Sk Hynix Inc S/Gdr 144A

Good morning, afternoon, and evening. This is Park Sung-hwan, Head of IR at SK Hynix. Welcome to the SK Hynix 2024 Third Quarter Earnings Release Conference Call. Allow me to introduce the executives present here today. We are joined by CFO Kim Woo-hyun, Head of DRAM Marketing Kim Kyu-hyun, and Head of NAND Marketing Kim Seok. Let me issue a disclaimer that all outlooks presented by the company are subject to change, depending on the macroeconomic and market circumstances. With that, we will now begin the SK Hynix earnings release conference call for the third quarter of 2024. Mr. Kim CFO will first present the earnings, followed by the company's future plans and market outlook, and a Q&A session with the attending executives. Good morning, everyone. Allow me to first introduce the company's performance for the third quarter of 2024. In the third quarter, while the recovery of demand in conventional applications such as PCs and smartphones was somewhat delayed, the demand for AI memory products for data centers remained strong. We expanded sales of value-added products such as HBM and enterprise SSDs, achieving record high quarterly revenue of $17.57 trillion won, an increase of 7% compared to the previous quarter and 94% compared to the same period last year. First, for DRAM, while sales volume of HBM3E products increased significantly, sales volume of conventional DRAM products were reduced due to weakness in mobile and PC demand, resulting in a slight decrease in shipment volume compared to the previous quarter. However, as sales volume of HBM increased and as the upward trend in conventional DRAM prices continued, blended ASP for the quarter rose by 18% sequentially, which is a similar level of improvement that we saw in the previous quarter. Notably, HBM revenue increased by more than 70% sequentially and by more than 330% year on year, driving the company's revenue growth. For NAND, despite solid demand for enterprise SSDs, sales bid growth was down by 18% sequentially due to weak procurement demand from PC and mobile customers, who are now undergoing inventory corrections. Meanwhile, blended ASP saw another steep increase in the quarter, which rose by 15% sequentially. Price increased across all products except for discrete NAND and MCP products, while sales portion of higher-priced enterprise SSDs expanded. Enterprise SSD revenue in the third quarter increased by almost 20 percent quarter-on-quarter and by more than 430 percent year-on-year, driving land revenue growth this year. In the third quarter, operating profit increased by 1.56 trillion won sequentially, reaching 7.03 trillion won, which marks a record high quarterly operating profit. The record high profit was achieved as the sales increase was driven by price increase rather than volume increase and also due to the higher sales contribution from high margin products. Operating profit margin recorded 40%, up 7% points from the previous quarter. Capitalizing on our industry-leading product technology, we were able to expand sales of value-added products such as HBM and enterprise SSDs meaningfully in the quarter. Therefore, DRAM and NAND profitability both improved sequentially, resulting in a profit that surpassed prior peak operating profit achieved during the super cycle of 2018. The depreciation and amortization present expenses for the third quarter was 3.0731, continuing a downward trend due to last year's CAPEX reductions. while EBITDA reached 10.1 trillion won, with an EBITDA margin of 57%. Non-operating expenses net of gain for the third quarter was 0.15 trillion won, which includes net interest expense of 0.23 trillion won, and net foreign currency related gain of 18 billion won. As a result, net profit before tax was 6.88 trillion won, and net profit for the quarter was 5.75 trillion won, with net profit margin of 33%. Total consolidated cash and cash equivalents, including short-term investments, amounted to 10.9 trillion won at the end of the third quarter, a 1.2 trillion won increase from a quarter ago. Interest-bearing debt was 21.8 trillion won, down 3.4 trillion won from the end of previous quarter, and net debt was 11 trillion won, down 4.6 trillion won sequentially. Consequently, our debt-to-equity and net debt-to-equity ratios at the end of the third quarter were 33% and 17% respectively, improving meaningfully compared to the debt of previous quarter. Growth momentum. Growth momentum of the memory market is continuing this year, driven by ongoing demand for AI memory products. Memory products adopted in AI servers, such as HBM and Enterprise SSDs, are showing particularly high demand growth. Although the recovery of demand for major applications, such as PCs and smartphones, is somewhat delayed compared to earlier expectations, strong demand for servers and AI memory products is offsetting the weakness in demand from traditional end applications. As the application of AI technology widens, the application of memory is also expected to broaden leading to even more stable market growth for memory going forward. The impact of AI PCs and AI smartphones released this year on memory demand has been rather limited. But from next year, enhanced AI features are expected to provide a growing momentum for memory demand. First, The PC shipments this year are expected to remain similar to last year's levels, but are expected to grow by low to mid single digit range next year. The replacement demand for corporate PCs due to the end of Windows 10 support in the second half of next year and full-fledged AI PCs are expected to lead to a gradual recovery in memory demand for PCs. The share of LPDDR5 within PC DRAM has already reached a meaningful level, and as sales of AI PCs rise, demand for high-performance and low-power products such as LPCAM2 is expected to increase. The smartphone market is also expected to see an improvement next year, growing by around low to mid-single digits. The smartphone market, having reached maturity, faced stagnation due to lack of innovative technologies and expansion of the refurbished market. However, potential launch of innovative AI features is expected to stimulate consumer purchasing demand. This year, AI features were limited to a few flagship models. but are expected to be adopted more widely in high-end product lines from next year, significantly increasing the sales proportion of AI smartphones. Given that running small LLM AI models in smartphones requires at least an additional three to four gigabyte DRAM, the growth of AI smartphones is expected to not only increase DRAM content, but also the need for high performance memory, such as LPDDR5X and LPDDR5T. The server market is expected to see significant demand growth, especially for AI servers. As big tech companies are continuously investing in order to capture the AI market, the scale of investments from major big tech companies this year has increased compared to initial forecasts. And despite some concerns over delays in monetization, the likelihood of reducing spending in AI servers appears low. Meanwhile, due to upcoming replacement cycles for general servers with growing customer needs for energy and space efficiency, the overall server market is expected to grow by mid to high single digits next year. As generative AI develops into multimodal forms and workloads continue to increase, the demand momentum for AI servers is expected to proceed in the mid to long term. For example, as with recent release of OpenAI's O1, Longer inference times lead to increased computing power needs, thereby enhancing performance. This is because more complex and in-depth models necessitate greater computational resources for more accurate and refined results. Various companies are currently competitively undergoing research to develop AGI and expanding training infrastructure in the long term to support these developments. Since large model sizes are essential for AGI, hardware requirements are considerable and are expected to become a key driver of server demand. Additionally, for continuous updates of AI models, and the provision of personalized services, real-time data processing and fast inference speed will be required, which is expected to increase the demand for cloud infrastructure and edge computing servers simultaneously. Amid the increasing demand and performance improvements of AI servers, growth in performance and density of HBM that supports computational operations is essential. Besides expanding bandwidth, the development of higher stacked packaged products for increased density and low power characteristics is also crucial. Furthermore, as customer demands diversify, the need for custom HBM is also expected to gradually grow. Considering such demand environment, DRAM demand growth is expected to improve from mid to high 10% this year to high 10% next year, while NAND demand is projected to grow by mid-10% both this year and next. Now I will discuss our plans. Fourth quarter DRAM bid shipments are expected to grow by mid-single-digit percent sequentially, driven by further growth in sales of HBM and server DRAM that are showing strong demand. NAND bit shipments are expected to increase by a low 10% sequentially, primarily due to higher sales of enterprise SSD products. We will continue our focus on improving profitability by expanding sales of value-added products in the fourth quarter as well. The share of HBM sales, which is driving our DRAM revenue growth, expanded to 30% of DRAM sales in the third quarter and is expected to reach around 40% in the fourth quarter. In the third quarter, the shipment volume of HBM3e was greater than HBM3, and we plan to begin shipments of HBM3E 12 high products in Q4 as scheduled. In the first half of next year, sales volume of 12 high HBM3E products is expected to surpass that of eight high HBM3E. We plan to respond swiftly to the rapidly increasing demand for HBM3E based on our proven high performance and stable 1B nanometer process, and advanced MR MOF packaging technology. Through our differentiated AI product competitiveness, we have achieved revenue stability as well as expansion of our profit drivers. As a result, we have become able to manage our product and sales strategies flexibly according to market demand. Going forward, we will continue to focus on improving our profitability. At the end of August, we developed the industry's first 16 gigabit DDR5 product using 1C nanometer node, the sixth generation of the 10 nanometer process, continuing our DRAM technology leadership. Our 1C nanometer node is developed based on 1B nanometer process platform that has already proven mass production stability and high product quality, thereby minimizing potential errors during the mass production stage and efficiently maintaining the advantages of the 1B nanometer process. We have provided samples for product validation and plan to respond to the growing demand for DDR5 next year with products that have the best-in-class performance and cost competitiveness. The sales of enterprise SSD, which is driving our NAND segment recovery, continue to increase, accounting for over 60% of our NAND sales in the third quarter. We are currently the only company in the industry providing 60 terabyte products in mass. And we are in the process of validating our 122 terabyte product to supply in the first half of next year. Furthermore, we developed the PCLE Gen 5e SSD product, PB110, in September, applying two 38-layer technology, which will further strengthen our product lineup and solidify our position in the enterprise SSD market. The changes in demand for memory products due to advancements in AI technology are also bringing significant changes in the supply environment. For the past two years, production growth of conventional DRAM products was limited due to production costs during the downturn and expansion of HBM portion in total production. However, this year, supply growth of legacy products is more marked amidst growing supply due to recovering utilization rates and increasing capital spending. To respond to these market changes, we plan to expand production focused on products with clear competitive advantages. While reducing production of low demand DDR4 and LPDDR4 earlier than initially planned, we plan to accelerate the transition to advanced processes needed to increase production of HBM, DDR5, and LPDDR5. Meanwhile, for NAND, we will continue to operate with the focus on technology transitions rather than capacity increases until industry inventories are sufficiently depleted while placing greater emphasis on investment efficiency and optimizing our product mix. This year our investments have been concentrated on expanding the mass production of value-added products that are increasing in demand. Next year we plan to continue investing in tech migration to advance nodes to ensure stable supply for products where demand growth is evident, such as HBM DDR5, LPDDR5, and enterprise SSDs. We will also consider multiple scenarios to adjust investments proactively in the event of a market downturn. Furthermore, infrastructure spending is expected to increase next year due to ongoing construction of M15X and preparation of first fab in Yongin cluster, which are to be our future growth platform. M15X, which is set to be completed first, is expected to contribute to our DRAM production starting in 2026. And we plan to flexibly adjust the timing and scale of mass production in the new fab according to market demand. We achieved record high revenue and operating profit this quarter. On the back of our differentiated AI memory technology leadership, we will continue to support next generation memory products on time to meet customers' demand so that we can continue to contribute to the growth of the AI industry. Thank you. With that, we are now ready to take your questions.

Now Q&A session will begin. Please press star 1, that is star and 1 if you have any questions. Questions will be taken according to the order you have pressed the number star 1. For cancellation, please press star 2, star and 2 on your phone. The first question will be provided by Dongwon Kim from KB Securities. Please go ahead with your question.

Yes, thank you for the question. I will ask a question related to DRAM. The price of premium DRAMs such as PC, Mobile, and DDR4 are increasing due to competition. Please give us your opinion on the future price of Commodity DRAMs. Also, even if the price of Legacy like this drops, SK Hynix will be able to move differently from the market price in the case of Blended ASP due to the expansion effect of HBM sales. Please give us your opinion on this. That's all.