Before going into the presentation, I would like to introduce the management who are present. We have Byung-Joon Lee, the CFO, SVP Ga Cheol-sun, Head of Support Team, Component Solution Division, General Manager Chan Gyu Ko , Head of Support Team, Module Solution Division, VP Jung Joonghyuk , Head of Support Team, Substrate Solution Division, and VP Lee Jong-sang, Team Leader of Sales Team one, Strategic Marketing Center. We will start with a presentation on our fourth quarter business results, followed by divisional results and outlook before taking your questions. First, our Q4 results. In Q4 2018, revenue recorded KRW 1 trillion, 998.1 billion, which is approximately 16% QoQ decrease, but about a 16% YoY increase. Major factors for the QoQ revenue decrease by division include an about 13% revenue decrease in the Component Solution Division due to decreased MLCC demand for IT applications.
Also, the Module Solution and Substrate Solution divisions recorded revenue decrease of 22% and 12% respectively due to seasonality, resulting in an overall decrease of revenue QoQ. Even though Q4 operating profit decreased by about 38% QoQ, it increased by about 136% YoY to KRW 252.3 billion at an OP margin of 12.6%. 2018 full year revenue was KRW 8,193 billion, and operating profit full year was KRW 1,018.1 billion, which are both significant YoY improvements. Pre-tax profit in Q4 was KRW 237.7 billion with about KRW 14.6 billion non-operating expenses, including financial expenses. Net income after corporate tax was KRW 185.3 billion. In terms of financial, as of end of December 2018, total assets was KRW 8,644.9 billion, an approximately 0.4% growth from end of third quarter.
All major financial indicators are controlled at healthy levels with debt to equity and net debt to equity decreasing to 75% and 25% respectively. Shareholders' equity also improved to 57%. Next are the results and future outlook for each division. First, the Component Solution Division. Component Solution Division's Q4 revenue was KRW 896.1 billion, which is a 13% decrease quarter-on-quarter, a roughly 29% increase year-on-year. Even though sales of high-reliability products for automotive Tier 1 and network equipment increased, sales of low-end products decreased due to weak demand from IT customers. In 2019, the MLCC market is expected to show continued demand growth, mainly around high-end IT and automotive and industrial products.
For IT applications, even though the supply situation for commodity MLCC is expected to ease with increased supply, demand for high-end MLCC is expected to grow, driven by greater adoption of new applications such as 5G and AI. Accordingly, we will increase sales of differentiated new products in the smaller size and high-capacitance segments utilizing our core powder technology. Also, in response to continued supply shortage in automotive and industrial application markets, we will expand our automotive product lineup to levels that of Japanese companies and convert some of our IT capacity to automotive and industrial applications to raise utilization. Next is the Module Solution division. Module Solution division's Q4 revenue was KRW 687.3 billion, which is a Q on Q 22% decrease but an 18% Yo Y increase.
The QoQ revenue decrease was mainly due to decreased supply of camera and communication modules to flagship handset modules due to seasonality. Meanwhile, Q4, we started initial mass production of high-performance products such as high spec multi-cameras and new specification Wi-Fi modules for the strategic customers' new flagships. In 2019, the camera module market is expected to see increased demand, especially around multi-camera modules such as triple and quad cameras and high-resolution products around 48 meg. Accordingly, we will continue leading the high-end camera module market by providing our own differentiated core component solutions such as low f-number, multi-element lens, and variable aperture. For communication modules, we expect to see the opening of 5G module market, and we will gain early leadership in the new market for 5G antenna communication modules by leveraging our new packaging technology. Last, the Substrate Solution division.
Q4 revenue of the Substrate Solution Division was KRW 381.8 billion, which is a 12% decrease both QoQ and YoY. Revenue for OLED RFPCB and mainboards decreased due to weak smartphone sales by major customers and demand for packaged substrates also decreased due to PC CPU supply shortage. Overall, Substrate Solution Division revenue decreased QoQ. In 2019, the substrate market is expected to see increased demand for high-spec package substrates around new applications such as 5G and AI, as well as autonomous driving. Accordingly, we will focus on development of low-loss substrates for 5G antennas and actively respond to new market demand, including multilayer and large body substrates. Also, we are expecting increased adoption of OLED displays by Chinese handset makers, and we will further diversify our customer base by adding new customers. This completes our presentation, and now we will take your .
[Non-English content] Now Q&A session will begin. Please press star one. That is 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. That is star and two on your phone. [Non-English content] The first question will be presented by Mr. Park Kang-ho from Daishin Securities. Please go ahead, sir. [Non-English content] The second question will be presented by Mr. Cho Cheol-hee from Hankook Investment & Securities. Please go ahead, sir.
[Non-English content]
I have two questions. The first question is about the MLCC utilization as well as ASP trends. Can you give us an update as well as your outlook? Second question is about the camera module. I think you're expecting to see demand grow for camera modules, especially the high spec ones throughout this year. Can you introduce to us the plans of SEMCO and how to respond to this demand growth?
[Non-English content]
To answer your first question regarding an update on our MLCC utilization and ASP. During the fourth quarter of last year, what we have heard is that the utilization of especially the Taiwanese low-end companies have decreased quite rapidly due to the weak demand from the major IT set companies. By contrast, we have been focusing on the industrial large capacitance MLCCs as well as the automotive high reliability products, and we have been expanding that. Actually in fourth quarter, we were maintaining our utilization above 90% and ASP also was continuing its quarter-on-quarter increasing trend. Looking into the first quarter of this year, we do expect, especially the demand to continue to decrease around the low-end products, mainly for the Chinese IT applications.
We are expecting in the first quarter to see greater MLCC demand, especially the ultra small size and the high capacitance from our strategic customers. Also, we have been operating our production lines flexibly so that we can convert some of our IT MLCC capacity to automotive and industrial applications. That's why we're expecting this first quarter we will be able to record a higher utilization versus the previous quarter. Looking a bit more further to the second quarter, we are actually expecting to see a recovery of demand as major customers by the second quarter will be running through their existing inventory. Also, there will be continued increase of production for automotive industrial applications. By second quarter, we're expecting to be running our MLCC operation at full capacity.
In terms of ASP, due to the improved product mix, we are expecting our ASP to continue to maintain high levels compared to the previous quarter.
[Non-English content]
To answer your second question about the high-spec camera module demand and how we plan to respond to it. As you know, on the smartphone, these high-spec cameras are becoming a major point of differentiation of the handset itself. Camera features such as high resolution, optical zoom, 3D sensing and ultra wide angle. This means that there's a greater demand for the high-performance camera modules that are at a level of a full digital camera, such as ultra high pixel cameras or triple quad multi cameras. Due to this change, actually, we're seeing this presents an opportunity for SEMCO that has not only the key technologies, such as the low f-number , bright lenses and the high performance ball guide structure actuator technology. Due to this change in camera module demand, the importance of a key component, the lens and the actuator is becoming more and more important.
That's why we are planning on focusing especially on the 48 megapixel and above level of high pixel cameras, where actually the pixel size of the sensors become smaller. We can address this by leveraging our multi-element low f-number bright lens solution, we will use this to lead the high pixel camera technology and the market itself. Also, we have already developed a folded actuator and slim lens which are used to implement the high power zoom. We will use this new technology to further widen the technology gap that we have versus other camera module companies. We do expect there to be a significant growth in demand for these high-spec cameras throughout 2019. By continuing our technology leadership and also nimbly responding to new trends in the camera market, we will continue to improve our revenue and profitability.
[Non-English content]
[Non-English content] The next question will be presented by Mr. Giuni Lee from Goldman Sachs. Please go ahead, sir.
Thank you for taking my questions. I have two questions today. One on MLCC and another on your substrate business. First on MLCC, there seems to be some concern in the market that the supply and demand, especially in the low-end side, have been easing. It would be great to hear how SEMCO is doing the overall MLCC industry for a year. More specifically, what would be your business plan within such view on the MLCC industry? My second question will be on the profitability of your substrate business. Seems like the profitability of the business may have not improved as much as you wanted in 2018. The natural question would be, what would be your strategy to improve the profitability of the business going forward, especially in 2019? Thank you.
[Non-English content]
[Non-English content]
To answer your first question about the MLCC market outlook for this year and how SEMCO plans to respond to this, as you know, the MLCC market situation, we're seeing there are a lot of weakness, especially due to weaker consumer sentiment driven by Chinese-U.S. trade disputes as well as a decrease in customer investments. When you look at only the high-end side of the MLCC market, the IT application high-end products, where only a handful of companies, including us and other Japanese companies, can respond, the supply situation continues to remain tight. It's on the other hand, the mid to low-end products where there is an increase of supply as well as increase in inventory at the customers' level, that the supply situation, as you mentioned, is showing some easing.
However, we think that from the second quarter overall MLCC demand will recover as customers start to launch their new models and also customers start to run through their existing inventory. On the industrial application side, we expect this year there to be about a 20% demand increase in the industrial applications, driven mainly by additional AI technology being adopted at data centers in response to edge computing trends, as well as there being a larger demand for large size for these 5G base stations. On the automotive applications, we do expect there to be a quite high growth, around 30% for MLCC demand this year. On the other hand, automotive MLCC supply will remain limited, and that's why we expect on the automotive application, this supply shortage will continue throughout this year.
Given this market outlook, our major plans, number one, is in the case of IT applications to focus on the small size, high capacitance, high-end products, and also produce mainly around the high-runner models or products where there is large market demand. Also convert some of our IT capacity to automotive or industrial MLCC production, and also at the same time develop new applications such as AI speakers or smart mirrors so that we will be able to maintain high profitability throughout 2019 despite market changes.
[Non-English content]
To answer your second question about how we plan to improve the profitability of our Substrate Solution business. First, if you look at the package business, in the case of BGA, we will continue to maintain our sole supply position for the APs of our strategic customer. Also, as the 5G market opens, we will be focusing especially on the 5G antenna substrates. In the FCBGAs, we will diversify off of our current focus on PCs, and expand our customers, more global customers, and more applications around automotive network and the high-end AI substrates. On the circuit boards, there are some capacities still left in Korea, which we will be relocating offshore to Vietnam so that 100% of our printed circuit boards will be manufactured overseas.
In the RF PCBs, we will be adding on new Chinese customers as well as global customers so that we will be able to reduce our dependence on certain customers and also reduce the effects of seasonality. At the same time, we will be expanding our business on hybrid substrates that leverage our differentiated technology and also further enhance our yield and quality competitiveness to improve the profitability of our Substrate business.
[Non-English content]
[Non-English content] The next question will be presented by Mr. Park Kang-ho from Daishin Securities. Please go ahead, sir.
[Non-English content]
I have one question, actually, it's about 5G and the changes you expect that to bring. 5G service will start this year and start full service, full-scale development from 2020. For example, many of the handset companies, including Samsung Electronics, are planning to launch 5G-capable handsets this year. Even the automotive companies, as they introduce autonomous driving and other applications, would be including 5G in their automobiles. Given this overall 5G trend, what do you think will be the changes that would occur at the component level? How do SEMCO plan to respond to these changes?
[Non-English content]
To answer your question, yes, as you mentioned, 5G communication service is expected to start commercial service from 2019, and the market will start to grow at a full scale from 2020. If we look at some of the implications of 5G on the component demand. At the handset level, first of all, in order to be capable of 5G communication, the handsets would have to have 5G dedicated components and greater battery capacity, which at a practical level means that there will be less space on the handset for these components. This will be the major practical challenge in terms of the component level. Therefore, in order to address the space issue on 5G handsets, there are some essential technologies such as making the components smaller, adopting modules, and also adopting more advanced packaging technology.
In a sense, the 5G implications can be divided in terms of applications at the handset level versus the base station level. In terms of SEMCO's product line, it can be divided into MLCC or antenna modules in a big picture. If we look at first the MLCCs, as smartphones become 5G capable, there will be an increase in the number of especially chip components such as RFICs or PMICs. This also naturally means that the handset would require more mobile MLCCs. We're expecting that, roughly speaking, the 5G handset will require about 20% more MLCC content versus the 4G LTE handsets. This will be a significant increase in the count of MLCC itself. Also, due to the absolute shortage in space on the handset, there will be a greater demand for smaller as well as high capacitance MLCCs.
At the industrial level, there will be also a larger demand for MLCCs for the telecommunication equipment. The 5G base stations that are operating at over two-digit gigahertz frequencies actually have a very shorter coverage versus the 4G LTE base stations. That's why there will be an increased demand for repeaters for both outdoor and indoor situations. This will eventually increase the demand for industrial MLCCs. At the same time as 5G service rolls out, we think that there will be acceleration in other fourth industrial revolution applications such as AI, IoT, and big data. This will drive a greater demand for AI server markets. That's why we're expecting MLCC demand for AI server applications to also increase by over 20%. Because we already have quite an advantage in MLCCs, we will leverage our key MLCC technology to take early leadership in these markets as they open.
[Non-English content]
Next, about the antenna module business. In the 4G mobile communication market, antenna components were actually RFICs and antenna separated items, and therefore, even smaller companies were able to sufficiently produce these antenna modules for 4G. However, in 5G, because of the importance of the antenna and RFIC matching, the antenna modules for 5G are integrated antenna modules with RFIC and antennas together. There has to be a low-loss substrate material adopted. Advanced packaging technology needs to be adopted for higher heat dissipation and EMI shielding. There has to be quite a lot of know-how in mass production and testing because these are products that operate at ultra high frequencies. Actually, there are only about three to four companies in the world that have all of these core technologies. The 5G antenna module market is quite a high entry barrier market.
SEMCO is one of the few of these selected companies, we are in the leader position among this selected few. That's why actually we are engaged in exclusive cooperation for 5G antennas with major 5G top-tier base station companies already. We also have quite a good track record. We are the only company that have the experience of mass-producing Wi-Fi module at 60 GHz ranges. We have also already completed successfully the 5G pilot service during the PyeongChang Winter Olympics , also supplied our modules for 5G pilot service of a major U.S. carrier. Many of the major set companies are quite eager to do collaboration projects with us. Based on this already gained track record and our competitiveness in the 5G antenna module space, we will continue to lead in terms of the communication module market.
[Non-English content]
[Non-English content] The next question will be presented by Mr. Kim Dong-won from KB Securities. Please go ahead, sir.
[Non-English content]
I have two questions. First of all is about your automotive MLCC business, which is basically the major driver of your growth this year. I would like to ask you for your automotive MLCC update, as well as your strategy on how to expand that business. Can you give us some guidance in terms of the share of automotive MLCC in your revenue this year? My second question goes to the CFO. It seems that once again, we are going to have some uncertainty in the market in 2019. In that context, can you introduce to us your overall company strategy for 2019 as well as near term first quarter?
[Non-English content]
To answer your first question about our automotive MLCC. As you mentioned, we expect there to be continued growth for automotive MLCCs. The automotive MLCC has some unique characteristics in that high reliability for high temperature and high voltage is essential. It has a very high entry barrier due to the sophistication of the product required. Only a handful of companies can actually supply MLCCs after going through very strict qualification processes by the customers. Given this unique feature, we will be maximizing our efficiency by internalizing the key materials. We have already established a very high reliability quality assurance system. Regarding increasing our capacity in China, we are planning to accelerate the construction work as is the approval process so that the Chinese additional capacity can contribute to our business earlier on.
Based on these efforts, especially around the ADAS application, we will accelerate the development of new high reliability products so that we can expand our product lineup to a level similar to the leading Japanese companies. Because we have already secured LTA supply contracts with major Tier 1 customers, we have already secured long-term supply volume, and based on that, we can expect the share of our automotive MLCC revenue in our total revenue to increase significantly from a single digit in 2018 to two digit above in 2019. Based on this, our MLCC business structure will be shifting away from IT towards more industrial and automotive MLCC business. For overall, this year our goal is to expand our non-IT MLCC revenue to around one third, so that we will have a more sound base of growth for our MLCC business overall.
[Non-English content]
To answer your second question of our 2019 full year as well as first quarter outlook. As you mentioned, uncertainty continues around IT component demand as the set growth remains stagnant due to various external factors. Given this environment, we will on one hand, continue to enhance the competitiveness of our mainstay business by improving the MLCC product mix and also addressing the foldable high-end camera demand. We will at the same time develop new business opportunities by diversifying our automotive and industrial application customers and also develop new component businesses that take advantage of technology inflection points such as 5G technology, so that we are able to create a foundation for sustainable growth and profitability. Looking towards 2019, our goal is to achieve, on one hand, double-digit revenue growth compared to the previous year, and at the same time strengthen our competitiveness for future growth.
Regarding the first quarter, as we mentioned during the Q&A session, we will maintain a very flexible production capacity in response to the unfolding MLCC market situation, maximize the opportunity that we have in terms of supplying components for the strategic customers flagship new model, and also further remove any operational losses to enhance our overall efficiency so that we will be able to, in the first quarter, achieve a revenue growth of around 10% versus previous quarter as well as on a year-on-year basis.
[Non-English content]
Well, since there are no further questions, we will end the conference call here. Thank you very much.