Please press star two, star and two on your phone. Now we shall commence the presentation on the fiscal year 2018 second quarter earnings results by Samsung Electronics.
Good morning. This is Robert Yi from Investor Relations. Thank you for joining our earnings call for the second quarter of 2018. With me representing each of the business units are Mr. Junwoong Chae, Senior VP of Memory Marketing, Mr. ES Jung, VP of System LSI, Sanghyun Lee is a VP of Foundry Marketing, Kwon-young Choi, VP of Samsung Display, Lee Kyeong-Tae , also VP of IT Mobile, and Mr. Jong-Hee Han is the VP of Visual Display Business. 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 second quarter dividend announcement. The board of directors today approved a second quarter dividend of KRW 354 per share to be paid in August for both common and preferred shares. On a pre-split basis, the dividend is KRW 17,701 per share, same as that of the first quarter. As was the case, the total dividend payout for the second quarter will be KRW 2.4 trillion. With that, I would like to walk you through our second quarter results. In the second quarter, despite a strong performance by memory business, the total revenue decreased slightly year-over-year to KRW 58.5 trillion, mainly due to a decline in sales of smartphones and display panels. Gross profit decreased approximately KRW 1.4 trillion year-over-year to KRW 27.2 trillion and gross margin edged down.
Compared to the last year, SG&A expenses fell in both absolute terms as well as a percent of sales due to a decline in advertising expenses. Operating profit increased KRW 0.8 trillion year-over-year to KRW 14.9 trillion, despite struggles in the IM and DP division, thanks to a strong performance in the memory business, as well as a reduction in SG&A expenses. Operating margin rose 2.4 percentage points year-over-year to 25.4%. Operating profit and operating margin decreased slightly on a quarter-over-quarter basis. In the second quarter, positives from a weak Korean won against the US dollar were eclipsed by effects of a strong won against other currencies, such as the euro and Brazilian real, negatively impacting operating profit QOQ by approximately KRW 400 billion, with effects felt mostly by the set businesses. I'll now briefly review the operating profits by business units.
In the memory business, we continue to generate solid earnings as demand remains strong from data centers for DRAM and strong demand for high-capacitive storage amid a strong softening of prices for NAND flash. We solidify product competitiveness by focusing on sales of high density, high value-added products such as 64 GB and higher server DRAM based on 1x-nanometer and 128 GB and higher for NAND mobile storage. For the display business, earnings decreased year-over-year and QOQ due to weak demand for flexible OLED panels and a deep dip in both sales volume and ASP for LCD TV panels. For the IM division, earnings in the mobile business slid considerably year-over-year as well as QOQ due to weak sales of Galaxy S9 amid a stagnant high-end market. In the network business, earnings improved thanks to increased LTE investments by overseas customers.
For the CE division, earnings in the TV business improved year-over-year and quarter-over-quarter with a major global sporting event boosting sales of premium products such as QLED TV. In the home appliance business, earnings decreased year-over-year due to weak demand for air conditioners despite strong seasonality. Now I would like to share our business outlook. For the second half, we expect earnings to grow half over half, led mainly by the component business on the back of favorable memory market conditions and an increase in shipment of flexible OLED panels. In the set business, we will focus on high-end segments via early launches of 8K TVs and the Galaxy Note 9 amid rising competition and new model launches by other players.
For the component business, we expect memory market conditions to remain favorable thanks to strong demand for server PC memory and launches of new mobile products. We will proactively address growing demand for differentiated products such as high density server memory and high bandwidth memory. We'll also strengthen our technology leadership by increasing our portion of 10 nano class products through 1y production ramp-up and by expanding mass production of fifth generation V-NAND. The System LSI and foundry businesses are expected to achieve a solid earnings as strong seasonality in the smartphone market boost demand for application processors and image sensors. For OLED panels, we expect the flexible panel business to improve its earnings as shipment rises, but the rigid panel business may face intensifying competition with LTPS products. In the LCD panel business, despite rising demand, we expect increased supply from competitors to keep weighing on earnings.
Moving on to set business, new model launches and intense price competition in the mobile business are likely to keep conditions challenging. To address rising competition, we plan to launch Galaxy Note9 early and add new features to our mid and low-end lineups, while continue to work, find ways to enhance cost competitiveness. We expect earnings in the TV business to keep improving as we expand sales of new models, including QLED and 8K TV. For the home appliance business, we plan to secure profitability by focusing on sales of our expanded lineups of premium products. In the mid to long term, as new areas like IoT, artificial intelligence, and 5G transform the IT landscape, we expect to see new demand in component business and widening opportunity for the set business on introduction of new form factors and technologies and increasing connectivity of digital devices.
In the component business, we'll use our cutting-edge semiconductor technology to capitalize on new demand for chipsets used in automotive and artificial intelligence applications, and leverage our strength in OLED panels to take advantage of expanding applications in the IT and automotive industry. In the IM business, we will seek to sustain growth and solidify our leadership by introducing innovative form factors such as foldable displays and leading the move to 5G technology. The total capital expenditure in the second quarter was KRW 8 trillion, including KRW 6.1 trillion for the semiconductor and KRW 1.1 trillion for the display. The total capital expenditure for the first half was KRW 16.6 trillion, with KRW 13.3 trillion allocated to semiconductor and KRW 1.9 trillion to display. Before we move on to presentation from each business unit, I would like to share several data points in key business areas.
For the second quarter, our DRAM bit growth was mid-single digit, and we saw our ASP increase by low single digits. For the third quarter, we expect DRAM market bit growth to be mid-teens, and we will slightly outgrow that of the market growth. For the year, we expect the market DRAM bit growth to be roughly 20%, and we expect to grow in line with the market. For the NAND flash, in the second quarter, our bit growth came in mid-teens, while the ASP declined low teens. For the third quarter, we expect market NAND bit growth to be mid-teens, and again here, we will slightly outgrow that of the market. For 2018, we expect NAND market growth to be low 40%, and we will grow in line with the market.
For panel business, the OLED sales of panel was roughly high 60% of the total display sales. For the mobile business, in second quarter, we shipped 78 million handsets and 5 million tablets. The blended ASP of the handsets was about $220 range, and the smartphone mix of the total handset sales was low 90%. In the third quarter, we expect both handsets and tablet shipment to be similar to that of the second quarter, while we expect the blended ASP in the third quarter to increase from that of the second quarter. The mix of the smartphone within our total handset will remain at low 90%. For TV business, for LCD TV in our second quarter, shipment declined mid-single digit. For 2018 in total, we expect total shipment to decrease by low single digits year-on-year.
I'll turn the call over to the gentleman from each business unit to present their performance and outlook.
Good morning. This is Sewon Chun from the memory marketing team. In the second quarter, on the weak seasonality, in spite of weakness in the smartphone market, thanks to increasing server demand for data center, overall demand growth was solid. For NAND, with price being softened, demand is penned mainly for high-density products from continuation of high-density trend for smartphone, as well as continued increase in server SSD demand. Due to expanding server cloud infrastructure and growing portion of all-flash array. We have gone solely the earning growth by actively responding to Chinese mobile demand for high-density E storage, as well as concentrating on expansion of eight and 16 terabyte high density for all-flash array via stable supply of 64-layer V-NAND at Pyeongtaek Campus. For DRAM, thanks to the high-density trends and expansion of data center infrastructure, server demand remains strong.
PC demand also remains solely demand from large OEMs. Meanwhile, graphic demand was solid as well, thanks to strong gaming demand. With growing demand for TV set build and 5G network infrastructure, as well as increasing high-density memory demand led by rising UHD set-top box portion, solid demand from the consumer segment has also continued since last quarter. For the mobile market, despite concerns about the slowdown in smartphone set growth, contents growth has continued due to the need for high-density memory component for their product differentiation. We continue to drive solely the earnings growth following the previous quarter through strengthening cost competitiveness by proceeding smooth 1x-nanometer product transition and managing product elastically according to each application market conditions. Next, I will comment on the memory market outlook.
In the second half of 2018, overall demand is also expected to be solid because while server demand remains strong, demand for mobile will also be increasing from new model launch season and content growth. For NAND , as BOM burden was relieved, thanks to softened prices, set maker may focus more on improving set performance. We anticipate that SSD adoption will take place in more areas, and all segments will use more high-density E storage. For server, strong cloud service SSD demand, mainly for data center, continues. Along with this, in the enterprise market, adoption of a high-density server SSD over eight terabytes will continue as well, especially for large OEM companies. For mobile, demand for high-density storage, such as 128 gigabytes, is expected to continue, mainly from newly launched smartphone and high-end models.
As for the supply side, even though supply and demand condition may vary depending on qualification status, overall supply of 64-layer products for solution demand, including server, is expected to expand. While closely monitoring the changes in demand for each application, we will secure production competitiveness through expanding 64-layer V-NAND portion. At the same time, we will concentrate on strengthening our competitiveness in the premium market by actively satisfying all-flash array replacement demand, where 10K HDD now prevails. Meeting Chinese and flagship mobile demand, adapting high-density UFS, and preempting high-density demand through UMCP. The fifth generation V-NAND announced last July is expected to be supplied this year, starting from SSD, and we will keep leading the high-density trend in server and mobile application. For DRAM, due to peak seasonality, strong demand for all application is expected to continue. For server, as data center demand expand from the U.S.
market to the Chinese market. As high-performance cloud service launch increases, demand growth is anticipated to continue. For mobile, with new flagship smartphone model launches, memory content will increase even in mid-range models because smartphone makers support high-specification mobile games, on-device AI, and dual camera as differentiation point. Therefore, we expect a positive effect on memory demand. In addition, thanks to back-to-school effect for PC and game console buildup, PC and graphic demand is expected to rise continuously. Demand for high-performance HBM products will also rise due to the increasing necessity of data analysis, fully utilizing AI and machine learning. On the other hand, in terms of the supply side, in spite of suppliers' effort to expand supply growth is more likely to be limited compared to demand growth due to increases in difficulties of 10-nanometer mass production.
Overall supply and demand is expected to remain tight. We will stick to our policy of flexible investment and production in accordance with market conditions. We will stably increase mass production of 1y-nanometer product and push ahead expansion of design-in for all applications. We will also focus on strengthening our product competitiveness via expansion of 1x-nanometer portion continuously. We will also intensify our competitiveness in high value-added markets by expanding sales of our differentiated products, such as high-density server DRAM, HBM2, and LPDDR4X. Effectively respond to market that require ultra-high speed and low power and super slim feature by using LPDDR5, which was developed for the first time in the industry.
In the medium and long-term view, the sub-trend of high performance and high density mainly for data center is expected to continue due to expanding AI services based on machine learning and adoption of in-memory database. The expansion of mobile demand is anticipated to continue thanks to the spread of high density contents as well as increasing need for high-performing devices. For the supply side, next generation technology is becoming more difficult. On top of this, capital intensity has greatly increased. We expect that there may be some difficulties of supply expansion. We will actively respond to customers' demand, as well as concentrate on managing capacity effectively by monitoring and forecasting each application's market, along with supply and demand conditions more closely.
We will try hard to strengthen the sustainable business foundation in the mid to long term by actively responding not only to the existing business area, but also to the needs of a newly emerging market, such as automotive, which will drive the next semiconductor generation via industry cutting-edge technology. Thank you.
Good morning. This is Kuk Heo from the System LSI Business. In the second quarter of this year, overall earnings in the System LSI Business slightly decreased quarter-over-quarter, which is negligible, as weak seasonality slowed demand for mobile APs and DDIs. Nevertheless, image sensor demand continued to rise, thanks to increasing adoption of dual cameras by Chinese smartphone makers. In the second half of this year, our earnings are likely to return to growth quarter-over-quarter as smartphone makers enter strong seasonality. To be specific, the growth will be backed by strong demand for OLED DDIs and high pixel image sensors. The former for use in flagship smartphones, and the latter amid increasing adoption of dual camera and triple cameras.
We plan to diversify our customer base by securing orders for mobile APs from China, and to expand our solution offerings by developing chips for use in automotive and IoT applications. With a view to the mid to long term, we will focus on developing cutting-edge chipset for use in 5G multiple cameras and display panels. By doing so, we will try to lead the market and establish a stable business structure by achieving high growth compared to the market. Thank you.
Good morning. This is Ryan Lee from the Foundry Business. In the second quarter, total earnings continued to grow quarter-over-quarter, thanks to a strong demand for high performance computing chipsets, mobile APs, and image sensors. Our efforts to diversify our customer base are paying off. By securing orders for 8-inch specialty products, we have established a foundation for achieving stable earnings. In the second half of this year, despite uncertainty over demand for high performance computing chipsets, we expect our earnings to be favorable, thanks to rising demand for high mobile APs and image sensors. We will continue to strengthen our process technology leadership by starting 8 nano mass production and the EUV 7 nano risk production.
On a full year basis, following sales of $9.8 billion in 2017, we expect 2018 sales to exceed $10 billion and secure a strong second place in the foundry market. For the mid-long term, by strengthening our process portfolio, including advanced nodes, FD-SOI, and 8-inch, we will strive to expand the customer base by more than twice by 2021. Foundry business will become the new growth engine of Samsung Electronics. Thank you.
Good morning. This is Kwon-young Choi from the planning department of Samsung Display. In the second quarter, total earnings in the display business decreased quarter-over-quarter due to weakened profitability in both the OLED and LCD business. For the OLED business, earnings decreased quarter-over-quarter, despite increased utilization for rigid products, as demand from major customers for flexible display continued to slow. In the LCD business, earnings declined quarter-over-quarter due to a decline in shipments alongside a continuous slide in panel ASP. In the second half of 2018, we expect sales in the OLED business to increase half-over-half on increased shipments led by rebounding demand for flexible display. Under these circumstances, we plan to increase our market share by actively addressing customer demands, enhancing our cost structures, and strengthening our technology competitiveness.
At the same time, we will strive to secure new growth engines by embedding more value-added features into our panels, such as fingerprinting technology, and reinforcing our competencies in new applications such as foldable displays. For the LCD business, under peak seasonality in the back half of the year, we expect demand to keep growing for premium TV panels for high resolution and ultra-large TVs. However, we expect improvement in profitability to be limited due to both intensified competition and capacity expansion by Chinese manufacturers. In preparation for such conditions, we will strive to secure profitability by further differentiating our value-added products, such as panels for quantum dots and 8K resolution TVs, and reinforcing strategic partnerships with our major customers. Thank you.
Good morning, everyone. This is Kyeong-Tae Lee from the mobile communication business. I would like to share our second quarter results and the outlook for the IM division. For the second quarter of the mobile communication business, market demand for both smartphone and tablets increased slightly compared to the previous quarter amid weak seasonality. For the smartphones, the overall market ASP declined as demand focused on low-end and mid-range products. Our shipment and revenue decreased QOQ due to weaker-than-expected sales of flagship models, including the Galaxy S9, and the effect of having discontinued production of older low-end models. Sales of Galaxy S9 and S9+ fell short of our targets amid a slow premium smartphone market and rising competition among flagship models. These factors considerably affect the QOQ decline in revenue in the second quarter.
Moreover, operating profit also decreased significantly as marketing cost as a percentage of total revenue increased with intensified marketing activities to expand the sell-off. The network business achieved solid sales thanks to increased investment in LTE expansion by our major overseas partners. Next, let's move on to the outlook for the second half of 2018. Market demand for smartphone and tablet is expected to grow half-over-half as we enter a period of strong seasonality. However, we expect the environment to remain challenging as of launch of a new product featuring higher specs and intensified price competition in order to increase the demand. We aim to expand the sales of flagship models via an earlier-than-usual release of a new Galaxy Note, which offers exceptional performance for a reasonable price. Detailed information about the new Galaxy Note will be revealed at our Unpacked event on August nine in New York.
We will also strengthen price competitiveness and actively adopt advanced technology in our mass models to aggressively respond to market conditions. Offering more sophisticated specs throughout our lineup will make it difficult to maintain profitability. In response, in order to secure our profitability, we will focus on expanding sales of our competitive new models in all segments from flagship to mass models and execute well-organized and effective marketing campaigns tailored to each region's seasonality. As for the network business, we will supply our major partners with the next-generation network solution for 5G commercialization and continue our investment and preparations to becoming the global leader in next-generation network solutions. IM Division will thoroughly prepare for the upcoming years based on new technologies such as 5G, IoT, and AI.
From a product perspective, we will regain our leadership in hardware technology by reinforcing core features to the ultimate level which we have the strength, and aggressively adopting cutting-edge technology, creating innovative form factors, and taking leadership in 5G technology. Furthermore, our Bixby-based ecosystem will expand application of AI service to a diverse range of products that includes not only smartphones, but also consumer electronics such as TVs, refrigerators, air conditioners, and IoT devices. At the same time, we will strengthen cooperation with third-party partners. Based on this development of our ecosystem, we will improve user satisfaction via personalized services and amplify synergies user services such as Bixby and Samsung Pay, laying the foundation for the monetization of our service business. Thank you.
Good morning. I am Kyung-ho Park, Vice President of Visual Display Sales and Marketing Team at Samsung Electronics. Let me start with the current market conditions and our result for 2018 Q2. The TV market in Q2 has decreased from last quarter due to continued global economic slowdown. The market has grown Y-o-Y due to sports events of this year. Samsung's results significantly improved due to a full-scale start of Samsung's new model sales, especially driven by extended sales and strategic products like QLED and ultra-large screen TV. Marking second year of its release, Samsung QLED was evaluated as the best TV of all time by German and the U.S. prestigious tech media. In addition, the QLED also received positive reviews from customers and consumers.
As for the ultra-large screen lineup of 75 inches and above, Samsung is expanding and leading the market while recording high market share of far above 50%. Also, Samsung is leading the large screen TV market's growth by extending 82 inch lineup. With this trend, sales of both QLED and ultra-large screen TV tripled Y-o-Y, and the average prices significantly increased in the course of innovative product mix restructuring, contributing to profitability increase. The digital appliances market in Q2 has shown a moderate growth in advanced economies, the overall market demand has decreased Y-o-Y due to economic instability in emerging markets. Samsung continued to expand sales of premium products like Family Hub Refrigerator and Cube Air Purifier. The result has slightly decreased Y-o-Y due to weak demand for seasonal products like air conditioner. Now I will share the market prospect for the second half of the year 2018.
The TV market in the second half is projected to grow year-over-year, mainly in the advanced market. Samsung will strengthen leadership in the premium TV product marked by actively responding to year-end peak season, mainly with QLED and ultra-large screen TV. Based on largely raised awareness of QLED, Samsung will complete a trend of QLED stamina by maximizing its peak season sales through an advanced partnership with main customers. For ultra-large screen lineup of 75 inches and above, we will promote ultra-large screen's benefit and consumer communications that ultra-large screen is not that big. This way, Samsung will build its strong brand awareness that is associated with ultra-large screen TV.
By releasing industry-first AI-based QLED 8K that delivers a new sense of realism experience enabled by integration of picture quality, sound quality, ambient mode, and smart feature technologies will be a market leader that paves a new way for ultra-high picture quality TV. We will achieve high profits by continuing our market leadership in the premium TV market. As for digital appliance businesses, demand is projected to show a stable growth in the advanced markets like North America and Europe. In emerging markets, demand could decrease due to economic instability. Samsung will strengthen promotion for regional peak season like Black Friday, expand sales of new premium products like Chef Collection and large capacity dryer, and reinforce sales of builder and built-in home appliances to focus on securing profitability. Thank you.
Thank you. This concludes the management's presentation. We'll turn the call over to questions and answers.
Q&A session will begin. Please press star one, star and one if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, star and two on your phone.
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The first question will be presented by Ricky Seo from HSBC. Please go ahead with your question.
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I have first a question regarding the memory business. There is talk in the market that Samsung Electronics will focus its strategy more on expanding its market share, especially around servers, given the fact that it's making movements to increase supply and also making quite a lot of investments. Can you confirm whether your company's strategy for the memory business has indeed shifted from the profitability focus to a market share focus? Can you share us some strategic direction in your memory business going forward?
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As we have mentioned during previous conference calls, our focus is on mid to long term profitability rather than short term growth in volume and size, and that strategy has not changed. In the second half, there is seasonality as well as a strong demand expected, especially around data centers and smartphones for high density and solution-based products. That's why we expect the supply and demand to remain tight in the second half.
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That is why we are focused on meeting and responding to the customer demands, especially around the 64GB server DRAMs, the 8TB SSDs and HBM2.
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Go ahead, Ricky, for the next question.
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Question for the System LSI was regarding the image sensors. A lot of the smartphones are now adopting triple cameras. I would like to hear your view regarding the image sensor market and an update on how you're preparing to meet the image sensor market demand. Recently, you've converted some of your DRAM capacity to image sensors. Would it be possible for the company to convert even more capacity to image sensors?
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I'll answer that question first by giving you an update on the market as well as our outlook, and then share our plans about capacity management.
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First of all, regarding the triple camera. The triple camera offers various advantages such as optical zoom or ultra wide angle, also extreme low light imaging. That's why we're expecting more and more handsets to adopt triple cameras, not only in 2018, but next year as well. By next year, about 10% of handsets are expected to have triple cameras, and triple camera adoption will continue to grow even after that point.
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Given this market outlook, actually we've already completed quite a wide range of sensor lineup that can support the key features such as optical zoom, ultra wide viewing angle, bokeh, and video support, that we're able to supply image sensors upon demand by customers.
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At the same time, we will continue to develop higher performance image sensors that will be able to implement even more differentiating and sophisticated features based on triple camera.
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To answer your second part of your question about capacity plan from the foundry business side, given the expected increase of sensor demand going forward, we are planning additional investments to convert line 11 from Hwaseong DRAM to image sensors with the target of going into mass production during first half of 2019. The actual size of that capacity will be flexibly managed depending on the customer's demands.
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Following question will be presented by Jong-woo Yoo from Korea Investment & Securities. Please go with your question.
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I have two questions. The first question is about memory. Your second quarter memory performance, some are saying was a bit below what markets were expecting. Bit growth-wise, second quarter bit growth was a bit below what you had originally provided as guidance. Can you give us a bit more detail of your second quarter memory business and its performance? Second question is about the TV business regarding MicroLED TVs or displays. Currently, the ones that exist are commercial applications. Do you think it's possible to develop MicroLEDs for consumer applications, and if so, when would such a product be available? Do you have ways of addressing the cost, which is one of the prohibiting factors of MicroLED in consumer applications?
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To explain the memory business performance in second quarter, while the NAND actually increased its shipments because there was demand driven by stable prices. On the DRAM side, there was a weaker demand on the mobile application side, and also the issues on the 1x-nanometer production for servers also had an impact so that we were under the guidance that we provided last quarter. Due to this change in product mix and also because of the initial cost related with the ramp-up of Pyeongtaek upper level, there were limitations in how much cost savings we could realize.
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To give a bit more detail about the 1x-nanometer production, there was a temporary increase in defects for 1x-nanometer during second quarter. Given the territory of technical difficulty we are working in, I think this was something that could normally occur in the process of ramp-up. We have been able to normalize the situation, and we do not expect this to have impact further down the road.
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To answer your second question about the MicroLED. MicroLEDs are displays that do not have a color filter, and therefore they are able to emit the colors itself. In terms of color recreation as well as contrast of viewing angle and the fact that it's a modular design, it's a totally new concept of display. We're actually preparing MicroLED-based products for both commercial and home entertainment applications. The commercial product, which is The Wall, is actually orderable based on a reservation basis. We are planning for mass production of The Wall starting from around October. The home entertainment version of MicroLED, we're currently targeting the product launch for first half of next year. It will be a slimmer version than what you can see currently.
In terms of price ranges, the Samsung MicroLED products will be launched at a price range where customers are able to accept and also what would be viewed as a reasonable price range.
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The following question will be presented by SK Kim from Daiwa Capital Markets. Please go ahead with your question.
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I have two questions. First question is about the mobile business, about the DRAM demand and supply situation. There's a lot of talk in the market of whether the DRAM demand has already reached the peak or has not yet. Can you share your view about the DRAM supply and demand situation, not only for the second half, but also for next year, 2019? In the mid to long term, do you think that in the DRAM industry, there will be a supply reduction in supply volatility so that overall this stable supply would continue in the mid to long term? Do you think that's a possibility? Second question is about the mobile business, S9 in particular. I'm sure the company has studied the reasons why S9 sales were below what was expected. What were the main causes, do you think?
Regarding with that, if the company continues to compete on specifications, that will probably further increase the BOM cost burden. There's concerns in the market that this would reduce margins further. Given this scenario, how does the company plan to respond in terms of its high-end flagships?
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To answer your first question, at least for the second half, there's seasonality and also there's strong demand expected from data center as well as mobile applications. Therefore, despite the industry's efforts to increase supply, we expect the industry situation to remain solid because it would not be easy for the increase in supply to catch up with the growth in demand.
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Regarding the outlook for 2019, even though it's early for us to say specifically, first half usually is a weaker season, there could be some seasonality effects in the first half. For the full year 2019, we're expecting the industry to remain stable, especially with strong server demand continuing until next year. There could be some changes or volatility in the supply-demand situation, depending on how the industry is able to complete the migration to 10 nano class technology.
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Even though there could be some short-term fluctuation in supply and demand due to factors such as seasonality, we think that in the mid to long term, given the fact that there are major drivers for increase in server demand, especially applications such as AI, machine learning, and 5G. On the other hand, the supply side, given the fact that we are in very difficult process territory and also, going forward, there will be greater capital intensity required to add on new supply. Given these two factors, we expect mid to long term, the industry to remain quite stable. To answer your second question regarding the S9 and the reasons for its weak sales. First of all, overall in the premium smartphone segment, the demand remains weak.
We also see that as smartphones become a more high spec and product differentiation is becoming less clear, the globally handset replacement cycles are getting longer. Also, the higher price points of premium products appears to be driving market resistance. To overcome these challenges, we implemented financing programs to ease initial consumer burden, including trade-in programs. Due to fierce market competition and also differences country by country in terms of situation, it was difficult to reap immediate effects. To answer the second part of your question, which was about what we plan to do. We have noticed that for some time, we have been focusing on ensuring high level of completeness in the actual user experience and ensuring seamless and convenient user experience, which may have resulted in a conservative approach to adopting new technologies on our models.
In the future, especially around the premium products, we will be enhancing the core functionality while also actively adopting leading technologies to provide differentiated value to our customers. Given the fact that we expect 5G and new form factors to bring energy to the market, we will be preparing visibly to tap this breakthrough technology. This is the approach that we will take to not only increase sales, but also to improve profitability.
The following question will be provided by Nicolas Gaudois from UBS. Please go ahead with your question.
Good morning, thanks for taking my questions. I have two related to memory. The first one is coming back to server DRAM demand. There's been a lot more debate recently on demand from hyperscale and the inventory level at some customers. Have you seen on your side any changes of behavior recently from either Chinese or U.S. customers? How would you expect overall server bit DRAM demand growth to change in 2019 versus 2018? Again, this is for total server bit DRAM demand. Second question, you have approximately half of your floor space on the second floor of Pyeongtaek Fab still available. When do you expect to reach full capacity, and how should the remaining capacity be split between DRAM and NAND flash? Thank you.
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Given the very dynamic changes in the cloud service market, it's difficult to give you a specific outlook towards next year, 2019. We do expect a very strong demand, especially around the 64GB and plus products for the higher density and for server applications to remain strong. Especially from the Chinese data center companies, we expect that demand to continue in the second half to be solid. In addition to the Chinese server customers, the U.S. server customers, which are larger in scale, we expect that demand to remain strong as well.
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As we mentioned during the presentation, regarding 2019 server DRAM demand, we expect the DRAM demand for servers to continue solid growth next year. Regarding customer inventory levels, even though there will be differences customer by customer, given the fact that the inventory levels were very low at start of the year, it's higher than where it was earlier in the year, but still lower than what customers would find to be normal inventory levels.
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Regarding your second question about the upper level of Pyeongtaek, we haven't decided yet what to do with the remaining space. We will be using it flexibly depending on the market situation.
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The following question will be provided by Peter Lee from Citigroup Global Markets Securities. Please go ahead with your question.
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I have two questions. First question is about the DRAM side. In the first half, there was a bit of an oversupply of NAND, which drove a decrease in prices for NAND in the first half. Do you think the price softness will continue in the second half? Do you think this will lead to greater demand? If so, how? Also, can you share with us the supply and demand outlook for NAND in 2019? Second question is about the IM business. I'm wondering if there was any reversal of provisioning related with the Apple litigation, which came to a close. Was there a reversal of provisioning that was included in your second quarter IM performance? If so, can you share with us the size of that provisioning reversal?
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To answer your first question, as you can see in the NAND performance, actually, because prices stabilized, there was an increase or greater increase in demand, especially around the high-density products. We expect this to continue in the second half so that there will be greater adoption of SSD as well as 128GB mobile storage.
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Looking forward to 2019, we think that the same factors will be in place: greater adoption of SSD, as well as mobile devices trying to differentiate by adopting more storage. Those, we believe, will keep demand solid. The variables for next year would be how the ramp up to 90 layer levels actually unfolds, as well as qualification situations for specific customers and applications. Depending on how these two factors play out next year, we think that the demand and supply situation may be different depending on product and also application.
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Regarding your second question, yes, there was the impact from the end of the Apple patent litigation that did reflect in our second quarter earnings. Due to confidentiality clauses in the agreement, we are not able to disclose details. I can also share that there will not be further impact on our performance in the following periods.
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The following question will be presented by Ko Jeong-woo from NH Investment & Securities. Please go ahead with your question.
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I have one question about the display business. There was a recent media article about Samsung going into QD-OLED, about installing lines and starting pilot production. Can you comment regarding these news reports and share with us, if possible, your business direction regarding QD-OLED?
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In the display business, our key focus is on gaining competitiveness and maintaining competitiveness in both the mid to small size as well as large size segments. Given the investments in China in 10.5G, we expect, especially in the large size segments, the competition and industry situation would worsen. Therefore, we want to actually move away from the existing capacity competition and focus more on quality rather than scale.
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Therefore, our focus on quality rather than quantity translates into a short-term strategy of trying to achieve quality or qualitative growth by focusing on high-end differentiated products such as ultra large size, quantum dots, 8K, as well as frameless products. On the mid to long term, this means that we are looking into various technologies for the large TV segments, and QD-OLED is one of many technologies we are currently considering and researching and developing to meet the more sophisticated customer needs in the large TV segment. We are looking at various technologies as candidates, and we will continue to closely collaborate with our customers so that we are able to deliver products that satisfy customer needs on a timely basis.
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We will take questions for two more attendants.
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The following question will be provided by Claire Kyungmin Kim from Daishin Securities. Please go ahead with your question.
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I have two questions. First question is for DRAM. As all of the DRAM manufacturers move on to higher process technology, the migration is becoming more and more difficult, and I think cost saving is becoming quite a challenge. In that context, can you share with us your roadmap in terms of process migration at the 10 nano class? My second question for the mobile side is the Note 9 launch, which will be coming. Compared to the previous Note product or the S9, what are the differentiating features of the Note 9? Also, how do you plan to expand the sales of it? How much of a sales volume are you expecting from the Note 9?
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Well, first of all, to answer your question about our migration regarding 1y, we've already started sampling and are in the process of receiving the reviews and assessments from our customers. We have started the 1y mass production in first half and will continue to increase the supply going forward.
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Regarding 1x, actually, it's counting for more than 50% in terms of wafer count. Combining our 1y and 1x, we expect that the 10 nano class processes would be accounting for around 70% of our capacity by year end or production by year end. Regarding the next 1z, it's difficult to give you details about mass production schedules. We are developing 1z according to plan. We are planning on maintaining the technology leadership in the industry.
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To answer your second question about the Note 9 and how we plan to differentiate that. As you know, Note customers are known to appreciate and use a lot of the S Pen based productivity features, such as note-taking or drawing. They watch a lot of videos and also use the multimedia functions, for example, by playing games.
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Given this insight into the Note 9 customer base, in Note 9, we have focused on, first of all, providing the best ever level of performance for these core features and functions. We've built in more functions around the distinguishing S Pen. We are offering new experiences by combining hardware, software, and services.
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We have increased the product value around these key essential user features, therefore improve the product competitiveness. We'll be offering the Note 9 at reasonable prices in order to maximize sales. Of course, the details of Note 9, please look forward to the Unpacked event, which is scheduled for August 9th.
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You've also asked about how much sales we're expecting from the Note 9. Given the fact that Note 9 is being launched earlier in the year versus previous models, also that we have put in a lot more value, offering it as reasonable price points, we expect in the second half Note 9 to sell more than its previous models. To ensure the successful launch, for each phase, we will be supporting the product by mobilizing all of our sales and marketing resources. Last question, please.
The last question will be presented by JJ Park from JP Morgan. Please go ahead with your question.
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My first question is for the memory. Some are saying in the market that the issues that you've had with the 10 nano processes have actually resulted in delay of investments for second floor of Pyeongtaek. Regarding these rumors, can you share with us your investment plans for the upper floor of Pyeongtaek in the second half? Also, can you share with us your targets regarding when you would go into mass production for number 2 line in Xi'an as well as number 2 line in Pyeongtaek that's currently being constructed? Regarding your first question about the investment plans for upper level of Pyeongtaek, actually, the investment plans and expansion plans are following original plans. The process migration or other issues have not impacted our investment plans for upper level of Pyeongtaek for 2018.
For 2019 investments, we are currently in the process of reviewing that, but we will decide the investment plans depending on customer demand as well as market situation. Regarding number 2 line of Xi'an, as we have originally mentioned, our targets still are to start operation around late 2019 with target mass production in 2020. For Pyeongtaek, we are doing the groundwork, but it takes about two years from where we are now for actual lines to be in operation, and we have not yet decided specifically regarding mass production schedules or product mixes. My last question is for the IM, the foldable form factor. In making a foldable form factor, what do you think is the greatest challenge or the stumbling block? Is it more of a price? Is it a UI? Is it a specific technology that needs to be overcome to produce and supply a foldable phone?
Can you share with us some of the challenges that you see? In terms of developing the foldable smartphones, the foldable smartphones need not only innovation in terms of the display, but other parts as well, including battery as well as cases. At the same time, there needs to be a UX as well as user scenarios developed to optimize, to match the new form factor, and that's why we have been engaged in research and development of the foldable smartphone for several years. The introduction of this new form factor is expected to bring new energy to the rather stagnated mobile market. To give you an update on where we stand, we're in the process of stabilizing the part performance as well as durability by working together with parts companies.
Also, we are at the same time focused on developing software and services optimized for this new form factor in order to raise the level of completion.