Earnings Call: Q4 2018

Jan 31, 2019

Now we shall commence the presentation on the fiscal year 2018 4th quarter earnings results by Samsung Electronics. Good morning. This is Robert Yi from Investor Relations. Thank you for joining our earnings call for the Q4 2018. With me representing each of the business units are Mr. Chang Jae won, Executive VP of Memory Marketing Mr. Ho Go, Senior VP of System LSI Mr. Shin Seung Cheol, VP of Foundry Marketing Yoon Jae Nam, VP of Samsung Display Lee Jong Min, VP of IT and Mobile Business and Kim Wonhee from VP of Visual Display. I want to make a special welcome to Seok Kyung Hoon, also known as Benjamin Cha, who joined the IR as a Senior VP in December and also Kang Tae Gyu is a VP of IR as well. 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 shareholder returns. The Board of Directors today approved a year end per share dividend of KRW354 per common share and KRW355 for preferred. The total 4th quarter dividend payout is KRW2.4 trillion, which brings the annual total dividend to KRW9.6 trillion, an annual increase of 66%. Regarding treasury shares, we completed the cancellation of all remaining treasury holdings on December 4, following a board resolution in November. In total, in 2017 2018, we retired equivalent of approximately 13% of common stock issued and 16% of preferred stock issued. As we shared during the Q3 earnings call, we plan to review free cash flow for the 3 year period of our current return program and update the 3 year total shareholder return in our Q2 2019 earnings call in July. With that, I would like to move on to the 4th quarter results. In our previous earnings call, we shared our view that 4th quarter results were likely to decrease due to weak seasonality in the memory market. The decline, however, was greater than we had anticipated due to a sharp drop in memory demand and a decline in smartphone sales amid a sluggish yet very competitive market. The total revenue in the quarter decreased 10% year on year to KRW59.3 trillion and the decline was primarily due to performance of our component business. The gross profit slid approximately KRW5 1,000,000,000,000 year on year to KRW25.2 trillion and gross margin also decreased. Compared to the previous year, SG and A expenses in Q4 fell slightly due to a reduction in advertising activities, but increased as a percent of revenue. Annual SG and A expenses decreased KRW4 1,000,000,000,000, 2 percentage points as a percent of revenue on a year on year basis due to more efficient expenditure, especially in the set business. The operating profit was KRW10.8 trillion, down KRW4.3 trillion year on year, mainly due to a weaker performance by the memory business. The operating margin for the quarter decreased to 18.2%. Except for a special bonus, which we announced in December, there were no other significant one time expenses. In the 4th quarter, financial impact from foreign currency exchange movement was minimum. Even though various macroeconomic and business factors pushed our 4th quarter earnings below market consensus, we did achieve record high annual results for the 2nd straight year and solidified our foundation for growth by reaching key milestones in major businesses. Throughout our component and set business, we continue to innovate and deliver industry first and meaningful differentiations. These include world leading memory and logic semiconductor solutions as well as processing technology. Form factors and lifestyle innovations in our mobile and consumer electronic products as well. Now I would like to share our business outlook. In the Q1, we expect demand in the memory business to remain weak due to seasonality and macro uncertainties as well as inventory adjustments by major customers. In the OLED business, profitability is likely to decline sizably weighed on by slow sales of premium smartphones and rising competition with the LTPS LCD products for rigid OLED. In the LCD business, earnings are expected to decline as a result of large scale capacity expansion by overseas suppliers. For the ZEP business, we anticipate earnings in the I'm division will improve on the back of global launch of Galaxy S10 and the commercialization of 5 gs in Korea. The Consumer Electronics division on the weak seasonality will focus on profitability via overall sales mix improvements, early launches of new TV models and the increased cost efficiency in the home appliance business. For 2019, we forecast our earnings to decline on a full year basis due to a weaker performance by the memory business. From the second half, however, demand for memory products and OLED panels are expected to pick up. The representative from each business unit will provide a detailed outlook. To secure sustainable growth in the mid to long term, we continuously strive to enhance competitiveness of our key business as well as develop new emerging business areas. To accomplish our goals, we plan to boost R and D activities, expand external technology collaboration and actively invest in expanding our core capabilities. For the Component business, in addition to enhancing our technology leadership in established areas, we will continue to develop new technologies and next generation packaging solutions to address future needs in automotive and artificial intelligence applications. We're also strengthening capabilities in the OLED business by new innovative technologies for smartphones, while also expanding our coverage into IT and automotive applications. To meet new generation large panel requirements, we'll continue to advance micro LED as well as QD OLED technologies. In that business, we'll continue to push hardware innovations, which include foldable smartphones and micro LED TVs, while also bolstering leadership in the 5 gs market by providing total solutions based on our leading infrastructure, handset and chipset capabilities. For artificial intelligence, Bixby will be enhanced to increase device connectivity and expanded to create an ecosystem supporting a broad family of applications. We also work to create an artificial intelligence enhanced service platform. Now I'll address the capital expenditures. The total CapEx in 2018 was approximately KRW29.4 trillion, with KRW23.7 trillion allocated to semiconductors and KRW2.9 trillion for display. In memory business, CapEx increased slightly year on year due to expansion at the Pyeongtaek campus. CapEx in Foundry business, however, returned to prior levels as the 10 nano line expansion was completed in 2017. In the OLED business, CapEx for flexible panels was significantly lower than it was in the previous year. As we have been doing over past few years, we'll manage our annual capital expenditure plan flexibly and respond to changes in the market. However, we'll proactively invest in memory infrastructure and EUV capability to address mid to long term demand. Before we move on to presentations from each business unit, I would like to share several key data points. First, DRAM. In Q4, our big growth came in high single digit negative growth and our ASP for the Q4 declined high single digit. For NAND flash, our Q4 bit growth came in high single digit minus and ASP declined low 20% Q on Q. For Q1, we expect the DRAM demand growth to decline high single digit. We expect out the growth of DRAM in Q1 to be slightly higher than of the market supply. And for NAND flash, the demand in Q1 is expected to decline mid single digit and our big growth will be similar to that of the market. For 2019, in total, the DRAM demand growth is expected to be high teens, and we anticipate that our big growth will be similar to the market. And for NAND flash, the annual demand growth is expected to be mid-30s. And again, our big growth will be in line with that of the market. Within display revenue in Q4, OLED sales represented about high 70%. And for mobile division, the total handset sales for Q4 was 78,000,000 units and we had 7,000,000 of tablet sales. The blended ASP was slightly higher than $200 and the smartphone mix within total handset was high 80%. And in Q1, we expect the total handset sales to decline slightly Q on Q as well as the tablet is expected to decline slightly. The blended ASP, however, will increase over Q1 and the mix of the smartphone within total handset will also improve to reach low 90%. And in Q4, our TV sales increased by mid-thirty percent. But because of seasonality, we do expect the TV sales in Q1 to decline to about 20% range. And we expect to see about mid single digit volume increase on TV sold in 2019. Now I'll turn the conference call over to gentlemen from each business unit, starting with memory. Good morning. This is Seowon Jeong from the memory marketing team. In the Q4, due to uncertainties in the macro environment, customers adjusted their inventory levels, which lowered the demand for major applications such as server and mobile. On end, major customers delayed purchasing due to expectation of further price declines. Moreover, decrease in smartphone shipment resulted in overall low demand. Positively, a trend toward high density in mobile persisted and all play array portion increased. On the supply side, as speed of qualification process for 64 layer three d NAND has been accelerating, supply of solution products expanded continuously. As a result, amid the fierce competition among suppliers, coupled with the recent price decline in NAND across all applications, we proactively addressed the growing high density trend by focusing on high end and high density SSD products. OT RAM, inventory adjustment by datacenter companies resulted in a decline of server demand, while the CPU shortage decreased PC demand. For mobile, Q o Q set demand reduced due to relatively weak sales of new smartphones by major customers and slow demand in China. However, this trend were partly offset by growing demand for high density products with more than 6 gigabyte per box. Subjected to affect the macroeconomic issues, which were also behind the dramatic changes in consumption patterns. Our earnings declined Q o Q, yet we focused on strengthening our cost competitiveness by expanding 1x nanometer transition and 1y nanometer designing to secure our technology leadership. In the Q4 of 2019, we are expecting slow overall memory demand, mainly because major data center customers are likely to continue adjusting inventory. On end, despite low seasonality, demand for high density and high performance SSD for data center will expand gradually. Also, for enterprise, we expect the demand to continue for all flash array replacement. While mobile segment is declining, we expect to continue to see steady demand for high density storage with more than 128 gigabyte, mainly from flagship and high end smartphone models. On the supply side, wide supply of 64 layer three d NAND for solution products continues to increase. Competition is likely to intensify, especially in client SSD as well as the channel market. Our company will closely monitor demand changes for Ity application. Moreover, we will actively address all flash array replacement demand in the 10 ks HDD market as well as smartphone demand found flagships and in China, which are adapting high density UFS. At the same time, we will differentiate our products and enhance our competitiveness through solution products based on 4th generation of V NAND. Moreover, we are currently mass producing 5th generation VNAND for branded SSD as planned. By accelerating expansion further into server and mobile. We will continue to enhance our product competitiveness and strengthen market leadership. For DRAM, inventory adjustment for server are likely to persist and for mobile on the low seasonal demand. Content per box is expected to keep rising mainly for new flex models. We will focus on enhancing our cost competitiveness by expanding the 1 line nanometer transition process and strengthening our technology leadership by increasing sales of differentiated products such as high density server DRAM, HBM2 and GDDR6, etcetera. Next, I'm going to talk about our full year outlook. In 2019, we expect demand to increase gradually from the second quarter. Demand will continue to recover in the second half of this year as the high density trend in major application continues amid the seasonal demand increase. On end, as prices soften, demand from all applications will increase backed by high density trend. For servers, we expect to see solid demand as high performance trends are likely to continue. For client SSD, due to a growing attach rate and adoption of high density storage, we expect steady demand growth. For mobile, the high density trend is projected to continue because of lower volume cost burden at customers and the need to strengthen product competitiveness and differentiation at smartphone companies amid the mature market. On the supply side, although industry supply of 64 layer may keep rising, we think possibility of rapid supply growth will be limited if price decrease continues. We will actively respond to high density memory demand based on customer need to differentiate their product and services. At the same time, we will strengthen our cost competitiveness by expanding supply of force and future generation of Wiener. For DRAM, after inventory adjustment at our customers complete in the Q2 of this year, we expect the demand to grow solidly due to step build growth caused by positive seasonal effect in the second half. For server, as the trend toward high performance cloud service continues, we expect solid demand growth for high density server DRAM, especially the launch of a new CPU in the Q2 is also likely to boost demand. For mobile, although set demand growth is likely in a mature stage, adoption of high density mobile DRAM with more than 8 gigabyte has room to spend in the high end segment. Moreover, we anticipate rising contents per box for mass market device will boost the memory demand. We will closely monitor changes in market demand and continue to manage our investment and capacity with flexibility. Also, we will focus on ramping up production of 1Y nanometer products and developing of 1 gs nanometer products. As the leader in the memory market, we will enhance the competitiveness of our differentiated product, which includes a 16 gigabit based high density server DRAM, UMCP with more than 8 gigabyte, HVM2, etcetera. Overall, we will work to strengthen our technological leadership to meet our customers' growing need for more advanced technology. Before we move on to SysML Sigh, I need to make one correction in the data point that I shared. I've been told that I said that the Q4 DRAM bit growth was high single digit minus growth, actually is high teens of minus growth. I stand to make a correction. My apologies. Please. Good morning. This is Ben Ho from the System Asset Business. And Ancelain Business. The 4th quarter, associate TDI earnings were solid, thanks to mass production of the new mobile, AP production and expanded OLED TDR supply to major customers. However, overall earnings declined due to slowing demand for image sensors as the Chinese smartphone market entered a weaker seasonality. Notably, our efforts to expand into new applications are bearing fruit. Advanced by the conformed adoption of the automotive processor, Exynos Auto V9 by Audi for a model in 2021. In the Q1 2019, we will maximize supply of APs, image sensors and DDIs for use in 2019 Flex model, pushing ahead with earnings improvements. In addition, we plan to secure technological leadership by commercializing the world's first 5 gs modem and concentrate on securing customer for the product in the U. S. And China. On a full year basis, even amid a likely stagnate smartphone market, set makers will continue to require high specification components, amid the shift toward 5 gs and increased adoption of the multiple cameras and high resolution sensors. Given the demand for high specifications in the smartphone market, we will leverage our commercially proven 5 gs modems to actively pursue new customers in the U. S. And China as those nations are prepared to launch 5 gs services. In response to demand for multiple cameras, we are expanding our sensor lineup to offer more choices for functions such as optical zoom, ultra wide angle and bokeh. On top of that, we have started mass production of mass producing 48 megapixel sensors to make strong demand for higher resolution sensors and plan to launch 64 megapixel sensors, a world's first in the Q2 of this year. Finally, we also extend our mid to long term business scope by diversifying our product offerings via development of 3 d FOD, which stands for finger on display sensors and automotive IoT chips. Thank you. This is Jason Qing from Foundry Business. In the Q4, Foundry earnings declined due to sluggish demand for mining chips as the cryptocurrency market continued to shrink and as a result of slowing orders for AP as the Chinese smartphone market entered a slow season. Positively, our 7 other EUV process won a new contract for next generation CPU for IBM servers, demonstrating market acceptance of our achievement in EUV technology, leading edge process competitiveness and foundry capabilities for high performance server products. Throughout this, we are gradually expanding our current mobile oriented business structure towards high performance computing. In the Q1 of 2019, volume demand, including that for mobile components and cryptocurrency mining chips, is likely to remain stagnant under sluggish overall demand for semiconductors. Despite the challenging environment, we will concentrate on preparation for full scale production of the 7 nano EUV process in the second half of the year and we will endeavor to secure growth in the mid- to long term by completing development of the 5 nano EUV process. In 2019, we will continue to expand our business structure from mobile towards HPC, automotive and network applications. And we will also expand our presence in 8 inches areas, which include AR, VR and discrete components. In addition to our mass production effort of the EUV 7 nano process, we will also focus on establishing a more stable business structure structure by increasing our customer base by over 40% to levels in the previous year. Thank you very much. Good morning. This is Jeremy Yoon from the Mobile Display Marketing of Samsung Display. First of all, I would like to inform you that we have reorganized into 2 business units, the mobile display business and the large display business to strengthen our competitiveness across the entire product area. In the Q4, overall display earnings decreased slightly Q over Q due to weakened profitability in the mobile display business. Basically, sales in the mobile display business declined Q o Q due to heightened competition with LTPS LCD, despite stable sales of flexible OLED panels. On the other hand, earnings in the larger display business improved slightly Q o Q, bolstered by an expanded sales portion of value added products such as high resolution and ultra large TV panels. Looking only to the Q1 of 2019, the mobile display business is likely to experience unfavorable market conditions due to intensifying competition among panel makers and amid demand in the smartphone industry. We plan to focus on securing capability by expanding our customer base and actively addressing demand from major customers' flagship model. In the large display business, we are concerned about ASP pressure on LCD panels on the weak seasonality and amid ongoing capacity extensions by Chinese manufacturers. Thus, we will strive to improve profitability by focusing on reducing costs and enhancing use of our core products. Now I would like to present our 3 market outlook and core strategies for 2019. For the mobile display business, we expect flexible OLED panels for smartphones to enjoy a rebound in demand from the second half. Against this backdrop, we will work to enlarge the OLED panel market through technical innovations for new applications while also increasing the portion of smartphones featuring OLED displays, leveraging our cutting edge technology, which offers differentiated design capabilities and power efficiencies. For instance, we started providing high contract OLED displays to replace conventional side view mirrors of automobiles. And this year, we are planning to supply the very first OLED display to be used in notebook PCs. For the larger display business, we are concerned about growing uncertainties caused by capacity expansions in the LCD industry. However, since we expect to see continued growth in demand for premium TV panels such as UHD, 8 ks and ultra large ones, We will strive to limit impacts on profitability by focusing on high value added products. Thank you. Morning. I'm Jongmin Lee from Mobile Communications Division. I'd like to present our 4th quarter results and share the outlook for the I'm division. For the mobile business, market demand for smartphone and tablet grew Q on Q as a result of year end seasonality. Sales, however, continue to buy online business. Despite strong seasonality, our operating profit decreased 2.2. This was due to a decline in both shipments and revenue for smartphone in an overall sluggish market. In our network business, our business performance improved Q on Q, thanks to supply of equipment to major overseas buyers for LTE expansion. And the initial supply of 5 gs equipment to South Korea and U. S. Next, I will share our outlook for the Q1 this year. For the mobile business, market demand for smartphones and tablets is expected to decrease Q on Q as we move into a weak season. Next, at the Unpacked event in San Francisco, we will unveil the Galaxy S10. S10 is the combination of the last 10 years of innovation, while also being the starting point of innovation for the next 10 years and beyond. Based on the most cutting edge technology in displays and cameras that we've been accumulated, S10 will offer a differentiated design with the best able specs for improved user experience. With these efforts, we will realize meaningful value and positive changes in our customers' lifestyle and strengthen our leadership in the premium market. We expect our business performance to improve in the Q1, result from sales growth of our flattish model, thanks to the launch of S10. However, overall smartphone shipments are likely to remain at a similar level Q on Q as the supply of mass models has been temporarily reduced due to a change in our lineup. For the network business, we will actually respond to 5 gs commercialization in South Korea and keep supplying equipment for LTE expansion. Finally, let me move on to our outlook for this year. We forecast that market demand for smartphone will be flat Y on Y. Overall smartphone ASP is expected to increase as a result of the trend toward adopting high end specs such as large display, higher memory capacity and multi cameras. We expect business conditions to remain challenging due to stagnant smartphone market and mature cost burden. However, we will increase smartphone sales and achieve solid results by executing a thorough go to market strategy, which includes differentiated product launch and strengthened target market. For our flagship models, we will provide the best performance and user experience with design innovations and highly sophisticated technologies. Furthermore, we are preparing our lineup by addressing the diverse needs of users so that more customers will choose our products. In terms of mass models, we are changing our lineup to quickly respond to rapidly changing market with diverse customer needs, while also improving the competitiveness of individual models. Outcome of this line of change is expected to come out after the Q1. With product competitiveness enhancement, we will strive to secure profitability by improving cost structures, which includes component standardization and executing effective marketing campaign. Lastly, we will strive to reinforce core competencies in new businesses to ensure sustainable growth. We will lead technology trends by introducing foldable and 5 gs phones at the right time. Moreover, we are planning to develop new business areas by building our ecosystem with strategic partnership. We will increase user retention by enhancing connectivity among devices, expanding Bixby to more products and services, while also improving AI. Through these efforts, we will provide individually optimized services on our diverse devices, which in turn will allow us to keep strengthening our AI and IoT platform. For the network business, we will take a global leadership role by expansion of 5 gs equipment for the initial market such as South Korea and the U. S. And lay the foundation for further global business growth. Thank you. Good morning. I'm Kim Won ji, VP, Sales and Marketing, Visual Display Business. Let me start with current market conditions and our results for 2018 Q4. The overall TV market in Q4 expanded by double digits quarter on quarter, thanks to year end peak season. On a yearly year on year basis, however, the market stayed similar due to a decrease in consumption, caused by unfavorable exchange rates in emerging markets. For Samsung, sales increased quarter on quarter, backed by our successful year season promotions and ongoing product mix improvements. In addition, an increase in the sales of high value added products such as QLED and super big screen TVs led profits to improve both quarter on quarter and year on year. In particular, our QLED TVs, well recognized as the leader in the premium segment for the super picture quality and differentiated features for consumer usability, roughly tripled their sales on quarter on quarter basis, leading profitability to improve. In addition, Samsung released QLED 8 ks models, pioneering the ultra high picture quality market and strengthening our tech leadership in the process. As for super big screen TVs of 75 inches and above, Samsung has continued to lead the market with its high market share and solidifying the link between super big TVs and the Samsung brand. For the digital appliance market in Q4, demand growth slowed due to a sluggish U. S. Housing market and price increases in emerging markets caused by exchange rate movements. Despite slow growth in emerging markets, we improved our results slightly both quarter on quarter and year on year through a strong sales of premium products such as family hub refrigerators, large capacity dryers and cube air purifiers. Now I will share market prospects for 2019 Q1 and the full year. The TV market entering a slow season in Q1 is projected to weaken slightly year on year due to declining demand in emerging markets. Samsung will continue to strengthen sales, focusing on QLED super big screen TVs and we'll globally release the QLED 8 ks TV, a next generation premium product. We will meet consumer needs for ultra high picture quality in a full range of sizes, while providing AI upscaling technology through our quantum processor. In addition, Samsung will proactively expand its market share in 8 ks TV market, which is expected to grow constantly. In Q1, the market for digital appliances is expected to grow with gains coming mainly from North America, Europe and Korea. Same store will expand sales of new lifestyle home appliances such as a clothes refresher and dryer and as well as launch new products in the quarter via a strong partnership with distributors. In addition, we will keep reinforcing our B2B business, which includes built in home appliances and system air conditioners. In 2019, the TV market is projected to stay similar year on year despite negatives such as economic slowdowns in emerging markets and a lack of global sporting events. Under these market conditions, Samsung will keep enhancing our leadership in premium products, which includes QLED and Super Big Screen TVs in our focus on securing profitability and growth. Samsung will also lead industry trends with MicroLED products, our modular technology that was showcased at CES 2019, a new live site products that add significant value to a consumer's lives. The digital appliances market in 2019 is projected to grow slightly, led by advanced markets. Samsung will continue to increase sales of premium products and secure future growth engines by strengthening our online and B2B businesses. Thank you. Thank you. This completes the management's presentation. Now I will turn the call over to the Q and A. My first question is about the memory business. As you mentioned during the data point, actually, during Q4, your shipments were very weak. And it's assumed that you have lost some market share in DRAM. Has that motivated the company to shift more towards, for example, regaining market share by running through its inventory and focusing on profitability? And does the company have an appropriate level of market share that it's operating against? First, you've asked whether we 1st, you've asked whether we have an appropriate target market share. Actually, we don't. As we've mentioned, rather than operating against a size or market share, we focus on maintaining a sustainable profitability of the overall business. So we do not have an appropriate market share target that we operate with in mind. As we mentioned though, we focus on leveraging our high density and high performance products so that we are able to satisfy the needs of our customers who need to differentiate their products as for example cloud service and the high performance and high end mobile and PCs are becoming more widely adopted. And therefore, we will be focusing on our high performance and high density products as we go forward. The next questions will be presented by Mr. Do Hyun Hoo from NH Investment and Securities. Please go ahead, sir. I have one question first towards the memory side. Your 4th quarter memory shipment actually fell below guidance quite significantly. Is it correct to assume that your inventory levels would have increased? Can you update us on your current inventory levels and also your future inventory management plan? The second question is towards the I'm division. Overall, there is weaker demand for smartphones and this has resulted in greater price competitive competition. And given this situation, what is the company's strategy in terms of price competition? Also, do you think given this situation in the industry, it will be possible for the company to achieve both increase in sales volume as well as improvement in its profitability? Also in that context, we noticed that there is a North American competitor that recently has been experiencing difficulties because of its excessively high pricing strategy. In that context, what does the company have in mind in terms of strategy and pricing for the new upcoming flagship? Regarding your first question about our inventory, our inventory has increased due to the lower shipments in Q4, but it is still at manageable levels and we will use the current inventory to respond to the demand that we're expecting after the Q2. As we mentioned before, there will be greater demand as cloud service becomes more advanced and greater higher end PCs or PCs and smartphones require more density. And therefore, we will continue to respond to these market demand at a stable trend. And in terms of our mid- to long term inventory management, we will also flexibly respond to the market demand as it unfolds. I'll turn to your second question about the handset business. Basically, our strategy is to both pursue increase in sales and improve profitability by adopting a product portfolio optimized by each market. Even though it's a bit too early in the year to talk about full year shipments, our goal is to year on year basis increase our overall smartphone shipments. Even though the more competitive products entail greater margin pressure, we will secure profitability, increasing our overall sales, also more adapting more standardized components and also increasing our operational efficiency. And in particular in the case of mass product, we will actively leverage the economies of scale that we can from the mass product segment. Also you've asked about our pricing policy and our strategy for our new flagship. In the case of the flagship, given that customers actually consider a variety of factors, including size, design, specifications and price when they choose a phone, we are considering the adoption of a wider price range that reflects such diverse needs. So together with the adoption of more competitive features such as displays, cameras and AP, we will offer a more detailed segmented lineup so that customers can actually choose what they feel is the most optimized product for themselves. With regards to the details of the upcoming S10, please turn into the Unpacked event that's planned in February. The next questions will be presented by Mr. Huang Min Song from Samsung Securities. Please go ahead, sir. I have questions about the DRAM business. Your DRAM sales in 4th quarter actually declined quite rapidly even compared to the competitors. Is there a reason why your DRAM sales were particularly weak in 4th quarter? During your outlook, you shared that you're expecting demand to improve from Q2 and onwards. But frankly, from the market, the visibility of demand improvement from Q2 doesn't look very clear. Can you share with us in that context any specific moves or signs from the customers that you're reading? To answer your first question, we actually entered into the 4th quarter, we did expect demand to slow down as season due to seasonality. But as we passed about the midpoint of Q4 due to various negative external factors, demand started to decline even faster than originally expected. Especially we're attributing the decline to the inventory adjustments that are being carried out by the data center customers. And because the major customers where we have large market share such as servers and other major applications because these customers' demand declined, that had a negative impact on our shipments. To answer your question about our outlook for demand improving after the Q2, we expect, especially around servers and mobiles, there will be a demand improvement after the Q2. To share a bit more detail, in the case of mobile DRAM, as price stabilizes, we think that there will be an increase in high density memory adoption on smartphones, high density, for example, 8 gigabyte plus high density UMCTs. Also flagship smartphones that will be PDDR4X base can actually adopt up to 12 gigabytes. So that would also drive greater demand from the mobile side. Actually, we are hearing of many mobile companies, device makers are preparing to launch new models that have high density products adopted. In the case of the server side, I think the critical factor there would be the time when customers' inventory would meet a would hit a stabilizing point. Currently, we're seeing that, that stabilizing point of inventory will come sometime during the Q2. And especially once the new are rolled out during the Q2, this would also help drive up demand for servers in the second half. And that's why we're expecting overall demand to improve as we approach the later half of this year. The next questions will be presented by Mr. Kim Dong Won from KB Securities. Please go ahead, sir. I have one question 2 questions. The first question is for the display side. We're hearing in the media a lot of media coverage regarding investments to convert to QD OLED. In that context, can you share the company's strategy in terms of its next generation large size display? Second question is to the VD division. It seems that in terms of the premium product segment, it's the 8 ks QLED as well as the microLED that's currently being receiving the spotlight. So in that context, would you agree that the QD TV would be the main technology for the VD division for its premium segment going forward? To answer your question, as you mentioned, as the TV market growth levels off and especially because of the Chinese companies also increasing their focus on higher efficiency as well as focusing on the differentiated and high end product segments. And so immediately for 2019, our focus is to achieve quality growth by focusing on the ultra large sized frameless as well as 8 ks technology. And in the mid to long term, our strategy is to secure the winning next generation technology so that we will be able to continue to meet the diverse needs of our customers who also need to find differentiation points. And so regarding the technologies that we're considering for next generation, QD OLED is included, but we are also considering at the same time various other technology options and also collaborating with our customers. The timing and these are plans, including mass production timing, have not yet been decided. Our strategy in the premium segment is to is a 2 track strategy where we will, on one hand, continue to focus on our QLED, which has already secured a very firm foundation in the premium segment. And also on the other hand, push microLED, which has various advantages, for example, of self light emitting, also in terms of flat rate recreation, contrast and also view angle. So actually, we introduced the 8 ks TV, QLED TV last October, which once again demonstrated our technology leadership and also our strong position in the ultra high picture quality TV segment. This year, we're planning to roll this out globally, actually and with a full lineup covering from 65 inches to up to 98 inches which will continue to help us meet the consumer needs in the ultra high picture quality TV segment by expanding our 8 ks offering. Also at the same time, we will focus on building a very strong Also at the same time, as we mentioned, our second program in the strategy is the microLED, which offers the advantage that the user can select the size as well as the ratio and the resolution that's optimized for each use. And therefore, the microLED will enable the customized screen experience for users. Our plans in terms of microLED business is to first start with ultra large size microLED LED products for commercial as well as high end residential and to have a residential application residential large size product rolled out by 2020. The next questions will be presented by Mr. JJ Park from JPMorgan. Please go ahead, sir. I have two questions. First is about the CapEx for it seems that the weak demand for the semiconductors will continue during the first half. In that context, what are your CapEx plans for 2019? 19? And can you break that down into CapEx spend for equipment versus infrastructure? 2nd question is to the system LSI division. It seems the usual LTE modems. Would than the usual LTE modems. Do you think this will bring about a change in the AP supplier landscape? And how much revenue contribution are you expecting from your 5 gs modems this year? To answer your question about our CapEx plan, actually, there is no change to our basic plan in that we will operate and manage both our capacity and CapEx flexibly in line to the customer demand and also optimize our lines for both memory and foundry. So even though our CapEx plans, investment plans for each product segment has not yet been decided for 2019. As we mentioned during the last conference call, given the uncertainty in the external environment, we will not be increasing our facilities, but most of our investments will be focused on new fab capacity, targeting the mid to long term demand that will come down the road. And so this year, the share within our CapEx facility investment will decrease and the share of infrastructure investment will increase. To answer your question about our 5 gs modem business, even though 5 gs modems require a different level of technology, a much more sophisticated level of technology versus LTE, we have been able to achieve meaningful technology innovations in 5 gs as well. For example, last August, we were able to we'll first succeed on the OTA over the air call on 5 gs. Also last December, we were able to 1st in the world commercialize the 5 gs modem. In terms of the landscape, different from the LTE modem landscape, we expect that the 5 gs modem landscape will start with 2 major players' landscape, including us. We are expecting revenue from 5 gs start this year, even though that revenue itself will depend on, for example, the 5 gs adoption rate and the adoption timing of both the handset makers and the carriers. In terms of but we believe that because we already have a commercially proven 5 gs modem throughout 2019 2020, we will leverage this proven modem to add on new OEM customers, especially in China and the U. S. The next questions will be presented by Mr. Nicolas Gaudois from UBS. Please go ahead, sir. Yes. Good morning. Thanks for taking my questions. First one is on DRAM. Can you update us on the pace of capacity conversion to 1Y nanometer? How much of it was out where 1Y nanometer at the end of 2018? And where do you expect this to be by the end of 2019? And where are you in the process of qualification of 1:1 nanometer with key mobile and server customers? And second question is for networks. Samsung appears to be the main if not the only alternative to Huawei and ZTE as a first source to 5 gs for 5 gs base stations outside of Ericsson and Nokia. Some countries and telecom operators have publicly stated that reviewing the use of Huawei and DC for 5 gs. Can you qualify for us how much are you benefiting from this? And more generally, what revenue growth you expect from Samsung Networks over the next couple of years? Thank you. To answer your question, first of all, even though it's difficult for us to share with you the detailed production share of specific products, as of 2018, the wafer share for the 10 nano class products, including 1Y was above 70%, which means our ramp up is moving smoothly according to plan. Regarding the qualification process, we are continuing the qualification process for our servers as well as mobile customers. And we expect that the share of 1Y in both mobile and server applications will increase throughout 2019. Based on our technology leadership, we will continue to offer our cutting edge process technology advantages, not only to our major customers, but our new customers overall. To answer the second question about the 5 gs equipment business, even though we can't comment on competitor issues as for our own network business because we have been focusing early on preemptively to the 5 gs wave, we have been leading the standardization process for 5 gs and we have took care of many 5 gs related patents as well. And that's why now we have the technology as well as the equipment to cover most of the 5 gs spectrum band. Our aim is to leverage this to actively increase our market share in 5 gs even compared to our LTE market share. As 5 gs is rolled out and the pace of 5 gs rollout picks up, we will leverage the technology that we have to capture more market opportunities. And actually many major carriers are already showing great interest in working with us. And so we do expect to see high growth in this business going forward. 5 gs as a technology will lead industry change and also actually it is going to bring about a technology revolution and make the 4th industrial revolution a reality by providing a high quality of service to individuals as well. Given the importance of this 5 gs, we emphasize the fact that we have a complete end to end solution starting from equipment but also handsets as well as chipsets. And based on our commercialization experience, we will lead the 5 gs market in all of these fronts. We will take about 2 more people for questions before we end the call. The next questions will be presented by Mr. Peter Li from Citigroup Global Market Securities. Please go ahead, sir. I have one question for the memory, the other for the foundry. For the memory business, is that as the DRAM technology become more difficult, it also seems that the cost reduction, the cost reduction, pace of cost reduction isn't as fast as the previous generation technologies. Do you think that this time it will be different from previous cycles? Or do you think that the pace of cost decline will pick up as we move forward in this current cycle? Also in that context, can you share with us the overall DRAM strategy direction that you have? The second question for foundry is about your 7 nano EUV. We do notice that there were some significant achievements, including winning the contract, the IBM contract, but can you share with us your current customer status for 7 nano EUV? Answer your first question about DRAM, I'll answer first the change in DRAM prices before moving on to our strategy for DRAMs. Even though it's difficult for us to predict about price changes because price is also determined by the market demand and supply situation. What we can say about the current cycle is that, as you mentioned, because the level of technology that we're working with has become much more difficult than before, the rapid increase in supply has become much more difficult than before as well. And also what's different from the previous cycle is that there was a wider application whereas before it was mainly PC driven. Now the applications have diversified for servers and mobile, which has also eased some of the seasonality in the demand that was traditional in the industry. Also, if we look towards mid- to long term, there's the expansion of 5 gs and AI. And therefore, we're expecting there to be solid demand growth in new applications, also around servers. And so compared to previous cycles, we think that it won't be easy or it will be difficult for the same long term and excessive supply or demand change or imbalance to continue. And in terms of our strategy, we will continue to increase the share of our 10 nano class process products, also enhance our product competitiveness through the techno class technology. And in the mid to long term, we will actively respond to the demand of customers that need high performance and high quality memory, such as 16 gigabit base or high density server DRAMs and LPDDR4x based mobile DRAMs. Regarding your second question about the foundry business, yes, as we you mentioned, we won the contract for the IBM CPUs on our 7 nano technology, which is a sign once again that not only our EUV technology, but also our 7 nano process technology as well as our service quality and service has been recognized by the market. We have already started production of our EUV 7 nano and are planning to go into mass production in the second half of this year, targeting applications such as HPCs and network products. The last questions will be presented by Mr. Yoo Jong Woo from Korea Investment and Securities. Please go ahead, sir. I have one question for the semiconductor side, the other question for the mobile side. My question is, first, the DRAM side. I think the there is a greater than expected decline in the server DRAM demand. And much of this is being explained due to the slowdown of data center facility investments by the hyperscalers. There could be many reasons explaining this slowdown in facility investments by data centers. It could be economic recession outlook or excessive investments already put in as well as greater efficiency in the existing hardware. But if assuming that the data center investment will recover, what do you think will be the signal to such investment recovery? It's my first question. My second question is about the 5 gs handsets. 5 gs handsets, I believe, can be a great opportunity for the company. But on the other hand, 5 gs handsets would need to have higher or pricier components, also would have higher cost. I also we're hearing that it would require greater battery capacity. So first of all, the question is how does the company plan to go about resolving these handsets? And also some are concerned that as 5 gs is expected to arrive, many of the consumers will actually postpone their handset replacement until 5 gs comes about. What do you think about that? To answer your question, I think the better way would be to explain the reason we see as the reason for the short term demand adjustments in the server market and then to share our views about a rebound of investment demand for the data center market. And so first of all, we think that this current short term adjustment in the server market is not actually a decline in the speed of facility investments by data centers, but actually is a combination of number 1, weaker demand due to hyperscalers already having secured inventory. Also the customers themselves postponing their purchases, expecting there to be additional price declines in the future. And so what we see is that because there was this actually supply shortage that continued for the past 2 years. And on one hand, the hyperscaler customers did need to have a stable memory supply in order to handle the rapidly increasing data traffic. They had a strong demand, but they've already secured what they feel to be stable memory inventory. And we think that this was the major reason for the short term demand adjustments in server DRAM recently. And so in terms of what will be the signal of data center investment recovery, we think that given the fact that the server fundamental demand still remains very solid and strong, the signal won't be an external factor, but actually would depend on when the customers feel that their inventory has stabilized. That would signal market demand recovery. In terms of timing, we're expecting this decline in demand to stabilize after the second quarter. Also in the second half of this year, we are expecting there to be server DRAM demand recovery together with the introduction of the new CPU. Also, we're seeing that there will be a strong server memory demand because there are companies that are preparing to adopt edge servers in advance to prepare for the 5 gs network rollout after year 2020. So given all of these factors, we're expecting server memory demand to maintain a solid level. Regarding the 5 gs smartphone, the handset question, as you mentioned, yes, the 5 gs phones will have the top line specifications of large screens, high performance APs, high capacity high density memory as well as high capacity batteries. In order to maximize the advantages of a 5 gs network, which is ultra high speed and ultra low latency, and so it will provide an innovative multimedia experience. And as you mentioned, as these new features are added on to the handset, the importance of battery performance is that much more critical. And we're going to approach this not only by securing greater battery capacity, but also applying algorithms to optimize the battery performance so that users will have no inconvenience in terms of using the 5 gs handset. And as you mentioned, even though the price point of the 5 gs handset will probably be higher than what we're currently seeing in existing handsets because pricier components, including 5 gs chipsets are going to be used. We will prepare a product that customers will feel is sufficiently worth what they're paying for. About the second part of your question about whether this anticipation of 5 gs would rather delay replacement, actually we think that as 5 gs is introduced not only from Korea and the U. S, but also to major markets such as China, Europe and Japan, there will actually be a simulated smartphone replacement demand, especially around the premium segment. Even though each country will have a different speed of 5 gs network rollout, we expect penetration of 5 gs handsets to increase quite rapidly within the next several years. And this will not only increase the sales of 5 gs smartphones, but also will help increase demand for peripherals such as IoT devices. And that completes today's conference call. Thank you very