Earnings Call: Q3 2016

Oct 27, 2016

Good morning and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the Fiscal Year 2016 Third Quarter Earnings Results by Samsung Electronics. This conference will start with a presentation followed by a division of 16 Q3 earnings results by Samsung Electronics. Good morning. This is Robert Thanks for joining our Q3 earnings call. With me representing business units are Mr. Chen Zai Won, Senior VP of Memory Marketing Mr. Ho Gook is the VP of System LSI Mr. Lee Chang Hoon, Vice President of Samsung Display Mr. Yi Deong Tae is the Vice President of IT and Mobile Business and Mr. Lee Yoon is the Senior VP of Visual Display Business as well as we have Mr. Kim Itae, he's a VP of IR Group. If I start, 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 could cause our actual results to be materially different from those expressed in today's discussion. With that, let's start the Q3 results analysis. In the 3rd quarter, the total revenue was KRW47.8 trillion, a 7.5% year on year decline. This decrease was mainly due to the Note 7 issue despite the increase of sales in the memory and OLED businesses. The gross profit for the quarter was KRW 18.4 trillion by KRW 1.7 trillion year on year decrease. But the gross profit margin as a percent of sales held steady due to higher gross profits from the sales expansion of premium products in the OLED and Consumer Electronics businesses. Our SG and A expenditures increased y on y, mainly due to the recall costs related to Note 7. The operating profit decreased by KRW2.2 1,000,000,000,000 year on year to KRW5.2 trillion and the operating profit margin declined by 3.4 percentage point to 10.9%. The earnings of the component business decreased marginally year on year due to price correction of DRAM during the first half of this year. However, on Q on Q basis, its operating profit increased due to sales expansion of high end products such as SSD, flexible LED under the stabilized ASP environment. In the SAP business, earnings declined in the I'm division due to the loss resulting from the Note 7 issue, but the consumer electronics business continued to grow year on year driven by the sales growth of SUHD TVs and premium home appliance products. In this quarter, strengthening of the Korean won against major currencies such as U. S. Dollar and euro had a negative impact on the operating profit quarter on quarter. We figure it's approximately KRW700 1,000,000,000 mostly on the component business. Other non operating profit was KRW540 1,000,000,000, mainly from the sales of various investments, including investments in ASML. Now I would like to address the business outlook. In the Q4, we expect the overall earnings to improve year on year. The mobile business is expected to recover its earnings to the similar level as 4Q last year through solid S7 sales, while earnings in the component business is projected to improve year on year. For the semiconductor business, we expect the earnings to improve due to the sales expansion of the V NAND based SSD. For the display business, we expect the earnings to improve also from LCD business recovery year on year. However, its Q on Q earnings will decline due to the reduction of flexible OLED panel shipments from discontinuation of the Note 7. For 2017, we will focus on solid earnings growth through the normalization of mobile business, while improving earnings from the component businesses with expansion of OLED panels as well as vertical NAND products. Regarding our memory business, we expect the earnings in NAND business will increase significantly year on year, led by the supply expansion of the highly profitable vertical net. We will strengthen our technology leadership by expanding 64 layer vertical NAND as well as 1x nanometer DRAM. Also in system LSI business, we will enhance profitability by maintaining a high utilization rate for the 14 nano and above capacities while expanding the leadership position in the 10 nano process technology. For the OLED business, we expect to achieve significant earnings improvements year on year. We plan to expand the supply of high end flexible OLED panels for external customers based on unrivaled technology leadership and capacity. With regard to the I'm business, our top priority will be regaining consumers' confidence and expanding sales of the new flagship products with a differentiated design and innovative features. Also, we will further strengthen our competitiveness through continuously enhancing solution capabilities such as KNX, Knox, Samsung K, Cloud Systems and Artificial Intelligence. For the TV business, we will continue to solidify our leadership in the premium market based on quantum dot technology. Regarding the home appliance business, we will focus on improving earnings by expanding sales of premium products and strengthening the B2B business. Now I'd like to comment on our capital expenditure plan. We expect the total capacity expenditure for this year to be at a record high of over KRW 27,000,000,000,000. In particular, we are focusing on investments in OLED business with a significant demand increase in 2017 and a strong demand for vertical NAND. Capacity I'm sorry, the CapEx for the semiconductor business will reach KRW13.2 trillion with about 8 to 2 split between memory and system aside. For the display business, the expenditure is expected to reach close to KRW11 1,000,000,000,000, which is more than double from that of the last year. During the Q3, we invested KRW6 1,000,000,000,000 in CapEx, including KRW3 1,000,000,000,000 for the semiconductor and KRW2.5 trillion for the display division. This brings the cumulative CapEx expenditure at the end of the 3rd quarter at KRW14.1 trillion. We've completed the US10 $1,000,000,000 special buyback and cancellation program last month as planned. We invested approximately KRW11.4 trillion during the 4 phases, and we were able to repurchase and cancel 6,600,000 common shares and 2,300,000 preferred shares. Currently, we are reviewing the overall shareholder return policy, including how we will utilize the remaining allocated capital from last year's free cash flow. At this point, we are leaning toward using the allocated capital from unused portion from 2015 for share buybacks and cancellation. However, we will update you on the details of overall shareholder return policy by end of November. Before the presentation of each business units, I would like to share with you several data points relating to the key business areas. In the semiconductor DRAM, for the Q3, our bit growth came in around mid-twenty percent growth, while we saw ASP decline of mid single digit. For the Q4, we expect the market DRAM bit growth to be low single digit and we expect our bit growth to be flat Q on Q. This will bring 2016 annual market bit growth at high 20% and our bit growth should be in mid-thirty percent. For NAND flash, in the 3rd quarter, our bit growth came in at low 20% and we saw ASP decline of low single digit. In Q4, we expect the market NAND bit growth to be about 10% and our bit growth would be mid teens in Q4. This brings the total year on year bit growth of NAND flash about mid-forty percent. For handset business, total sales of handset in the 3rd quarter was about 89,000,000 units, and we also had 6,500,000 tablet sales. The blended ASP in the 3rd quarter came in at high $180 with at about mid-eighty percent. Q4, we expect our shipment of handsets to be similar to that of the 3rd quarter, and we expect to see an increase of tablet sales in Q4. Blended ASP for our handsets in Q4, we expect it to decline slightly. The mix of the smartphone within handset will remain at about mid-eighty percent. For TV business, sales of our LCD TV in Q3 was roughly 11,000,000 units, and we expect to see about 50% increase in Q4. Now I'll turn the call over to gentlemen from the business units to present their specific outlooks and the results and the outlook. Thank you. Good morning. This is Sewon Jeon from the memory marketing team. In the Q3, the demand for memory increased remarkably due to seasonality and new smartphone launches. The memory division achieved outstanding earnings growth by actively responding to increased demand for high density mobile server products, including free NAND. For NAND, the supply shortage has intensified due to continued strong demand for mobile storage and SSD. Demand for mobile storage such as eMCP and eMMC is surging due to expanded adoption of high density products over 64 gigabyte through solid demand from Chinese smartphone makers. For server SSD, where demand is concentrated on Samsung products, demand for high density over 8 terabyte increased due to the expanding transition of 10 and 15 ks RPM HDD2 Enterprise SSD. We focused on addressing the demand for mobile storage over 64 gigabyte and high density enterprise SSD, such as 8 and 16 terabyte as well as on expanding supply of PC NVMe over 2 56 gigabyte. We achieved outstanding improvement in profit by continuing migration to 3rd generation free NAND, which is continuously securing profitability. For DRAM, mobile demand remained strong, driven by expanded adoption of high density mobile DRAM due to smartphones with higher specifications. High density server demand for data center also increased, led by increased adoption of the Broadwell platform. For PC, following the previous quarter, price continued to increase under strong seasonal demand. Demand for 20 nanometer products increased due to the supply and demand imbalance for some applications. We focused on responding to this increased demand by improving process efficiencies and utilizing available sources. By doing so, we achieved outstanding improvement in earnings compared to the previous quarter with busy month exceeding our initial forecast. Next, I will comment on the memory market outlook and our strategy for the 4th quarter. On end, demand will continue to remain strong, driven by increasing mobile contents and server SSD adoption. Supply and demand conditions will be tight as strong demand will continue for SSD in all segment driven by the launch of all flash array systems equipped with products over 8 terabyte. Also, increasing demand for high density products over 2 56 gigabytes will contribute to this result, led by accelerated increase of PC SSD attach ratio and expansion of high density NVMe adoption. For DRAM, although there will be some impact for low year end seasonal demand, the overall market situation is expected to be favorable. This is because of demand for mobile remaining solid, thanks to new smartphone launches, continued strength in 32 gigabytes and 64 gigabytes server DRAM demand, led by expanded transition to ProDuel platform and increased 8 gigabyte attach ratio for PCs. We will focus on improving focusing on a profit focused product mix based on our unrivaled competitiveness of VLAN and 20 nanometer DRAM. Next, I will comment on our strategy for 2017. On end, overall demand will increase due to content growth in all applications, especially our next set of high density mobile storage over 64 gigabytes is expected to increase due to higher specifications of smartphones such as dual camera. Demand for server SSD will remain strong due to an increasing portion of high density data center products and spending adoption of all FlashArray in enterprise. Also, as SSD adoption in PC continued to grow continued to increase, this attach ratio for notebook is expected to exceed 50%. Although demand is expected to be remain solid in 2017, our industry's 3 d NAND ramp up status will be a key variable for supply and demand. We are focusing on investing in concentrate on concentrate on premium markets such as high performance server SSD. Also, in addition to highly profitable 48 layer of WinNAND, we will strengthen technology leadership and secure differentiated profitability by focusing on 64 layer process migration. For DRAM, supply and demand is expected to be balanced, led by solid growth of demand. We project increasing adoption of mobile DRAM over 6 gigabyte and strong demand for high density server DRAM due to dual server platform launches and expansion of cloud services. Meanwhile, in terms of supply and demand, we expect some uncertainties will remain in the first step such as industry supply expansion due to process migration. We will focus on maximizing profit through maintaining the basis of investment and supply management, taking into account the market situation. Also, we will strengthen our product and market leadership by supplying high performance, low power, high density products and by continuing cost reduction through 1x nano ramp up. Now moving on to the System LSI Business. In the Q3, we have achieved solid earnings due to strong 14 nanometer foundry demand, expanded shipment for shipment of mid to low range associates and consistently increasing sales of image sensors in China. In the Q4, we expect the demand to remain solid mainly for LSI products. Despite the seasonal component inventory adjustments in the market. Also, we have started the industry first mass production of 10 nanometer logic process and will commence shipment within the year. We will work tirelessly to maintain our leadership in the cutting edge process technology. In 2017, we will begin mass production of 10 nanometer products in full scale, diversify 14 nanoproducts customers and applications and further differentiated the key technologies for LSI products such as image sensors and OLED DDIs. By doing so, we will strive to ensure our continuous growth. Thank you. Good morning. This is Chang Lee from the Planning Department of Samsung Display. During the Q3, total earnings for the Display business improved significantly Q o Q. This was driven by increased earnings from OLED panels as well as increased shipments in larger sized LCD TV. For the OLED business, 3rd quarter earnings improved sharply Q o Q with increased shipments of high end products such as flexible display based on the strong demand for flagship smartphone. For the LCD business, our 3rd quarter earnings turned the profit on the stabilized ASPs led by favorable supply demand situation. Also, we have strengthened profitability with improved yield and continued cost reduction as well as expanded value added products, especially from the large size UHDs. In the Q4, on the strong seasonality of the smartphone market, we expect OLED demand to rise constantly as major set makers pursue product differentiation in the form of hardware specification. Under these circumstances, we expect to produce solid results through actively addressing demands of flagship products as well as enhancing product mix. In the 4th quarter, UHD TV market growth and size migration towards larger screens are expected to continue under stable panel pricing. In preparation for these market conditions, we will make the best efforts to improve sales and profits by focusing on cost reduction and yield improvement as well as expansion of value added products such as large size ultra large size, high resolution and curved panels. Now I would like to present the outlook for the display market and our core strategies for 2017. For the OLED business, we will strive to achieve a significant improvement of earnings Y o Y through expanding supply of the flexible display to address major smartphone customer demands. Although we expect competition to intensify in the LCD industry under the capacity expansion, we also expect that the market for premium TV panels such as UHD and ultra large size TV panels will continue to grow. These circumstances will make best effort to strengthen profitability by improving competitiveness of value added products, focusing on UHDs and larger sized TVs as well as expanding a portion of differentiated products such as frameless and curved TVs. Thanks for listening. Good morning, everyone. I am Kyung Tae Lee from the IT and Mobile Communication business. I would like to present our Q3 business results and the future outlook for the I'm business. Our earnings for the mobile communication business declined significantly Q on Q due to the Galaxy Note 7 issues. However, due to the strong sales of our existing models, including the Galaxy S7 and S7 Edge, our smartphone shipments have only slightly decreased Q on Q. For the network business, our operating profit improved from the previous quarter mainly because of supply expansion of product for new frequency bands to our major partners. Next, let me move on to the outlook for outlook of the 4th quarter. Market demand for both smartphone and tablets is expected to increase Q on Q as we enter the year end peak season. As for the mobile communication business, we will push forward to achieve the business earnings at a similar level to the same period in the previous year by focusing on the sales of the Galaxy S7 and S7HE, which have shown continuous demand and stable profitability. Moreover, we will aim to increase our smartphone shipment Q on Q with the newly introduced models in the mid- to low end segment. As for the network business, we will focus on improving our business performance by leveraging the LTE expansion in the emerging markets and extending supply of product for dual frequency band. Lastly, I would like to address the outlook for the year 2017. We are expecting some difficulties until the Q1 of 2017, but we will achieve a business turnaround with the release of our new flagship smartphone. We will continue our differentiation in hardware, including design and camera. In terms of software and services, we will expand the service coverage and available modules for the Samsung Pay and Cloud while introducing artificial intelligence related service to provide new values to our customers. With these efforts, we will do our best to regain trust from our dear customers and get our business back on track as soon as possible. Thank you for listening. Good morning. I'm Yoon Lee from Visual Display Sales and Marketing team. For the TV business in the Q3, global TV demand decreased compared to the same period last year due to economic slowdown in major emerging markets, including Latin America. Under such market conditions, our performance improved year on year by enhancing promotional activities in various local markets, preparing for the upcoming peak season and by expanding the sales of premium products such as SUHD and COVID TV. In particular, significant sales increase in North America and positive outcome from Latin America also contributed to such improvement in the 3rd quarter. Our efforts in Latin America started to show tangible results as we have increased operational efficiency and strengthened proactive cooperation with our channel partners since last year. Other digital appliance business in the 3rd quarter, although demand in North American market continued growth momentum, global market demand declined year on year due to the slower market growth in China and the impact from continued economic downturn from emerging markets. Despite these circumstances, earnings improved compared to the previous year, led by increasing sales of premium innovative products such as Breeze Free Air Conditioner and Chef Collection Kitchen Appliances. Especially, strong sales in Korea and Southwest Asia market greatly contributed to the earning growth. For the TV market in the Q4, as year end peak season is around the corner, we expect to see an increase in demand quarter on quarter. However, due to the continued economic recession in Latin America, we forecast a decrease in global TV demand year on year. In response, we will maintain solid performance and set a new record for the 11th consecutive year global number 1 position by expanding the sales of strategic products based on accumulated expertise in seasonal promotion activities. As for the Digital Appliance business, in order to prepare for the upcoming year end peak season, we will strengthen our existing partnership to maximize opportunities and increase sales for our premium products largely in the North American markets. At the same time, we will expand investment in B2B business and reinforce our online marketing to actively create new market opportunities and increase sales. For the T business in 2017, we will set up a foundation for sustainable growth and post a strategy that encompasses existing sales opportunity and new demand by launching innovative products based on quantum dots, the core material for the next generation of TV display and by expanding premium lineups in UHD and large screen TV. Furthermore, in order to ensure continued growth and improved profitability in 2017, we will diversify our sales structure to focus on high value added B2B products such as gaming monitor, LED and auto signage and will expand sales through online channel, which is currently showing growth. As for the digital appliance business in 2017, we will continue to produce innovative premium products as well as products that uniquely reflect different lifestyles of local consumers in order to improve our performance and capitalize on new demand in the market? Thank you. Yes. Thank you. So this will complete the part of the presentation by the management. Now we'll move on to questions and answer session. As we have done in the past, we'll have to we will do the consecutive interpretation for this session. So please understand that this may take a little longer, but this is the best way to get the most accurate information delivered to you. Again, I would like to ask you to refrain from asking questions that were already asked from other individuals and ones that involving data points, which I provided as part of the presentation, okay? So let's get the Q and A going. Now, Q and A session will begin. The first questions will be provided by Ms. Claire Kyung Min Kim from Taixin Securities. Please go ahead, ma'am. My first question is about the CapEx plans for next year. This year, you focus your CapEx plans especially around the 3 d NAND capacity in Hwasong. Looking towards next year, what will be the size and timing of the CapEx investments for Pyeongtaek? Also, what are your plans next year for operation of the Hwasong capacity? And what are your plans about investments CapEx investments with DRAM next year? Next year, DRAM bit growth is expected to be in the 20% range. And so within that context, what will be your investments in DRAM capacity? First, to answer the question regarding CapEx for VNAND, we are expecting that next year, the demand concentration will continue upon us in terms of the high density, high performance SSD as well as high capacity mobile storage. And so we will continue to actively pursue investments, expansion of capacity in V NAND. Also regarding our Pyeongtaek campus, I think this is the first time we're officially mentioning of our plans there, but our schedule at PyeongChang is to start mass production at Pyeongtaek of VNAND from mid-twenty 17. And so according to that schedule, our plan is to complete the fab construction before the end of this year. Regarding line 17, our schedule there is to start mass production within the first half of next year and we're currently in the process of bringing in the equipment to hit that schedule. Of course, the actual production and supply will be flexibly managed depending on how the market situation as well as customer demand folds out next year. And that would also have impact on the bit growth of our supply or our shipments next year. Regarding the DRAM, it's difficult for us to talk about exact DRAM bit growth that we're expecting from our side next year. But given the fact that we haven't done much investments in DRAM this year, we are expecting our growth rates to come down and be close to be in line with market growth in DRAM next year. Once again, as we have always mentioned, regarding DRAM, our focus is not to increase our market share, but to maximize our profits. And so our investments as well as production will also be flexibly managed according to how the market unfolds. The next question will be presented by Mr. Peter Sachin Lee from NH Investment Securities. Please go ahead, sir. I have a follow-up question to the previous question, which is about semiconductor memory market outlook for next year. You did mention about the demand and supply outlook for next year during the speech. I'm particularly noticing that you've mentioned uncertainties in demand and supply situation possible in the first half. Can you give us some details of why you're expecting uncertainty? To give you some details of why we are why we expect possible uncertainties in the first half of next year is that overall, as we mentioned during the speech, overall demand next year in 2017, we're expecting that to remain very strong. But given the fact that this year, specific applications have increased their adoption more than what we had expected relative to this year, next year, the increase rates may be relatively slower. And so that is why it's particularly related with smartphone or server adoption. We think that, that is a potential risk versus the high adoption growth rates this year. So overall, looking upon next year, we do expect that the market will have a balanced supply and demand situation and will continue to record sound growth. But we also think that there are uncertainties possible in demand and supply situations. And so in response to that, we have prepared scenarios depending on different demand supply situations, and we will implement the right scenarios depending on the market situation. We will focus on leveraging our competitive products and also focus and manage our product mix based on profitability. The next questions will be presented by Mr. Toghoon Lee from CIMB. Please go ahead, sir. I have two questions related with the I'm division. First of all, recently through press releases, the company had stated that the opportunity loss due to the discontinuation of 7 would be around the range of mid-two trillion in the 4th quarter and an additional mid-one trillion next first quarter. Could you explain what were the outlook as well as assumptions that were behind such projections? And also, can you divide that into direct impact on the I'm divisions versus the impact on other business divisions that you have? 2nd is there were recently reports by the media saying that a large part of the Note 7 replacement demand is or Note 7s are being replaced by S7 or S7 Edges. Do you think that this would possibly reduce the opportunity loss that you have projected previously? Before we answer no 7 related questions, I would like to inform you that Mr. Shin Jong Kyun, President of I'm Division, is going to make a special report during the extraordinary shareholders meeting. He wants to share the steps that were taken to investigate the cause of the 7 issue. He will also conduct Q and A sessions within that EGM to address shareholders' concerns. Because of this, we will not cover any node 7 issues except the financial aspects, which is the question that was just raised. The content of Mr. Shen's report will be shared with everyone as soon as it becomes available, which I assume to be within the next couple of hours. I appreciate your understanding and cooperation. And to give further answer to your question, within the mid around mid 2,000,000,000,000 range of opportunity loss that we announced to the market that we expect in the Q4, most of it is I'm directly related, perhaps around close to KRW 500,000,000,000 is related with the component business. I've also been looking at the analysis that's been produced by the market, and I don't see many of them presuming an opportunity loss around the 2,000,000,000,000 yen ranges. I think perhaps this is because a different definition of earnings are being used by the market than what we are using. We believe that even if the revenue is not incurred because we still need to pay considerable amount of fixed costs, that the standard to be used here is the contribution margin. To answer the second part of your question, I'm Kyung Ta Lee of the I'm division. Regarding your second part question of many of the Note 7s being replaced with S7s, in the Q3, yes, actually, we've seen our S7 sales to maintain a strong sales. And we think that the S7 will be able to greatly surpass the previous Galaxy S series in terms of full year sales. Actually, in all of our Galaxy S series, the S7 probably will be recording the highest sales in the launch year. Also in the mid to low range, our Galaxy A and J series sales have actually increased quarter on quarter, and we are seeing these other substitute models taking on the as the Note 7 space. The next questions will be presented by Mr. Tong Tang Won from Nomura Securities. Please go ahead, sir. I have a question about last month, Elliott made several proposals as a shareholder, including special dividends and changing of the company's governance structure. Does the company have any responses to offer on that? And also during the speech, you mentioned that the shareholder return plan will be announced around mid November. Is there any possibility that we'll see different elements than what we saw last year? Regarding the proposal, the BOD, the Board meeting as well as the management team is very carefully considering and reviewing the proposals, not only about the shareholder return, but also all aspects of the proposal that was made. We believe that shareholder return is not a onetime event that we need to continuously improve our shareholder return and therefore, from that context, we are considering the proposal. As we mentioned, we will be finalizing the plan regarding not only shareholder return, but the overall aspects of the proposal and plan to communicate the plan within November with the market. To correct the translation, what we will be communicating will be the direction of our not only shareholder return, but the overall proposal. And therefore, what we will be communicating within November would not be the finalized plan. The next questions will be presented by Mr. Simon Wu from Bank of America Merrill Lynch. Please go ahead, sir. My question is related with the LSI non memory division. You've recently announced mass production of 10 nano. And I also welcome how we're hearing more about areas such as AI or IoT as a part of the business plan, which is related with the non memory side of the business. However, also looking at the overall trend, I do notice that actually the products that would need the relatively expensive technologies such as 7 or 10 nano is decreasing overall in the overall tech trend. And so my question against that backdrop is what are the specific applications that would need such high performance 10 nano or 7 nano technology? And when do you think the 10 nano or 7 nano technology will per chip become cost competitive versus the 14 nano? In the case of cutting edge process technology for the system LSI, it is the cutting edge technology, as you mentioned, is a relatively high cost process. And so what usually happens is that the first productions are used for the premium applications where we can still guarantee sufficient ROI. So for example, the high value SoCs are where the first cutting edge process technology are used. And then as the yield ramps up and the fab is able to produce more cost efficiently, then the supply migrates to other mass applications. An example will be our 14 nano process, which we started mass production last year. So we're in year 2, next year will be year 3. Initially, the 14 nano was used for the premium products and started to go for the more mass applications from mid last year. And this year, we're seeing an increase of more mass applications taking on our 14 nano products. And we think that the same migration process will happen to our 10 nano technology. Also regarding 7 nano, which you mentioned, as we have always mentioned previously, we are ready to go 7 nano. The decision is the economics, the ROI and also whether their products or what products would be taking on 7 nano. And once those business decisions are made, we are technically ready. The next questions will be presented by Mr. Nicolas Godoy from UBS. Please go ahead, sir. Yes. Hi. Good morning. Thanks for taking my question. The first one relates to DRAM. So you just indicated you intend to grow next year more or less in line with the market. At the same time, considering that supply is still tight, are there any parameters where you would that you would consider to potentially add any wafer capacity in DRAM next year? And if so, when could you actually do that within either the Piantech side or Line 17? Thank you. Regarding the DRAM, once again, our bit growth will be focused more on process migration. And so as we have mentioned, our we will be focusing on quickly and flexibly responding to the market environment as it unfolds. The next question will be presented by Mr. Marcus Shin from Goldman Sachs. Please go ahead, sir. I have two questions related with the I'm One is that what are your what are you noticing in terms of sales trends for the S7 and the S7 Edge since the discontinuation of Note 7? And also some are talking about a possible early launch of the S8. What are your plans regarding that? Regarding the Note 7, we don't see any impact of the Note 7 discontinuation on our other product demand. As I previously mentioned, the S7 sales trends remain strong in the Q3. And on a full year basis, it will greatly surpass the sales of its previous model. Also, the sales on our mid- to low end models are also strong. The second question about the release early release possibly that's been talked about of the next flagship model, the S8, it's difficult for us to talk about a model that we have not yet launched, but our basic approach is that we will launch it after thorough verification and once safety is guaranteed. The next questions will be presented by Mr. JJ Park from JPMorgan. Please go ahead, sir. Doctor. Business, first of all, the technologies, the new technologies for DRAM, there will be 1x nano for NAND, there will be 64 layers. With these new technologies, how much in terms of cost as well as productivity improvements do you expect versus existing technology? And can you quantify that change or difference? The second question regarding the system LSI side is currently how much of a yield are you seeing on your 10 nano production? And during the previous last quarter's conference call, you mentioned that you're planning to use EUV technology for the 7 nano. But I guess since then, the industry trend is to not use EUV for 7 nano. And I'm wondering if you've changed your strategy as well. It's difficult for us to talk about specific costs or productivity on products that are not yet even in mass production. But for DRAM, the 1x nano went into mass production in the 3rd quarter and we're in the process of ramping that up. For the NAND, the 64 layer, the target is to start mass production during the Q4 and to start to ramp that up during the first half of next year. Regarding V System LSI, it's we cannot give you the exact internal yield that we're seeing on the 10 nano, but I can say that the yield is according to our plan what we had expected and planned for. And the current plan is to have that commercially adopted on the flagship model next year. The 7 nano, we still plan to use EUV and we're going to maximize the advantage of the EUV technology so that we have improvements in terms of performance, power as well as scalability, which are the key features of semiconductors. The next questions will be presented by Mr. Yoo Jong Woo from Korea Investment Securities. Please go ahead, sir. I have a question related with OLED related investments. As you mentioned, the demand especially for the mid- and small size OLED panels are increasing quite significantly, especially driven by the smartphone makers. In that context, I'm expecting that you in that context, I'm expecting that you will probably need additional investments in OLED capacity in addition to what you're currently investing in. And so can you give us your plans of additional OLED investments as well as what in terms of your space plans? Because I see that you may have not enough space for the additional expansions necessary. Our outlook in terms of market demand is that market demand for OLED panels will continue to increase, especially around flexible panels. And our approach to investment is to make timely and preemptive investments so that we are able to maintain our competitive advantage. And we plan to strategically utilize the resources that we currently have that we have to respond effectively to market and customer needs. The next questions will be presented by Mr. To Hyo Noo from Mirei S. H. A. Securities. Please go ahead, sir. I have a question related with the CE business. Recently, the CE business' earnings has, I think, moved up to the next level. I think the main factor behind that is the strong sales of high value ad products, especially the Quantum Dot TV. In that context, my first question is what are the recent sales trends you're seeing of the Quantum. TV? And what are your sales targets, for example, next year? 2nd is, do you think that this enhancement of earnings for the CE division is temporary? Or do you think this is more of a structural nature? Regarding the sales trends of the Quantum Dot TV, the SUHD TV that's based on the Quantum Dot technology is having the top tier lineup and 3rd quarter sales of the SUHD TVs increased 60% year on year. And we think that on a full year and there will be additional growth in the Q4, which is a peak season. And so on a full year basis, we're expecting the sales to double versus the sales last year. As you know, the quantum dot Dot technology is considered the next generation display technology that overcomes many of the limitations of the existing TV technology in terms of brightness, color, reproduction and durability. We are still in the process of working out our business plans for next year. So it's difficult for us to share our sales targets for next year now. But our basic approach is that we will continue to innovate our product based on the quantum dot technology and maintain our market leadership in the premium segment. Your second part of the question was whether the earnings improvement enhancements are sustainable. We have analyzed that there are 3 major factors that explains why we have been surpassing market expectations in terms of our earnings performance. 1 is the premium product lineup, the improvement of our product mix represented by the Quantum. TV. 2nd is that in all in many key regions, we have strengthened our relationship with the major key distributors in region and that has also helped. The third is that we've actually been able to preemptively manage many of the external risk, including foreign exchange volatility this year, and this has all helped improve our earnings. We are looking towards the Q4, there are some risks. For example, the overall market is contracting or decreasing in terms of sales size in all regions and also the panel prices are tending to go up. But despite that backdrop, we will continue to provide a differentiating user experience through our premium products and continue this trend of good performance next year. The next questions will be presented by Mr. Han Seung Hoon from Deutsche Securities. Please go ahead, sir. I have a question about the service side. This year, Samsung acquired a cloud company and mentioned that, that company's capabilities will be leveraged in order to further develop future software as well as content. And so could you give us an update on how that preparation is coming along? And can we expect to see some new and differentiating features on the next year new smartphones? Yes. We acquired Joyant during the first half of this year, and we are currently in the process of building out our own cloud infrastructure globally. We believe that this will be able to provide a more efficient cloud service in the future, where we will also expand the connectivity between our multiple devices, so not only the handset, but tablets and wearables and also use leverage the content to provide a seamless experience to the users across different devices. This will also in the future be expanded to connect with IoT as well as further connectivity between devices and this we plan to leverage this to provide a differentiating service experience. The next questions will be presented by Mr. Peter Yu from BNP Paribas. Please go ahead, sir. I have an additional question related with the solutions for the mobile business. During the speech, you mentioned plans of adopting AI based services for the mobile side in 2017. Can we expect this to be a differentiating a major differentiating point for the handsets that you'll be launching next year? I'm assuming that also the capabilities that you've acquired through the acquisition of Viib will be used to do this. And this AI platform, are you planning to run this, operate this as a complete open platform that is open also to non Samsung devices? Or would it be limited to Samsung products? And if it's the second, that if it's limited to Samsung products, what are your plans in terms of attracting third party vendors to join the platform or creating Regarding the AI service, if I can share some of the direction that we're preparing that for. We have noticed that in the mobile space, there's a very rapid shift of these services from app based to more voice recognition based, big data analysis, AI supporting services. And the Vip Labs, the company that the Vip Labs, the company that we acquired has a platform that is natural language based AI. And it also is a platform where external third party service providers can easily connect their services onto that platform. And so we believe that this will help us create an open ecosystem for our intelligence based services in the future. And through the acquisition of ViP, we have been able to secure a key capability in creating a very vibrant open AI ecosystem. We will be connecting not only our smartphones and tablets, but also TVs and other home appliances. And this will be and to create an AI conversational interface to provide various services to the devices. And this will be a differentiating point, and we will leverage this as a differentiating point for our Samsung devices. The next questions will be presented by Mehdi Hosseini from Susquehanna International Group. Please go ahead, sir. Yes. Thanks for taking my question. I actually have 2 clarifications. Earlier, you said you there is some uncertainty regarding the DRAM environment looking into the first half of twenty seventeen. Can you please elaborate on it? There is a process migration to 20 nanometer and Samsung is migrating to 1x. And I'm not sure if anybody is adding wafer capacity. So what exactly did you mean by uncertain environment as it relates to DRAM? And my follow-up question has to do with display. You mentioned flexible OLED, but I think you're referencing curved edges. And in that context, when should we expect Samsung to finally introduce a true flexible display? To give you more detail Regarding the uncertainty that we have mentioned before, the uncertainty or the risk that we potentially see next year in terms of the demand side is the first demand side is, 1st of all, that as you know, the gigabyte per system this year for smartphones and servers have both grown very strong, higher than what we had expected. And so the risk on the demand side is the potential of the growth demand growth not sustaining what we saw this year. If, for example, the demand growth levels off next versus this year, that could potentially make the demand softer next year. So that is the risk that we're seeing on the demand side. On the supply side, as you mentioned, most of the bit growth is being driven by process migration, migrating to the cutting edge processes. And so on that end, on the supply side, the risk would be perhaps the ramp up plans not going as scheduled, having a negative impact on supply or the reverse whether the ramp up goes better than expected, the cutting edge process migration goes better than expected and that would have an upside on supply. But then any demand supply outlook has pertained to risks and uncertainties. And despite these risks and uncertainties that we potentially see next year, we will focus on leveraging our differentiated products, leveraging our competitiveness versus the competitors to focus on operating a product mix that is profitability oriented. The second question about the flexible display. In addition to the curved flexible curved edge, we are also preparing various applications including the true flexible to meet the customer demands. So in terms of timing, we are continuously working to raise the level of perfection to meet market as well as consumer demands, and we will continue to do that. The next questions will be presented by Mr. Song Young seo from High Investment Securities. Please go ahead, sir. My question is related to the previous question about the DRAM demand supply outlook next year. While mentioning the potential uncertainties next year, you mentioned also first half of next year. In that context, I think what the market is concerned about in terms of demand next year is the fact that recently Intel made comments about its PC inventory that there is a talk that Renovo also has a huge amount of inventory. Also on the smartphone side, the Chinese smartphone makers have been competing to increase their production against each other. And also with the absence of the Note 7, we're hearing that Apple or other Chinese makers are also planning to increase their high end handset production. And this may all end up being an overproduction now, which will end up having to be having eventually leading to perhaps an inventory adjustment next Q1, I think that is a concern that the market has in terms of potential demand risk. What is your views about this? I think once again, we have to repeat what we had said before that in terms of the demand and supply outlook next year, the main risks that we are looking on the demand side is the possibility that the huge growth in gigabit per system that we saw this year may perhaps not be sustained next year and that is the risk that we're seeing on the demand side. On the supply side, as I previously mentioned, the demand supply balance will be affected depending on how the cutting edge process migration or ramp up takes place. We are very carefully watching the demand and supply side, and we are in the process of establishing scenario based strategies to respond to whatever situation unfolds. But given the fact that we have many products that are differentiated by themselves, we will be able to maintain a very profit oriented product mix next year to respond to whatever demand and supply situation. Would it be correct for me to understand that you don't see an oversupply on the application side? So to the question of whether we think that there are overproduction on the set side smartphones or PCs, we don't think there is an overproduction. Once again, in terms of our DRAM business, a basic approach that we will be more profitability oriented than market share oriented, and we plan to next year at this point expect to grow at market level. The next questions will be presented by Mr. Ike Zhou from Sanford Bernstein. Please go ahead, sir. Hi. This is actually Mark Newman from Bernstein. Thanks for taking my question. I wanted to clarify a little bit on some of the capacity ramping comments you made. So first of all, on DRAM, your Samsung is going to have about mid-thirty percent bit growth this year, which is quite a lot higher than what was previously guided. So first question is perhaps could you clarify exactly how the capacity or how the bit 2017 for DRAM, there was a comment earlier about Line 17 ramping. I just want to clarify if that was the additional space of Line 17 ramping for DRAM or was that a NAND specific comment? And then final question related to that is, any specific capacity numbers you could give us? I know you had mentioned very much depending on demand, but perhaps you could put some ranges around the potential capacity additions that we should expect in NAND flash next year and also for DRAM, if any? Thanks very much. Regarding the DRAM bit growth, one factor was that there was a seasonality. It was a peak season, so that's one effect on the demand side. Also, there was a high concentration of demand for high density DRAMs that came to us. So that was another reason behind our DRAM bit growth. There was a demand supply imbalance in specific applications and a lot of that demand came towards the 20 nano DRAM, our 20 nano DRAM and that helped us achieve the higher bit growth. And so in response to such concentrated demand, we improved the efficiency of our production and also managed our inventory quite effectively, And that is how we were able to achieve higher bit growth than previously guided. But once again, regarding the capacity plans, it's difficult for us to talk about the ranges that you've asked for. And our position is that we will be managing the capacity depending on the demand supply situation unfolding. The last question will be provided by Mr. Kim So no from Merit Securities. Please go ahead, sir. The question I have is a follow-up to the bendable display I think in the answer to the previous question, you left the issue of timing opened. And given the fact that even the curved edge display, which only provides mainly aesthetic value, is being hugely in huge demand by the Chinese makers and other leading makers. I would expect that if you are able to supply a bendable, a true flexible display, that would bring about very explosive significant expectations or responses from the market. So in that context, where are you in terms of technology at this point? Is it correct for me to assume that you are technically capable of producing something on a pilot basis, but you're waiting to for other elements to come into play so that you would be able to provide a differentiated consumer experience on the end device level, which will drive up, for example, ASPs as well as demands. I do understand that especially given the recent experience, the company may focus more on quality or yield rather than trying to show off its technology prowess. But given all of that, could we expect something of a bendable or truly flexible display based product next year? Or we have to wait after or will we have to wait more? I take that question from the I'm business side. Regarding bendable or foldable displays, It is a new form factor, and we are focused on finding the optimized user experience for this form factor. And so the timing of commercialization will depend mainly on whether we have the optimized user experience, where the consumers can actually feel a differentiated value through this new form factor. Also in terms of hardware, for a smartphone, the not only the display has to be bendable and foldable, but other parts of the device such as battery or cases and other material also have to be compliant. And so that is also a factor in determining the commercialization time point. So in terms of the form factor, we are focused on optimizing the usability and also whether we are able to provide a differentiated new user experience that the customers will find satisfactory. And given all of that, more time is necessary before we launch the product. Thank you very much. This ends the conference