets, we are expecting the Note 10 to achieve higher volumes versus its predecessor Note 9. The next questions were presented by Mr. Peter Li from Citigroup Global Market Securities. Please go ahead, sir. I have two questions regarding the semiconductor side. First on the DRAM, have there been any changes in terms of DRAM production since the last conference call? 2nd question on the NAND side, we've been hearing that the capacity on your Line 12 has been decreasing. Can you share some details about that? To answer your first Actually, there hasn't been any changes in our DRAM production since the last call. But we can say that as we have always, our line operation will be managed flexibly in response and depending on the demand changes. And currently, we're not considering, for example, any artificial decrease of wafer input. And in the case of the second question about our NAND Line 12 capacity, that's actually the decrease in our Line 12 capacity is a reflection of how the demand is shifting for NAND from planner to V NAND. And so there is a decrease in planner land demand. And that is why from the first half, we have been converting some planner capacity for R and D purposes. The next questions will be presented by Mr. To Hyun Ho from NH Investment and Securities. I'll ask two questions. First question is about your DRAM and NAND inventory. Can you give us the inventory changes on quarter on quarter basis? And also can you share with us your second half outlook for your DRAM and NAND inventory? Second question is about the recent announcement of the licensing agreement for the GPU technology with AMD. Can you share with us, for example, what specific SoC models we can look forward to, when those models you plan to launch and also the implications of this AMD relationship on your existing relationship with ARM. To answer your first question about our inventory, first on the DRAM side, our 2nd quarter DRAM inventory was flat. It was similar to the previous quarter levels. However, given the fact that data center customers have resumed purchasing and also there has been a continuous trend of high density on the mobile side, the sales volume has increased and our inventory turnover has shortened versus Q1. Looking forward to the second half DRAM inventory, we do expect there to be strong demand given the seasonality. And also, we expect our inventory level to continue a gradual decrease. However, in terms of the pace of our inventory decrease, given the very low visibility of increased expected industry volatility and external uncertainties, it's difficult for us to predict. On the other hand, in the case of the NAND inventory, given the fact that customers have realized that the prices have bottomed up bottomed out, this has driven up demand. Also, sales towards the channels have also increased. So NAND inventory has already started to significantly decrease, and we expect this to continue as strong demand comes up in the second half. And so we expect that in Q3 for NAND inventory, we will be able to achieve balanced levels. To answer your second question about our AMD partnership, as you know, AMD has been a leader, especially in the GPU area since the early days of the PC market and is one of the leaders in terms of technology. We think that with this partnership, we will be able to leverage the GPU competitiveness AMD to enhance the performance of not only our mobile SoCs, but also in other applications. But considering the usual time it takes to vet out IT technology, we expect that the GPU technology will start being adopted in products that will be launched 2 years down the road roughly. Regarding the relationship that we have ARM, ARM, yes, is an important strategic partner that we have and that partnership will remain solid going forward. The next questions will be presented by Mr. SK Kim from Daiwa Capital Markets. Please go ahead, sir. I have two questions. The first question is about the DRAM. I think the market is still concerned that perhaps due to various uncertainties, the data center demand may stay weak for long term or that in the second half the mobile demand may become more uncertain. So in that context, can you share with us the company's perspective on future demand from both server and mobile applications as well as your outlook on second half demand and supply situation for DRAM? Second question is for the mobile side. Actually regarding the 5 gs smartphones, there were some positive news that actually the Chinese handset makers may actually adopt or bring online 5 gs handsets earlier than expected. Given that context, can you give us the company's view on 5 gs demand as well as how the company plans to respond to the stronger 5 gs demand? I'll answer your first question about the DRAM demand. First for the server side, as you know, the data center customers have been going through inventory adjustments starting from Q4 last year and continuing on to a full Q1. So given that period, we think that a large part of their inventory has already been normalized. And in fact, these customers have started to resume purchasing from late second quarter. And once the strong seasonality of the second half kicks in, we expect the demand to remain solid. In the case of the mobile side, one major trend has been the high density trend across all smartphone products. Also, the price elasticity has been driving up demand for mobile DRAM as well. And so with the second half seasonality, we expect on the mobile side demand will also continue to expand. So from both server and mobile side, the basic fundamental demand remains strong and solid, and we expect that second half demand will increase versus first half. However, given the increase in uncertainty in external environments, we do expect this may lead to more volatility in overall industry situation, and that's why we find it difficult present any specific supply and demand forecasts. Regarding your second question about our 5 gs strategy, Regarding your second question about our 5 gs strategy, for example, to give you an update on Korea, which started 5 gs commercial service last April, we have reached more than 1,800,000 5 gs service subscribers and 5 gs service is actually growing faster than expected. In this growth, we have been showing very good strong performance with our S10 5 gs model and we are rolling that out to other countries such as Europe and Australia as we did in Korea and the U. S. Already. In the second half, we will also be expanding our 5 gs lineup with the Note 10 5 gs and we will be preparing for the demand for 5 gs commercial service for each country depending on the country's 5 gs commercialization schedule. According to Strategy Analytics, the 5 gs smartphones would account for about 42% of the entire smartphone market by year 2025. Given the initial pickup, which has been faster than expected, actually, the 5 gs smartphone market may expand faster than expected. Therefore, based on the early leadership that we have in our commercial experience and track record as well as our technology, we will contribute to the rollout of 5 gs service and also at the same time solidify our leadership in the 5 gs market. The next questions will be presented by Mr. Yoo Jong Woo from Hangul Investment Securities. I have two questions. First question is about the foundry business. It seems that you've been signing up new customers for the foundry business. Can you share with us whether you have any plans of capacity expansions for 2019 or 2020? 2nd question is for the mobile side. Your margins for the Q2 was actually lower than expected. Now going forward, given that you're probably expecting a larger volume, volume increase from your A Series and also overall component prices are probably going to decrease, what how much possibility do you see in terms of improved profitability or margins from your mobile business in the second half? To answer your first question about the foundry, you are currently maintaining high utilization, and we are planning to expand our capacity around UV cutting edge, cutting nodes, image sensors and 8 inches technology where there is more demand growth that we're seeing. To give you some details, for example, we're planning to start operation of our Huasong EUV line from the first half of year twenty twenty. And we'll be putting bringing that online in line with the 7 nano technology development. For the image sensors, the S4 line is the dedicated line for image sensors and we will continue to add on new capacity in line with the trends that we see on the device. And for example, the multi camera adoption on smartphones and also the greater demand for high pixel image sensors. For the 8 inches lines, we will continue to also add capacity there, especially around the PMICs and discrete power products. To answer your second question about our mobile profitability, as you know, this year, our focus has been on increasing our market share overall by strengthening the attractiveness of our overall lineup. So as part of this process, we have been not only diversifying our flagship models, but also have been changing up our mass model lineup. And in this process, our 2nd quarter profitability has decreased mainly due to the need for building in more price competitiveness for our new mass segment model and also the inventory adjustment for our older models. Now in the second half, we'll be focusing on increasing our revenue, both on the premium as well as the mass lineup. For the premium model in the second half, we have the new premium models being launched based on our 5 gs as well as foldable new technology. Also in the mass lineup, we will be leveraging our product competitiveness and also our channel capacity to increase our sales globally. And so with such increase in revenue and also with greater operational efficiency, we will continue our efforts to improve our profitability. The next questions will be presented by Ms. Claire Kyung Min Kim from Hana Financial Investment. Please go ahead, ma'am. I have two questions. I will give you the first question first before asking you the second one. The first question is on the NAND side. We are seeing NAND demand improving, recovering and also there may have been some supply side issues due to the recent power outage at the competitor. Can you share with us your views regarding supply as well as demand situation? And do you see a possible quick turnaround of the market situation during the second half? In the case of NAND, I think it was mainly 2 factors. 1 is the price elasticity and also the fact that customers have realized that the prices have started to bottom out. That's been driving a significant increase in demand starting from the Q2. This has resulted in significant increase of our shipments for NAND in the 2nd quarter and also a significant decrease in our inventory levels versus the Q1. Even though we can't comment on the supply situation of other suppliers, if we assume that the second half seasonality will kick in and also if the suppliers other suppliers, for example, go through their investment adjustments as they've been announcing in their conference calls, is it possible to expect stabilized prices and industry situation as overall industry inventory levels become normal starting from the Q3? But at the same time, we do given the very high level of uncertainty in the external environment, there could be quite a lot of volatility in the demand and supply side, and that's why we will continue to very carefully monitor the market situation. The second question is about the memory CapEx for year 2020. Can you share with us your CapEx direction for next year? And also when you plan to operate the Xi'an and Pyeongtaek new fabs? Regarding our next year CapEx plan, because the planning is not yet finalized, it's difficult for us to share with you the details. But as always, we will be executing our investments efficiently in line with the market situation. Given the high level of uncertainty in the external environment and also the the potential high volatility of the market, we believe that flexible CapEx is very critical at this point, and that's why we have actually increased the frequency of reviewing our investment plan so that we're able to reflect any changes in market demand as quickly as possible. Regarding our new fabs, they will be completed as scheduled. So existing schedule was to have Xi'an Phase 2 completed by end of 2019 this year and Phase 2 of Pyeongtaek to be completed during 2020. And Xi'an 2 will we are planning to start operation of Xian2 as scheduled in early 2020 to respond to mid to long term demand growth. Specific sizing of Xi'an and Pyeongchang is still not yet decided and we will be operating our investments flexibly considering the market situation. The next questions will be presented by Mr. Kim Dong Won from KB Securities. Please go ahead, sir. I asked two questions. The first question is about the display side. There are talk in the market that the glass input feeding into your 8 Asan number 8 line or 8 generation line has been discontinued. Can you share with us your company the company's position regarding this? And also there is can you share with us your position regarding the conversion to QD OLED on the display side? Second question is about the micro TVs, micro LED TVs. You've launched the 146 super large TV version. And also, there is expectations that you will bring this down to the consumer side, for example, a B2C consumer platform. But I would assume that the price point would be a bit too high for consumers to approach. And so in that context, can you share with us your plans of how to reduce the cost on the micro TV platform as well as your future product launching roadmap? Regarding your first question about our display business, we believe that in the long term, there will be customer greater customer needs for higher quality display technology given the expected increase in higher picture quality content and broadcasting that we'll be rolling out. And that's why we believe that maintaining a However, regarding the technology, no specific decisions have been reached yet. Regarding your first question about our line operation, we are operating our resources flexibly depending on the market situation as well as our business strategy. Regarding your second question about the LED TVs, as you know, it's one of the next generation display technologies that's gaining a lot of attention currently. The critical two issues in terms of technology is making the LED smaller and also securing the technology to go into mass production. And we have actually secured these are the 2 key focuses in terms of the technology of microLEDs. Given the strength that we have given our semiconductor background, we have already gained the industry leading position in these areas. And so currently our focus is on, as you mentioned, gaining the cost competitiveness or reducing the cost. Regarding our product lineup and future plans of in terms of roadmap, as you know, in the first half, we've launched the Dowol for the B2B segment. And also in the second half, we're planning to launch the DouoWao Luxury, which addresses the B2C premium segment. We will continue this in this next year with, for example, more household or consumer applications even branching out to the large size segment. Of course, the specific timing of these launches will take into account the market situation. I think we have enough time to take 2 more questions before ending the call. The next questions will be presented by Mr. Mark Newman from Bernstein. Please go ahead, sir. Hi, thanks so much for taking my question. Two questions. First question, if you could clarify some of the questions we've had in the past on memory capacity. You commented earlier that there's no artificial reduction in wafer input. But last quarter, you commented that there's going to be some line optimization for memory fabs, which would have some impact on wafer output, I. E, wafer output will be slightly down. I would like to ask specifically any update on that and if you could quantify how much wafer output will be different compared to the peak levels in Q4 last year, particularly for DRAM, but also for NAND? And then the second question is on the memory demand visibility. So a lot of positive comments on demand improvement. I'd like to ask specifically on data center. You DRAM demand improving due to low inventory. Can we say that year on year gigabytes, are they going to be up in the second half versus last year? And if you could quantify year on year data center DRAM either market demand or Samsung demand, if you have any quantification around that, it would be very, very useful to get an understanding of how much the DRAM demand is improving. Thank you. To answer your first question, what we mentioned in the last conference call about our line optimization, that is basically relocating, repositioning our equipment in order to achieve greater line efficiency. And on that side, there hasn't been any specific changes due to that. Our line operation policy, as you know, has always been to flexibly operate our lines in response to market demand changes. And once again to clarify, at this point, we are not considering any artificial decrease in wafer input. To answer your second question about the DRAM, specifically the data center demand. You've asked for specific quantified outlook for on a quarterly as well as a second half versus faster second half comparison. Given the low visibility, it's difficult for us to share with you any details about the demand on a quantified basis outlook. But we do expect that on a full year basis in terms of content for DRAM, there will be about a 10% increase on a year on year basis. Question before ending the call. The last questions will be presented by Mr. Mehdi Hosseini from SIG. Please go ahead, sir. Yes, thank you for letting me ask the question. Two follow ups. On the memory side, can you please provide the mix of DRAM technology today and by year end 2019 DRAM technology in terms of the 1Z mix? And a follow-up on that, can you update us on when you would insert EUV lithography for DRAM application? And one follow-up question on system LSI, if you could provide the mix of image sensor and how does a foundry compare to that? So the mix of image sensors and foundry revenue will be great. Thank you. Regarding your first question, I think we can answer that by sharing with you our outlook on our cutting node share that we're expecting at the end of the year. So this will be 1x and above. We're expecting that to account for about 70% as of end of 2019. Regarding the 1Z, we can tell you that, that development is coming along as we planned. Regarding your second question of EUV adoption on our DRAM side, actually, our R and D center is going through evaluation of the equipment. And also, we are trying to measure the productivity benefits versus the economics of using EUV for our 1Z process. I think there were some press releases in last March that hinted that we will go and develop onesie without adopting EUV, but actually to clarify, we're doing a two track development for our onesie. So we're also at the same time considering a onesie process that uses EUV. Sir, would you mind clarifying your third question about the system LSI business, you've asked for the share of image sensors and foundry? Yes. The mix of image sensor and foundry within the system LSI or within the overall semiconductor industry.