Earnings Call: Q1 2019

Apr 30, 2019

Now we shall commence the presentation on the fiscal year 2019 Q1 earnings results by Samsung Electronics. Good morning. This is Robert Yi from Investor Relations. Thank you for joining our earnings call for the 1st quarter 2019. With me representing each business units are Mr. Cheon Sei Wang, Executive VP of Memory Marketing Mr. Ho Gok, Senior VP of System LSI Mr. Lee Sang yeon, VP of Foundry Chaekwon Young, VP of Samsung Display Lee Jong min, VP of IT and Mobile Business and Kim Won Hee, VP of Visual Display and we also have Mr. Ben Se and Mr. Kang Tae Gyu, who are both with 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. Before we go over the results, I would like to address the Q1 dividend. The Board of Directors today approved the Q1 dividend of KRW354 per share to be paid in May for both common and preferred stocks. As we announced in 2017, our shareholder return policy covering 2018 through 2020 promises the annual dividend of KRW9.6 trillion. Accordingly, the payout for the Q1 is KRW2.4 trillion in total or 1 fourth of the annual total. With that, I would like to move on to our results. During our Q4 last year earnings call and in our March earnings disclosure, we shared our concerns regarding unfavorable memory market conditions and display business challenging our businesses in 2019. These concerns are the main cause for the weak performance in the earnings results that I am presenting today. The total revenue in the Q1 decreased 14% year on year to KRW52.4 trillion, the decline primarily due to weaker demand and prices for memory and display products. Gross profit contracted approximately KRW9 1,000,000,000,000 year on year to KRW19.6 trillion with corresponding decrease in gross margin. SG and A expenses remain similar compared to the same quarter last year. The operating profit in the Q1 was KRW66.2 trillion, a significant year on year decrease, mainly due to challenges in the memory business. The operating margin decreased to 11.9%. The financial impact from foreign currency exchange movements were minimal as weakness in the U. S. Dollar and euro were mainly offset by strength in emerging market currencies. I'll now briefly review the performance of each business units. In the semiconductor business, memory prices declined considerably due to weak demand caused by continuation of inventory adjustments at major data centers, which began in Q4 last year. On the mobile memory side, we actively responded to increased demand for high density products in new flagship smartphones. In the system LSI and foundry businesses, earnings improved quarter on quarter as we addressed demand for application processors used in Flexi smartphone products. The display business recorded a loss due to low utilization and price declines for flexible products in the mobile display segment, as well as unfavorable supply demand conditions in the large display business. In the I'm division, despite solid sales of Galaxy S10, profitability in the mobile business declined year on year as competition intensified in the lowtomidgrain segments. In addition, the process of revamping of our mass market lineup amid softer overall smartphone demand led to a year on year decrease in sales volume. In the network business, earnings grew due to accelerated commercialization of 5 gs network in Korea. For the Consumer Electronics division, sales growth of premium TVs, which included our QLED and ultra large screen models resulted in year on year earnings improvements. Now I would like to share our 2nd quarter business outlook. In the component business, even though memory demand from major applications such as mobile may start to recover, such improvements are likely to be dampened by continued price decline and weak seasonality. In the system LSI, we expect application processors and CIS demand to continue to improve. For the OLED business, increased demand of our Infinity Display Rigid Panels is expected to help improve the results. In the SET business, we introduced the world's we will introduce the world's first 5 gs smartphones. And in the mass market, we will continue to enhance specs in areas such as camera and display to differentiate our lineup in an extremely competitive environment. The network business will keep growing its presence in global 5 gs and LTE network installations. In the Consumer Electronics division, we expect earnings improvements due strong seasonality for products such as air conditioners as well as positive response to our new premium TV lineups. In the second half of this year, demand for high density memory products is expected to increase in most market segments, barring global macroeconomic uncertainties. In the display business, earnings are expected to improve as multiple companies release new smartphones utilizing flexible OLED displays, including key flagship products by our major customers. In the set business, we will focus on maintaining our leadership by increasing sales of premium products amid a challenging environment caused by growing competition in stagnant market for TVs and smartphones. In mid to long term, we aim to strengthen competitiveness for our key businesses by diversifying applications and continuously delivering innovations in component technology and set form factor. We'll also continue to enhance the capabilities of our emerging business areas for automotive solutions by expanding the synergies between our component technologies and Harman's capabilities and for artificial intelligence by expanding the Bixby based service platforms to solidify foundation. Now I'll address capital expenditures. Capital expenditure in the Q1 was approximately KRW4.5 trillion with KRW3.6 trillion allocated to semiconductors and KRW0.3 KRW0.3 trillion to display. We will continue our capital expenditure strategy of investing flexibly with the changes in the market conditions. As we previously mentioned, we expect our investments in memory equipment to decline significantly in 2019. However, we will continue to make infrastructure investments to address mid to long term demand. Before we move on to presentation from each business units, I'll share several data points for your reference. Q1, our DRAM bit growth was flat q on q with about mid-twenty percent ASP decline. And for the Q2, we expect the market demand to grow low teens and we expect our bit growth to be similar. For 2019, annual demand DRAM bit growth is expected to be roughly mid teens, and we may come in slightly over that. For NAND flash, in Q1, our bit growth was mid single digit with about mid-twenty percent ASP decline. For the 2nd quarter, our we expect the market demand NAND bit growth to be mid teens, and we will grow our bits in line with the market. For 2019, annually, we expect NAND demand bit growth to be low 30%, and we expect our bit growth to be slightly over that. For display panel business, the revenue mix pertaining to OLED was about mid-seventy percent. For our mobile business, our total handset sales in Q1 was 78,000,000 units and we sold about 5,000,000 tablets. The blended ASP for our handset division was about high $2.40 and the mix of smartphone within our total handset was low 90%. For 2nd quarter, for total handset shipment, we expect slight increase over Q1. We will we expect a similar level of shipment for tablets in Q2. We expect slight decline in blended ASP for our handsets in Q2 and the mix of smartphone within total handset will remain at low 90%. In Q1 this year, our TV set sales declined by mid-twenty percent, and we expect mid single digit decline in 2nd quarter. But for the year, we expect mid single digit increase of TV shipments this year. Now I'll turn the call over to gentlemen from each business units, starting with memory. Good morning. This is Seowon Jeon from the memory marketing team. In the Q1, demand from major applications weakened steadily under high macro uncertainties. On end, overall demand was softer because of seasonality and inventory adjustment by several companies. However, demand for high density e storage remains solid, thanks to the launch of a flagship smartphones alongside the server transition from HDD to SSD. However, increasing the supply of 64 layer OEM solution products and expanding supply in the channel market led NAND ASP to decline continuously, especially in the channel market. As a result, we proactively addressed demand for 128 gigabyte and higher e storage that focus on us and the growing demand for high end, high density SSD. For DRAM, demand from overall applications weakened and ASP showed a sharp decline due to seasonal effects. For server, in particularly, inventory adjustment by data center phones caused the demand to slow continuously, while a CPU shortage and seasonally weak set build reduced PC demand. For mobile, however, launches of new models, growing adoption of high density products and a strengthening trend toward high density memory from Chinese major customers partially offset the decline in set demand similar to the case of phone NAND. Our company actively addressed rising demand for high density mobile products, which led sales to beat our previous expectations. In the Q2 of 2019, the market is likely to remain slow due to seasonality, yet we expect overall demand for applications to recover gradually. For NAND, the high density trend and HDD replacement demand seems to be expanding continuously as price decrease. Demand for high density server SSD is increasing in overall market, and we expect the old flash rate replacement trend to continue, especially in the enterprise market. For client, we also expect the price declines to boost the attach ratio and to strengthen the trend toward high density. For mobile, we expect the high density trend to continue as price softens. Also, launches of high end smartphones that adopt more than 256 gigabytes of storage will keep demand steady. For each applications, our company will closely monitor demand changes, triggered by price declines and with our competitiveness in solution products, we will actively address demand for high value added products such as a server SSD and high density storage. Moreover, we are currently mass producing 5th generation VNAND for brand SSD as planned. By accelerating expansion deeper into server and mobile, we will continue to enhance our product competitiveness and strengthen market leadership. For DRAM, we expect the demand recoveries recovery in server from the end of the Q2, mainly from datacenter companies as their inventory adjustment process complete. Also, we expect PC demand to grow due to an increase in contents per box, while set build is likely to show a decline as the CPU shortage is expected to persist in the 2nd quarter. For mobile, we expect the overall high density trend along with the newly launched smartphones from Chinese companies will lead demand. We will actively address demand for high end differentiated products such as LPDDR4X. On the other hand, we will also focus on the transition to 1Y nanometer in major applications based on our technology leadership. Now I am moving I am going to talk about the second half of twenty nineteen. On end, although the situation that the supply surface, the demand is likely to continue throughout the year, the demand from most applications is expected to increase as prices soften. For SSD, we expect to see increasing high density SaaS portion in enterprise. And for client SSD, we expect attach rate to grow and steady demand to grow mainly from NVMe. For mobile, although overall set demand is likely to be slow, launches of high density flagship models by major customers will drive demand growth. We will actively generate new demand while responding to high density memory demand based on our customers' need to differentiate their products and services. At the same time, we will strengthen our cost competitiveness by expanding supply of 5th generation Vnet. For DRAM, the macro environment has created overall industry uncertainty, yet we expect demand to grow because of seasonality. For server, due to expanded adoption of new CPU by data center companies, demand mainly for high density products is likely to be solid. For mobile, although set volume for smartphones is expected to be stagnant, we expect the demand to increase solidly across all segments. In the high end and above segment, adoption of over 8 gigabyte high density mobile DRAM is expanding. And in the mid range and below segment, the trend toward the high density is strengthening. We will continue to monitoring changes in market demand caused by uncertainties and flexibly manage our investment and capacity. We will also actively react to rise demand, mainly for differentiated high density products and make every effort to generate sustainable profit. Moreover, as a leader in technology, while enhancing the quality of cutting edge products, we will focus on ramping up production of 1y nanometer products and mass production of 1 gs nanometer products. Thank you. Good morning. This is Ben Ho from the System ASR Business. In the Q4, despite slowing demand for image sensors related to the Chinese smartphone market entering weak seasonality, overall earnings improved thanks to increased supply of APs and modems adopted by our key customers' 2019 flagship model. Notably, we secured a technological leadership by commercializing the world's first 5 gs chipset solution, offering modem chips, radio frequency chips and power management chips. In the 2nd quarter, our earnings are expected to improve slightly as demand for mobile image sensors and DDIs is expected to recover slightly, thanks to seasonality. In addition, demand for 5 gs chipset solutions is also expected to rise on the back of increasing sales of the 5 gs enabled smartphones. In this quarter, we will seek to secure new multiple customers in the U. S. And China for 5 gs chipset solutions and commercialize them in a timely manner. We also concentrate on developing the next 5 gs chipset solution by integrating an application processor and a 5 gs modem into one single chip. In the second half of this year, even amid a likely stagnant smart market, set makers are expected to continue to adopt the high spec components amid a shift toward 5 gs and increased adoption of the multiple cameras and high resolution sensors. And we expect these environment to have positive impact on our business. Looking ahead, we plan to expand our lineup of 5 gs chipset solutions and image sensors to address the demand for high specs in the smartphone market. And we will also expand our mid- to long term business scope by diversifying our product offering through the development of the 3 d F40 sensors and automotive IoT chips. Thank you. Good morning. This is Sunghyun Ryan Lee from the foundry business. In the Q1, foundry earnings was stagnant quarter on quarter due to sluggish global foundry market conditions as well as slowing mobile demand related to the start of weak seasonality in the smartphone market in China. Positively, we first started mass production of mobile products for 5 gs and IoT products, adopting the EMM process. In addition, we secured new orders for computing chipsets from a major customer by promoting our FinFET based 8 nano process. By doing so, we were we have diversified our business areas into computing, AR, VR, 5 gs and Automotive. In the second quarter, even if mobile demand recovers slightly quarter, we started shipping EUV 7 Nanoprocess based mobile products to major customers. In addition, we will continue to strengthen our process competitiveness through the tape out of EUV 6 nano process and by completing the development of 5 Nanoprocess. In the second half of this year, based on our success for mass production of EUV 7 nano process, we will concentrate on developing the EUV 4 nano process and gate all around architecture, which is expected anticipated to overcome physical scaling and the performance limitations of Infant architecture. By leveraging our EVI process leadership, we will focus on increasing advanced node customer basis in mobile and high performance computing. In addition, we will use our specialty processes, including FDSY and 8 inches and advanced nodes to take leadership in newly emerging areas such as 5 gs, AR and Automotive Technology. Thank you. Good morning. This is Gwon Young Choi from the Planning Department of Samsung Display. In the Q1, the display business recorded an overall operating loss due to weakened profitability in both the mobile business and larger display business. Specifically, earnings in the mobile business mobile display business fell into the red due to slow demand from major customers, alongside continued declines in panel ASP caused by heightened competition with LTPS LCD. In addition, under weak seasonality, the large display business recorded a loss due to a continued slide in LCD panel ASP caused by capacity expansion for 10.5 generation in China. Looking ahead to the Q2, we expect any improvement in profitability in mobile business to be limited by soft demand for flexible display. Under these circumstances, we'll focus on profitability by increasing sales of rigid OLED products by leveraging our cutting edge technology with which includes fingerprints on display and infinity display. In the large display business, although we are concerned about the imbalance between supply and demand, we expect demand to keep growing for high value added products, such as once used in high resolution and with larger TVs. In preparation for such conditions, we strive to improve profitability by actively addressing demand for core products, alongside our efforts to enhance our cost structure and reinforce technical differentiation. Now I would like to present our display market outlook and core strategy for the second half of twenty nineteen. For the mobile display business, we expect demand for smartphone use OLED panels to rebound, bolstered by product launches at our major customers. At the same time, however, we are concerned about constant pressure on OLED panel ASP caused by competition with the LTPS ACD. Against this backdrop, we'll work to enlarge the OLED panel market by actively addressing demand for new products at our major customers as well as by launching products for new applications such as notebooks and foldable displays. For the large display business, we are concerned about mounting uncertainties caused by capacity expansion in the HD Industry. However, since we expect to see continued growth in demand for premium TV panels, including ones used in UHD 8 ks ultra large motors. We will seek to improve profitability by focusing on high value added products. Thank you. Good morning. I am Jong Min Lee from the Mobile Communications Business. I would like to share our Q1 results and outlook for the I'm division. For the mobile business, overall market demand for smartphones decreased quarter on quarter as we moved into a seasonally weak period. Demand also decreased year on year due to a stagnant market trend. We released the new Galaxy S series S10 Series, which celebrate the 10th anniversary of Galaxy innovation. The S10 Series is designed to deliver a practical and perfect mobile experience, leveraging our accumulated innovations in technology, including Infinity O Display with ultrasonic fingerprint scanner, a camera that captures professional grade looking images and wireless power share. Revenue in the Q1 increased considerably quarter on quarter, thanks to the sales performance would be S10, which out performed its predecessor S9 backed by high interest and a positive market response from its launch. However, our shipments increased modestly quarter on quarter due to a decrease in sales of legacy models as a result of our lineup reorganizations of mid to low end models. Moreover, profitability improvement was limited due to the trend of offering higher specs for new models, brand marketing for the new flagship models and expenses related to changing the mass market lineup. Now let me address the outlook for the Q2 of this year. Under continuing weak seasonality, market demand for smartphones is expected to increase slightly quarter on quarter, but is likely to continue its declining trend on a year on year basis. For our mobile business, with a healthy sales trend of the S10 series, we expect our smartphone shipment to grow slightly quarter on quarter as the newly launched A Series is getting a positive period from the market. To quickly respond to diverse customer needs in a rapidly changing market, we replaced the lineup by integrating the JCs into the A Series and introduced a number of new A Series, which adopted innovative technology. For the A Series, in particular, along with its stylish design, we upgraded essential features that are frequently used by our customers, offering an enhanced camera experience, a powerful battery with super fast charging and on screen fingerprint scanner. Now new models post stronger initial sales than its predecessor DN. In the Q2, we will not only strive to drive solid sales of both S10 and new A Series, but also to enhance comparativeness of our overall portfolio by expanding adoption of cutting edge technology as demonstrated by the S10, 5 gs and A80. For our network business, we will do our best to maintain our strong performance through 5 gs commercialization and LTE expansion. Finally, I will share our outlook for the second half of this year. We forecast the market demand for smartphones in the second quarter second half will be flat year on year. As we enter the period of strong seasonality, each competitor will expand launch of new smartphones. Market competition is expected to intensify amid such conditions. We will strongly push sales growth by launch competitive new models in all segments from the A Series to the Galaxy Note. First, we aim to strengthen our premium leadership and gain growth momentum. For the new Galaxy Note, we will build on its own strength, which includes its larger display and S Pen, while also increasing sales of innovative products such as 5 gs models and foldable devices. For the A Series, we will actively response to market competition and drive sales growth by introducing cutting edge technologies that meet customer needs. Furthermore, we will strive to secure profitability through improving efficiency over our operations as well as expenses. For the network business, we will maintain our leadership role by strengthening our business foundation through continuing to expand LTE networks into the overseas market and 5 gs equipment for initial markets such as South Korea and U. S. As well. Thank you. Good morning. I'm Kim Ho Ho Hee, VP Sales and Marketing, Visual Display Business. Let me start with the current market conditions and our results for the Q1 2019. The overall TV market in Q1 declined quarter on quarter as it entered a slow season after end year peak seasonality. And year on year due to weak demand mainly in emerging markets. For Samsung, sales in premium products increased backed by ongoing product mix improvements through expanded sales portion of strategic products. In addition, all the adoption of new models led profits to improve year on year. In particular, boosted by an increase in the sales of premium models like QLED and super large products, Samsung expanded its market share year on year and maintained the number one position in the super large screen and US2500 dollars and above segment, solidifying leadership in premium markets. In addition, Samsung released its full QLED 8 ks TV lineup globally, offering models ranging in size from 65 to 98 inches pioneer the market for ultra high picture quality. QLED 8 ks TV is receiving favorable responses from the market, thanks to a proprietary picture quality processing engine and upscaling technologies. For the digital appliances market in Q1, market demand decreased slightly year on year due to the spread of conservative consumer sentiment caused by the slowing U. S. Housing market and Brexit effects in Europe. We improved our sales and profitability through all the adoption of new models with strengthened product competitiveness. In particular, growth in the domestic market is trending up solidly, centering on new lifestyle home appliances such as hairdresser, dryers and air purifiers. Now I will share market prospects for the 2019 second quarter and the second half. For the TV market in Q2, market demand is projected to weaken slightly both quarter on quarter year on year due to an ongoing decrease of consumption caused by unfavorable exchange rates in emerging markets. While sales are projected to decrease year on year because of a lack of global sporting events this year, Samsung will seek to improve results through expanding its high value added portion of products, including QLED and super large screen TVs and increasing sales of new models such as QLED 8 ks TVs. In particular, we shortened the schedule for new model releases this year by more than 1 month compared to last year's schedule. Through this, we will focus on further strengthening our leadership in the premium market as well as securing profitability. For digital appliances in Q2, we will seek improvements by strengthening sales of air conditioners, which are entering peak seasonality and continuously increasing sales of new premium products. In the second half of twenty nineteen, the TV market is projected to grow slightly year on year despite negatives such as economic slowdowns and favorable exchange rates in some emerging markets. Under these market conditions, Samsung will keep increasing sales of its high value added product lineup, which include QLED and super large screen TVs, further enhancing our leadership in premium products and generating continuous growth and profits. In addition, through modular micro LED products, which have no bezels or limits in size, resolution or shape as well as lifestyle products that add value to our consumers' lives like the Frame, Siri TV. Samsung will continue to lead product innovation as a leader of the market. For the digital appliances market in the second half, demand for appliances is projected to recover half on half amid easing the trade conflict between the U. S. And China and despite concerns over Brexit. While improving profitability through an increase in the sales of new lifestyle appliances and premium products, Samsung will further strengthen its B2B business, which includes built in appliances and system air conditioners as well as its online channels to secure future growth engines. Thank you. Thank you. This concludes our presentation, and we'll move on to Q and A sessions. The first questions will be presented by Mr. Yoo Jong Woo from Korea Investment Securities. Please go ahead, sir. I have two questions about the semiconductor. The first question is about the 1x nano defect that was talked about in the market quite a lot. Can you share us share with us some details about the cause as well as the current status of that defect? And if there was, what was the impact? How much was the impact to your Q1 results due to this 1x nano defect? Also, would there be any implications or changes to your DRAM ramp up schedule as a result of this defect? Second question is about the bit growth. Actually, you were above guidance for both DRAM and NAND in the Q1. Can you give us some background to why you were able to be above guidance? On the other hand, we noticed that you've actually sort of decreased the full year guidance for bit growth. Can you also share some background on that? To answer your first question about the 1x nano issue, the cause and the current update, we will like to also then explain the impact that would have on the company as well as how we plan to respond. The issue itself is actually a quality issue that we found in some of the 1x nano DRAM products that were delivered to some of our server customers. It was a temporary quality issue that occurred in the process of ramping up our 1x Nano product. We've already found the technical solution. It's been adopted to our mass production. And currently, our 1x nano is in normal operation. The provisioning for this quality was quality issue was taken in the Q1 results. We cannot share with you 2nd quarter as a part of handling this quality issue would be minimized. Also, regardless of this quality issue, our 1Y ramp up is going ahead as scheduled. As we move up with the process migration, the technical difficulties are becoming more sophisticated. Actually, we've learned valuable lessons from this experience. We are focused even more on quality control, and we will be able to, therefore, deliver even more perfect quality as we ramp up to 1Y Nano and the other processes. And we will maintain a very strong position as the technology leader in the industry. About your second question on the bit growth, first about the reason why we were able to overachieve the guidance in terms of the Q1 shipment. Even though the overall market demand remained weak, we were fortunate to have a high share, especially of the high density mobile products for the new smartphones, and that has helped us overachieve the guidance as well as the market growth. In terms of the reason why we are downward adjusting our full year guidance is explained by several factors, such as the fact that actually the market demand for Q1 was weaker than what we had expected. Also, actually, the timing when major customers are expected to complete their inventory adjustment and come back to buying, That timing is actually being pushed back to closer to the end of the second quarter. Also, we're noticing that as prices decline, the customers are actually operating on a leaner inventory than what they used to. So considering all of these factors, we have decided to downward adjust the full year bit guidance to mid teens. Now about how we expect our bit growth to be slightly above market for the full year. To give you some background, our basic strategic direction of focusing more on a profit based growth, mid- to long term sustainable growth has not changed. We will focus on sustainable profitable growth rather than focusing on, for example, short term growth in scale. However, the reason why we're expecting to be slightly above market is number 1, because we have grown above market in terms of 1st quarter shipments. So that has been counted in. Also, we believe that of the application markets, the mobile where we have a large share is going to be relatively the more stronger application market, and that's why we are expecting our full year bit growth to be slightly above market. The next questions will be presented by Mr. Ricky Seo from HSBC. Please go ahead, sir. I have two questions about the DRAM inventory. It seems the DRAM suppliers, their inventory is rapidly increasing. Can you give us some color in terms of your inventory, how high it is right now? And is it high enough to call for flexible adjustment of your production, for example? Have you been considering ways of adjusting your production by, for example, reducing the wafer feed or input? A second question is that we're also noticing that the data center customers data centers are just not buying anymore. Do you notice from your customer end whether the inventory is just has inventory has been run through? Do you see signs of your customers' demands improving? And if you see that, can you compare that to the amount of demand improvement you saw this time last year? To answer your question, even though we can't share you with the details of our inventory levels, we can say that our inventory has definitely increased quarter on quarter, mainly due to the fact that we're in the weak season of the year and also the fact that we went through expansion of the capacity second half of last year. But as we mentioned always during our calls, we have continued to maintain flexible capacity considering the market demand. And then because we've downward adjusted our overall market demand for this year, we are currently in the process of undergoing line optimization to respond to the decrease in demand and also to stabilize our future inventory. About the line optimization, as you know, because there was such a rapid increase in market demand over the several past years, we've been increasing our production through not only facility expansions, but also by converting some of our production capacity. And in this process, there were actually many areas that needed to have some optimization work done. And this time, we have decided to optimize and raise the efficiency of our overall semiconductor line through, for example, relocating some of the equipment. Of course, line optimization is something that goes on routinely in a fab, but this time, we will be able to take on a more aggressive scope, and this may have some impact on the production volume. However, the actual and detailed scale of the production that will be affected by our line optimization has not been determined, and we plan to review and adjust this level depending on market demand in the future. About your second question of the customer demand and their inventory, even though it's difficult for us to share the details of customers' inventory levels, we do presume that their inventory levels would have decreased at least compared to the end of last year, given the fact that they've been going through inventory adjustments since Q4 of last year. Even however, it seems that the timing when the server customers will start back purchases have been pushed back to closer to the end of the second quarter. But we think that from the second half of this year, as inventory levels stabilize and also the seasonality kicks in, there would be an increase in demand. The next questions will be presented by Mr. Nicolas Kodowa from UBS. Please go ahead, sir. Good morning. Thanks for taking my questions. The first one relates to memory. So several of your peers have implemented production cuts or idling for NAND flash and to a lesser extent DRAM. Beyond what you described today in terms of probably more larger impact of line optimization. Do you consider potentially implementing similar measures or not going forward and why? And what would be the considerations in doing so, including profitability, pricing and also the risk for DRAM of potential price collusion? And number 2, related to mobile, last week, you issued a press release indicating you are delaying the launch of a Galaxy Fold. Could you summarize for us the key issues, how you intend to address them? And whether and how this is changing your outlook for foldable devices into the mid- to long term? To answer your first question, as we've always done, when it comes to our decisions about investment, supply or price strategy, we've always done decisions based on our own market analysis and our own market outlook regardless of what peers or other suppliers have been doing. And in terms of the line optimization, it's being done for 2 main purposes. 1 is, of course, the fact that this will help us optimize the lines in mid- to long term perspective, but also because we adjusted down the full year demand growth. And based on this adjustment, the inventory would have gone above the appropriate level that we believe, and therefore, the line optimization would also achieve that purpose. To answer your second question about the Galaxy Fold, we have received the review sample. And according to what we've analyzed, there were some display damages in the review sample due to force applied to the part of the display that's exposed on the top and bottom part of the hinge. And also, there were some foreign substances that were discovered in the display. The reason why we announced to delay the launch was because we wanted to thoroughly analyze these issues to find the fundamental solution and to supply and deliver a product that meets our very high standard of completeness. The updated launch schedule will be announced within the next few weeks. Also, we have realized that we need to provide and prepare even better communication with the customers in terms of how to use the Galaxy Fold. Regarding the Galaxy Fold itself, as you know, we have invested quite a long time and effort in order to develop the Galaxy Fold. We believe that it is going to be the product that provides a differentiated premium experience to customers who want to have the latest technology and innovative experiences and that the Galaxy Fold will create a new category in smartphones. And our conviction and commitment behind that has not changed. We will continue to exert our efforts to innovate new form factors and also actively respond and reflect the voices of our customers and the market. The next questions will be presented by Mr. SK Kim from Daiwa Capital Markets. Please go ahead, sir. I have two questions about memory. First of all, it seems that listening to the message, you're expecting the recovery of DRAM demand to be delayed than what we originally thought. And under that assumption, do you still think that you'll be able to meet the beat this growth guidance that you provided for Q2? Also, it seems that the price pressure is going to continue into the second half. Given that, can you give us an outlook for the overall market as well as how you plan to respond to it in terms of strategy? The second question is about the NAND industry. Inventory seems to be running quite high. But if the SSD demand doesn't recover as people are expecting, probably this oversupply may even continue until the end of this year. If this happens, if oversupply continues in the second half, how will you respond? Are you, for example, considering ways of responding by using this as an opportunity to gain market share by actually increasing your investment? To answer your first question, first of all, in terms of the bit shipment for Q2 DRAM, we expect to actually meet the guidance for Q2 about increasing shipments for not only the mobile but also for server DRAM in the Q2. Regarding recovery of the data center demand, even though there will be differences in inventory levels from server customer to customer. We think that overall, as inventory stabilizes for servers, there will be recovery gradually of demand starting from 2nd quarter. Regarding price outlook, fundamentally, price, of course, is determined by the demand and supply situation of the market. But more recently, I think the visibility has even become lower, so it's very difficult to predict where the price will go. But just looking at the market situation, even though there are external variables in terms of environment, we think that in the second half, with the seasonality kicking in and also the server customer inventory stabilizing, there will be solid demand in the second half. And that's why we would leverage our technology leadership, especially strengthening our cost competitiveness around our cutting our advanced nodes and also actively respond to the high density and differentiated demand in order to gain a stable profitability. Regarding your second question of NAND, NAND prices, there are many complex dynamics in play. For example, in some customers, actually, they were hesitant in increasing the memory content because they thought that if they started to buy again, this may actually rebound the prices. On the other hand, from the suppliers' perspective, because of the impact of the inventory that they're carrying, even though demand was growing, supply also grew, and this also resulted in continued weak prices. That was the past. However, we think that there is actually a recovery in demand in all applications, including e storage and SSD, driven by the lower prices. And as an example, for example, in mobile, the adoption of e storage of high density of 256 gigabyte and more is expanding. And actually, the demand from HDD to SSD, that conversion demand is also accelerating. That's why from the second half, we expect both the market situation and also prices to stabilize. Regarding our investment plans, as we've always mentioned, we do not pursue just short term growth in size and scale, but we've always emphasized the stable profitability as the priority of our strategy and that remains valid. So in the short term, we will very closely sense changes in the market to flexibly manage both our investments and supply, but at the same time, focus on the mid- to long term perspective so that we're able to analyze and better understand the overall mid- to long term trends of the IT industry so that we are well prepared to maintain our position as the industry leader. The next questions will be presented by Mr. JJ Park from JPMorgan. Please go ahead, sir. I have two questions. The first is about the semiconductor. Can you give us the current status of the second floor of Pyeongtaek Phase 1? What and plans of using the remaining space? And also, can you give us when you expect to operate the 2nd phase of Kyntech? 2nd question is about the I'm It seems that the S10 has actually done even better than expected. But compared to that, the improvement in your profitability for Q1 seems to be limited. Assuming that S10 would sell even more in the Q2, accounting for that, can you give us your overall outlook for mobile results in the second quarter? To answer your first question, as we mentioned during the last call, this year, we'll be focusing more on migration rather than new expansions. That's why the remaining capacity on the second level of Pyeongtaek Phase 1, that will be operated flexibly according to market demand. And we have not reached any specific decisions regarding operation of a new fab. Regarding your second question about the S10 and the I'm performance outlook, as we mentioned during the speech, in the Q1, the improvement in profitability was limited. For example, there was the new model unpack for both the S10 and Folds, brand marketing and also there were some costs associated with the revamp of our mass lines. But the S10 margin itself is maintaining healthy second or 2 digit level similar to its predecessor. And looking forward, even though the BOM cost burden continues as products become more high spec and market competition is expected to become more fierce. And so overall, it's not an easy competitive situation. We will try to improve our profitability incrementally by gaining stronger economies of scale, by increasing our sales and also by cost efficiency and more effective marketing efforts. The next questions will be presented by Mr. Mehdi Hosseini from SIG. Please go ahead, sir. Yes. Thanks for taking my question. On the smartphone guide for the second half, you said that you should be able to show year over year growth. Can you share with me some of the factors that give you the confidence that the unit shipment in the second half of twenty nineteen would actually grow on a year over year basis? And I have a follow-up. The reason why we're projecting that we'll be able to grow in terms of shipments year on year, number 1 is the A series, which actually was announced at very competitive prices compared to the product itself. The shipments, the sales volume we're expecting will increase throughout the year. The E Series that was launched last year has had very positive responses from the market. Also on top of that, there's the S10, which has shown very strong performance in the Q1 that will continue in the Q2 and thereafter. And also towards the second half, there's always the launch of the Note, which will also help increase our overall shipments. Thank you. And on the foundry side, as your 7 and 6 nanometer ramps, how should we think about the margin profile for that specific sub segment relative to the operating profit for the entire semiconductor business unit. Regarding the profitability, the margins of our advanced nodes, having done advanced nodes before, we do know that 6 nano and 7 nano, these advanced nodes do require initial investment. But once we have the volume ramp up, the margins actually quite improve to cover, for example, the depreciation. And on top of the 7 nano and 6 nano, we have the road map for 5 and 4 following. And so we are confident that in the long term, margins will be secured. The next questions will be presented by Ms. Kim Kyung min from Hana Financial Investment. Please go ahead, ma'am. I asked 2 questions. The first question is about the foundry business. You've announced plans of investing KRW 133 1,000,000,000,000 in System Semiconductors by year 2030. Also, you're planning expansions for both 8 inches and 12 inches Can you share with us the insight that you have in terms of your downstream demand to justify these sort of expansions and investments? Second question is about the system LSI business. Move out still accounts for a large share, which may have actually dragged down the business in the second half 2018. But especially with the rollout of 5 gs, this may actually become an opportunity for you. And so in terms of that context, what kind of product portfolio are you preparing? Regarding the 12 inches actually, it is the demand from applications such as mobile, network, 5 gs, HPC and auto that's driving and justifying the investments and expansions that we're doing, including the EUV exclusive line for 5 and below or excuse me, 7 nano and below. Also for the existing 65 nanos, we have demand coming, for example, from the high pixel and multi camera image sensors, and that is why we are planning to expand the S4 line. Regarding the 8 inches that is focused, for example, for the power or DDI or sensors, discrete fingerprint recognition and the discrete sensors, even the discrete products. Also, that's the current demand. In the future, we're expecting more demand to grow, for example, in the automotive and IoT. And that's why even for the 8 inches we are making investments to expand the production. Regarding your second question, Yes, even though the smartphone handset market itself decreased, contracted between 2018 2019 and expected to only grow about 1%. Actually, from the semiconductor business side, with the adoption of 5 gs, this is actually an opportunity see increase in both market revenue as well as market size. Given the fact that we were the first to commercialize the 5 gs, we think that this is a great opportunity for us to strengthen our position as a mobile SoC company. We were the first to develop and supply the chipset solution for 5 gs for the flagship handsets. On top of that, we are currently working on creating a 1 chip solution that combines the AP and the modem. In addition to the mobile demand, there will be 5 gs solution demand from the auto as well as IoT, which we are preparing and we will continue to expand our business in the 5 gs area by signing on new customers. We'll take one last question before ending the call. The last questions will be presented by Mr. Marcus Shin from Mizuho Securities. Please go ahead, sir. I have two questions. First question is about the display business. We're noticing that the first half is always weak. First half last year was a weak period. And also, you're recording an operating loss first half of this year. Do you know why the reason why this is repeating? Do you think that the same pattern would repeat next year? Or do you have strategies and plans of countering this repeated seasonality in the business? Second question is about the network, the 5 gs network equipment business, which many people are expecting to be the next driver for company overall. Compared to the expectations that the market has about the 5 gs equipment business, I think there's relatively less known about specifically what Samsung is targeting in terms of 5 gs equipment, what's the size, what kind of markets are you targeting? And so can you share with us the target market size and the description of the 5 gs equipment market that you will be focusing on? And can you give us some guidance in terms of the 2019 2020 revenue that you're expecting from the equipment 5 gs? Gs? Regarding your first question about the low utilization of capacity in the first half, that is actually caused by our high dependency on a specific customer in a specific part of the smartphone industry. So it will be difficult to fundamentally remove that effect in the short term, but we are countering this, for example, by developing new solutions such as FOD, fingerprint sensors or SODs, speaker on display and also we're increasing our supply of flexible OLED to Chinese handset makers. Even though we can't disclose the exact scale, we do expect, therefore, the supply volume to increase in the second half, and this will continue to have a positive effect until the first half of next year. In the mid- to long term, the way of us countering the seasonality of the business would be to diversify our applications to beyond the mobile to look at, for example, laptop computers in IT, automotive or foldable. Regarding your second question, actually when it comes to our 5 gs network equipment business, there's the equipment business itself consisting of the radio access network or core, but also there's we are also focusing on the service business, example, on equipment deployment and optimization. We are working with the major carriers in markets such as Korea, U. S, Japan and India. We were able to complete 5 gs commercialization, 1st in the world successfully early April in Korea. We will leverage this to maintain a strong leadership in 5 gs in countries such as Korea and the U. S. And also continue to roll out our base to new areas. Even though it's difficult to give you details of the results, the business results we're expecting, we are expecting to have solid results on because not only the 5 gs network business, but also that we will continue to supply the 4 gs LTE equipment. Thank you very much. That completes this quarter's conference