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.

Thank you very much for this opportunity to ask my questions. I have a question related to the DRAM. Recently, with the continued slowdown in demand for mobile and PC, and also because of the intensifying competition, there has been a fall in the price of the general-purpose DRAM, such as D4 and LPD4. So can you give us your price outlook for the general-purpose DRAM going forward? And also, If the legacy DRAM prices go down, then the blended ASPs will fall as well. However, because of the increasing share of HBM products in your cell structure, do you believe your blended ASP will move in a different direction from the actual market prices?

Thank you for the question. As you have mentioned, DRAM price volatility is increasing due to a number of factors,

negatively impacting the DRAM supply and demand, including the delayed improvement in PC and mobile demand, and also the Chinese suppliers entering the legacy market.

However, the supply situation of legacy products such as DDR4 and LPDDR4 and premium products such as HBM, DDR5, and LPDDR5 is very different.

However, there are significant differences in terms of supply and demand of legacy products such as DDR4 and LPDDR4 with that of premium products such as HBM DDR5 and LPDDR5, which we believe can lead to different price directions for each product.

As you well know, the volume and price of our HBM products are largely locked in through long-term contracts.

And so our company's average HBM price in 2025 is expected to increase YOY, accompanied by a shift towards greater share of the HBM3 products.

Also, in the case of high-performance, high-format DDR5 and LPDDR5 products, we believe that it still needs time for later companies, and we believe that the supply level of customers and supply companies is low.

In addition, for the high-performance, high-spec DDR5 and LP DDR5, at this point, it will still take some time for new entrants to enter the market, and customers' and suppliers' inventory levels are still believed to be low, while future demand for these products is expected to increase. therefore limiting any downward pressure on prices.

The blended DRAM ASP is expected to maintain an improvement rate even if some product prices drop.

Meanwhile, our DRAM business has become much more stabilized with HBM's share in the revenue growing, expected to reach 40% by the end of the year. Given HBM's relatively high ASP, we expect our blended DRAM ASP to continue its improvement trend, even as prices for some products decline.

We will continue to enhance HBM's business and maximize its profitability.

Going forward, by strengthening our HBM business, we will strive to maximize our profitability while also securing stable revenue.

The following question will be presented by Simon Wu from Bank of America. Please go ahead with your question.

Thank you for your question. My question is about the low BIT growth rate in the third quarter. Please explain the background of the low BIT growth rate in the NAND. Congratulations again on your good performance.

Thank you very much for this opportunity to ask my question. I have a question about the third quarter BIT growth, especially for demand products. It seems that your BIT growth has been lower than was expected. So can you provide a background as to why this has occurred? But despite this being so, I would like to congratulate you on your good performance.

Yes, I'll start with D-DEM. In the case of D-DEM, the BIT Growth Guidance that we gave in the performance announcement three months ago First, let me talk about the DRAM.

In the case of DRAM, three months ago in our earnings release, our big growth guidance in our earnings call was for a low single-digit growth versus Q2, but actually we delivered a low single-digit decline in the third quarter.

The lower than planned sales were mostly PC applications, and as you might expect, the DDR4 sales volumes have declined.

However, we sold more DDR5s than planned, making up for some of the lost volume.

Yes, in the case of Mende, the 3-minute Bicross Guidance was said to be a quarter-of-quarter, one-digit-middle decrease, but the performance was a 10%-middle decrease. Most of these decreases were single-segment and client SSD products, and depending on the channel and PC market demand and demand,

For NAND, we said our Q3 bid growth guidance was for a mid-single-digit decline, QOQ, and the actual result was a mid-10% decline. Again, most of the decline was in discrete and client SSD products with pressure on discrete pricing as demand from PCs and smartphones slowed.

We decided to carry out a supply carry if some of the demand is increased and the price drops even if the existing sales volume plan is lowered according to the sales strategy centered on profitability. This is a plan to gradually reduce the supply through future production control.

In line with our profitability-driven sales strategy, we have decided to carry inventory for some of the products where demand is slowing down and prices are falling, even if it is well below our original plan. And we plan to gradually reduce inventory through production adjustments in the future.

Next question, please. The following question will be presented by Sunggyu Kim from Daiwa Securities. Please go ahead with your question.

Yes, hello. Thank you for the question. First of all, congratulations on your good performance. I have a question for HBM. According to the recent possibility of Blackwell platform supply support and HBM supply increase of companies,

uh thank you for this opportunity to ask my question first of all let me offer my congratulations for your excellent performance i have a question about the hbm recently with the potential of a possibility of delays in the delivery of the blackwell platform and the increase in HBM supply from the suppliers, there are concerns about a possible oversupply situation in 2025 HBM market. So what is the company's view on this?

Thank you for your question. Unlike general DLM, HBM has a long-term contract structure, and most of the volume and price negotiations are completed in 25 years, so I think it is very likely in terms of demand.

Thank you very much for your questions. So unlike the general DRAM, HBM has a long-term contract structure with the volume and pricing negotiations already completed with most of our customers for 2025.

So we have very high visibility on the demand side.

We believe that next year's HBM demand is likely to be higher than what is currently anticipated, given the strong demand for AI chips and also the customers' willingness to expand their AI investments. The current AI technologies are evolving in a direction that uses more computing time to generate multiple possibilities and consider potential outcomes and also make inference-based decisions rather than simply generating learned patterns or making predictions that are based on historical data.

So as we expect the computing power requirements to increase further,

and computational resources to be in greater demand going forward, we believe that it is premature to talk about a slowdown in demand for AI semiconductors or HBMs at this point.

Rather, the difficulty of technology needed to develop HBM new products is increasing. Accordingly, if we consider various factors such as sales loss and customer certification,

Rather, the increasing difficulty of the technology required to develop new HVM products, the resulting yield losses, and also considering the need for customer qualifications. We believe all of these factors will make it difficult for the memory industry to supply enough products of the quality required by the customers in a timely manner.

I would like to say again that the possibility of upside in terms of demand and downside in terms of supply is high, so we expect that demand will continue to be stronger than supply next year.

In other words, the potential for upside on demand and downside for the supply is high, and we expect demand to remain stronger than supply in the coming year. We believe this is reflected in the fact that unlike the general DRAM, Customers are signing long-term contracts for HBM.

Thank you for the answer.

We will now receive the next question.

The following question will be presented by Junhee Lee from Goldman Sachs. Please go ahead with your question.

Thank you for the question. I also have a question about HBM. You said that HBM Kepa was sold out in 2025. If there is an additional demand here, I wonder if you have the capacity to respond and how you plan to respond. Thank you.

Hello, my name is Yi Jun Yi from Goldman Sachs. Once again, I would like to also offer my congratulations for your good performance, and thank you very much for giving me this opportunity to ask my question. I also have a question on HBM. During your presentation, you noted that your HBM capacity has been largely sold out for 2025. But if there is an additional demand or upside demand for HBM, Do you have the additional capacity to respond and how do you intend to respond? That is my question.

Thank you very much for your question.

Contrary to some concerns, AI-driven demand continues to exceed expectations this year, resulting in additional supply requests from our customers.

The company is smoothly implementing a plan to secure 2 times more than last year's TSV CAPA, and we are also working tirelessly to change the 1B nanometer for HBM-3 supply.

We are on track with our plan to more than double the TSV capacity this year compared to last year, and our transition to 1B nanometer and to ramp up the HPM3E supply is also proceeding very smoothly.

We are also making necessary investments to meet the customer demand for next year.

We are also making the necessary investments to meet our customers' volume requirements for next year, which have already been secured. But it is also true that our production capacity is facing limitations in meeting all of the increased demand in excess of our original plan.

Especially, the demand for HBM-3 products is increasing faster than expected. The company plans to quickly convert the legacy tech used in HBM-3 and DDR4 into a front-end process, reduce the production of products with lower demand, and focus on expanding HBM-3 production to meet the maximum customer demand.

Especially recently, demand for HBM3e from customers has been growing at an accelerating pace, more so compared to our initial expectations. We plan to transition legacy technologies utilized in HBM3 and DDR4 to the advanced production processes as soon as is possible, focusing on reducing production of products with slowing demand and increasing production of HBM3E to meet customer demand as much as possible.

Thank you very much for that answer.

We'll now receive the next question.

The following question will be presented by Peter Lee from Citigroup. Please go ahead with your question.

Hello, I'm Lee Se-pul from Citigroup. I have a question about the recent stock situation. Recently, as the number of PC and mobile phones has increased, there are some stock issues and concerns in the market. I'm curious about the current stock situation of companies and customers. And I think the premium products of DJI 4 and DJI 5 will be different. When do you think the stock will normalize? Thank you very much.

I have a question related to inventory. There are inventory issues due to the recent slowdown in mobile and PC demand, and there are market concerns about this matter. So what is the current inventory situation for the company and your customers? I do believe the situation will be different from conventional products compared to the premium products. But when do you think the inventory will become normalized?

Yes, thank you for the question. The recovery of PC and mobile demand has been delayed than expected, and the company is reducing the production ratio of some legacy products with a high supply ratio.

Thank you very much for your question. As the recovery in PC and mobile demand has been slower than initially anticipated, we have adjusted our production plans and are reducing production of some of the legacy products with high share of inventory faster than has been originally planned.

The overall supply of PC and mobile customers in the third quarter has been maintained at a similar level compared to the previous quarter.

The overall inventories at PC and mobile customers at the end of third quarter is understood to be remaining at similar levels compared to the previous quarter, while inventories at server customers, where demand is relatively robust, are at healthy levels.

한편 PC, 모바일, 서버 등 전 응용처를 막론하고 DDR5와 LPDDR5는 여전히 높은 수요를 유지하고 있습니다.

Meanwhile, a high level of demand interest is maintained for DDR5 and LPDDR5 across PC, mobile server, and other applications.

당사의 일반 DRAM 생산 여력은 HBM 생산 확대로 제한적이기 때문에 DDR5와 LPDDR5 제보는 Our conventional DRAM production capacity is limited by the ramp-up of HBM production, so inventories of DDR5 and LP-DDR5 are tight.

We are accelerating the transition to advanced process by increasing the scale of production cuts for legacy products to meet HBM demand upside and also to respond to demand for DDR5 and LP-DDR5 next year.

Through flexible production plans aligned with demand, if the supply of legacy products is gradually reduced,

As we gradually run through the inventories of legacy products through this flexible production plan to meet demand, we expect industry-wide inventories of legacy products to normalize in the first half of next year.

Next question, please. The following question will be presented by Nicholas Goudois from UBS. Please go ahead with your question.

Yes, good morning. Nick Goudois from UBS. Thank you very much for taking my question. So going back to HBM, for HBM 312i, you just mentioned that you're starting shipping in Q4. 24. uh that seems first of all earlier than peers but also considering that nvidia may not need uh to put hbm3e12 high in servers before uh we think q225 and whatever amd mi325 seems to also be using at high um you know this this effectively looks like a reasonably early timeline so how could we explain this discrepancy and how do you look at your 12-high ramp from here? On the back of this, what do we think about your likely market share in HBM3 12-high compared to your already high market share in HBM3 8-high? Thank you.

Thank you for the question. As you said in the presentation, SK Hynix released the HBM-3 to a while earlier than other competitors. One of the competitors recently announced that the HBM-3 has been affected by the release of a new product. I wonder if SK Hynix is experiencing the same changes. I wonder how the HBM-3 market share is compared to the HBM-3 8th stage. Thank you for your question.

The company started supplying HBM-3 8th stage products for the first time this year. In this quarter, the HBM-3 share exceeded the HBM-3. In the early part of this year, we have announced that we started to supply HBM3E8 high for the first time in the industry.

In this quarter, we have announced that the share of HBM3E has increased surpass HBM3. This rapid change... And as I mentioned earlier, demand for HBM3 is going faster than we had originally anticipated.

HBM3 12-dan 제품은 9월부터 이미 양산을 개시했고, 계획대로 이번 분기부터 출하할 예정입니다. 고객의 신제품 출시에 따라서 내년 HBM 시장 수요는 HBM3 8-단에서

HBM 3E 12 High started commercial production in September and will start shipping this quarter as has been planned. With the new product launch of customer, the HBM market demand next year is expected to quickly shift from HBM 3E 8 High to 12 High.

As a result, HBM3E 12 high sales are expected to surpass HBM3E 8 high sales in the first half of next year and the majority of sales in the second half.

Of the year, it is expected to be 12 high products.

당사는 단수 증가로 공정의 난이도가 높아지는 만큼 순조로운 양산을 위한 재반 준비를 미리 갖추었고 고객과 긴밀한 협업으로 12단 수요를 선점해 나갈 예정입니다.

We have made the necessary preparations to proceed with smooth commercial production as the increased number of staff increases the difficulty of the process. And we will work closely with our customers to preempt the 12 high demand.

In the same way as in the 8th stage, HBM3's 12th stage products will also be led by HBM. As the industry's best characteristics have been secured in terms of characteristics, we will continue to expand the HBM market through product differentiation.

As with the 8 High, our HBM3 E12 High product will also take the lead in market share. As we have secured the industry's best product characteristics, we will continue to lead the HBM market through product differentiation.

Thank you for the answer.

We'll receive the next question. The following question will be presented by Sunwoo Kim from Merit Securities.

Please go ahead with your question. However, NAND seems to have conservative standards. I would like to ask you how our company is looking at the NAND market and what strategy you are setting up. Thank you.

Thank you very much. I have a question about your investment for NAND. It seems to be that you have a rather conservative strategy when it comes to investments. You are making proactive and aggressive investments when it comes to the DRAM. but your investment style seems to be rather conservative when it comes to the NAND products. So what is the market outlook that you have for the NAND products, and what is your strategy to respond to this market situation?

Thank you for your question. Like I said at the beginning of this year, the NAND business is not focused on external growth, but on first, profit, and second, optimization of investment.

Thank you very much for your question. As we have stated since the beginning of this year, our NAN business is focused on profitability and investment optimization rather than focusing on outward growth.

As a result of this strategy, we are focusing on investment efficiency by supporting CapEx in the process of securing profitability. The industry's stock has recovered to its normal level,

As part of this strategy, we are focusing on investment efficiency by only spending capex on positive convergence for products that are guaranteed to be profitable, and we plan to maintain a conservative capacity and investment posture until industry inventories return to normalized levels and we see a full-scale improvement in demand.

Also, we are strengthening high-profit-centered product mixes such as Enterprise SSD, which shows clear demand recovery in the NAND market this year, and we are going to expand our portfolio by expanding the ultra-high capacity Enterprise SSD product lineup.

Also, in the NAND business, we are strengthening our product mix toward higher-margin products, such as enterprise SSDs, where we are seeing a clear demand recovery this year, and we will further advance our portfolio by expanding our ultra-high-capacity enterprise SSD product lineup.

As you can see from our performance in the third quarter, even though the NAND bit sales have decreased slightly, As was shown in our Q3 results, we are focused on stabilizing prices, even if it entails our bid sales volume declining slightly.

As a result, we expect the market share of our NAND products to decline this year in terms of volume, but in terms of revenue, our market share will be higher year over year.

올해 NAND 수요는 예상보다 더디게 개선되고 있으나 내년에는 AI PC와 AI 스마트폰 출시가 본격화되고 교체 수요까지 발생하면서 NAND 수요 환경은 올해보다 개선될 것으로 예상됩니다.

While NAND demand is improving more slowly than expected this year, the NAND demand environment is expected to improve next year as AI PCs and smartphones are rolled out and replacement demand is generated.

We are planning to maintain the investment optimization method.

To strengthen our NAN positioning and fundamentals to drive sustained profitability, we plan to maintain our profitability for strategy and investment optimization.

Thank you for your answer. Next question, please.

Thank you very much for that answer. We'll receive the next question.

The next question is from Kwon Jae-hyun of J.P. Morgan. The following question will be presented by Jaehyun Kwon from J.P. Morgan. Please go ahead with your question.

Hello, I'm Jaehyun Kwon from J.P. Morgan. Thank you for your question. I have a question about HBM. I know that HBM needs about three times as much vapor as general DLM for home production. If HBM4 is moved to next year, Thank you for giving me this opportunity to ask my question.

I have a question on HBM. It is said that HBM requires about three times more wafers than conventional DRAM for the same chip production. But if we transition to HBM4, will the conversion ratio become even larger compared to the conventional DRAM? Thank you.

HBM requires a larger die size than conventional DRAM to achieve high bandwidth and high performance.

And due to the nature of the package processing, where multiple layers are stacked, more wafer capacity is required to produce the same number of bits as conventional DRAM products.

HBM-3E requires about 2 to 3 times the additional wafer capacity compared to the same amount of DDR products. HBM-3E requires about 2 to 3 times the additional wafer capacity compared to the same amount of DDR products.

HBM-3E production requires 2 to 3 times more additional wafer capacity compared to DDR products of the same capacity. And 12 high products is even more difficult to package than 8 high with lower maturity yields requiring more capacity.

When HBM-4 is changed, the die size will be larger for higher band width and high-performance characteristics. 일반 DRAM과의 전환율은 3배 이상으로 증가할 것으로 보입니다.

The transition to HBM4 will require an increase in die size to enable higher bandwidth and higher performance characteristics, which will more than triple the conversion rate to conventional DRAM.

중장기적으로 DRAM 수요는 연평균 10% 중후반대 성장이 전망되고 있습니다만,

In the medium to long term, DRAM demand is expected to grow at a category of mid to high teens, while HBM is expected to grow significantly above the DRAM average. Given the increasing demand for HBMs and the rising conversion rate, more wafers are expected to be required to produce the same bit with each new generation of HBMs, which will continue to limit the supply of conventional DRAMs.

Thank you.

Next question. The following question will be presented by Minsuk Choi from Korea Investment and Securities.

Please go ahead with your question. First of all, let me offer my congratulations for your excellent performance this quarter.

I have a question related to China. Recently, the aggressive capacity expansion by Chinese DRAM suppliers is of concern for the market as more Chinese suppliers are entering into the memory market. So my question is, what is your medium to long-term response to China's entry into the memory market?

Thank you for the question. I will answer it.

Thank you very much for that question.

Let me answer your question.

As you have mentioned, due to the increased supply from Chinese memory suppliers, for legacy products like DDR4 and LPDDR4, the market is becoming more competitive.

However, in the market where DDR4 and LPDDR4 products are used, there is already a crossover between DDR5 and LPDDR5.

However, the market where DDR4 and LPDDR5 products were adopted is already making the crossover to DDR5 and LPDDR5 and the newcomers are still far behind the incumbents in terms of technology and product capabilities.

According to the application, price competitiveness can be relatively more important than performance, but high-performance and high-use memory will be more necessary so that the installation of AI functions can be expanded on PCs and smartphones.

Depending on the application, price competitiveness may be more important than performance, but as AI capabilities become more prevalent on PCs and smartphones, the need for high-performance, high-end memory will increase.

Given the changing competitive environment, we will quickly reduce legacy products and focus on choosing and focusing on high-quality markets where medium-term growth is expected.

Given the changing competitive landscape, we will be rapidly reducing our legacy offerings and selectively focus on higher value-added markets where we expect mid- to long-term growth.

In the case of DDR5 and LPDDR5, we plan to continue the gap with late-stage companies through product development that supports faster speed.

In the case of DDR5 and LPDDR5 as well, we plan to continue to maintain our lead over the latecomers by developing products that support even higher speeds.

Thank you for the answer.

Let us receive the next question. The following question will be presented by Donghee Han from SK Securities.

Please go ahead with your question.

Thank you very much. I am Handong Min from SK Securities. I have a question related to your capacity investment plans. So may I ask what your investment plans is for capacity related to 2024 and 2025? And if there is downturn in the memory market that is more serious than what you have expected, how do you plan to reduce such investment plans going forward? Thank you.

Thank you for your question. I will answer it.

Thank you very much for this question. Let me answer your question.

This year's investment volume is expected to grow faster than expected due to the HBM demand and the M15X investment decision, so it is expected to increase by 10 trillion won in the mid-to-late stage than the previous plan.

Investment for this year is expected to be in the mid to high $10 trillion range, slightly higher than planned at the beginning of the year, reflecting faster-than-expected growth in HBM demand and also the decision to invest in M15X.

In 2025, the specific size has not been confirmed yet, HBM's investment in stable supply, i.e. the transition of 1 bnm, TSB CAPA acquisition, and post-production CAPA investment, and investment in products that have already been acquired and secured by the supply contract of the customer and legacy products, instead of reducing legacy products, D5, LP D5's expansion and expansion investment,

Although the exact investment amount for next year 2025 is not yet finalized, 2025 is expected to be slightly higher than this year due to investments for stable supply of HBM, in short, the 1B nanometer transition and securing TSV capacity, investments for products for which demand has already been secured through supply agreements with customers, including back-end process capacity, transition investments to ramp up production of D5 and LP-D5 while reducing legacy products, and also continued investment into M15X and the Yongin infrastructure.

However, the impact of this on short-term production growth is limited given that most of the increase in investment is in infrastructure, R&D, and back-end processing. We are considering multiple scenarios for next year's investments and will continue to select and continuously review the signpost that may influence our investment decisions.

Our company continues to maintain the principle of only investing in products that are profitable, and we will be flexible in our investment decisions as the market evolves, and this is how we're going to respond to the market situation.

Next question, please. The following question will be presented by Rikis Hall from HSBC. Please go ahead with your question.

Yes, this is Seo Joo-il from HSBC. Thank you for the question. I have a simple question regarding NAND. Looking at Bicross and ASP, I think the sales of this quarter will be similar compared to last year. The margin seems to have improved a bit. As you mentioned earlier, there would be a product mix improvement aspect, but I would appreciate it if you could explain whether there is a part of the stock asset evaluation pre-return fee or something like that. Thank you very much for this opportunity to ask my question.

If you look at the growth and ASP performance, it appears that it will be at a level that is similar to the previous quarter, the NAND sales. And I believe there is also some improvement in your margins. This may be due to the product mix improvement that you have mentioned during your presentation. Or is there any one-off expenses that has been reflected in the third quarter, such as the write-back of the losses on valuation of inventory and other such one-off expenses. And also going forward in the fourth quarter and onwards, do you have any remaining one-off expenses that needs to be further reflected? Thank you.

Thank you very much for those questions. Let me answer your questions. In the third quarter, NAN revenue declined very slightly QOQ as shipments declined due to a focus on ESSD products where demand continued.

to be strong, and sales responses were driven by real demand. But higher ASPs nearly offset the decline in shipments.

According to the decrease in sales, the sales price decreased, but as the price rose, the sales remained and the profitability improved. The sales value of ESSD products with high profitability exceeded 60%,

Cost of goods sold decreased due to lower sales volumes, while revenue was maintained due to higher prices, resulting in improved profitability. And the share of highly profitable ESSDs in the revenue exceeded 60%, contributing significantly to improved profitability.

In terms of the cost of the high-end evaluation or the cost of the low-end evaluation, most of the high-end evaluation funds already recognized during the downturn have been included, and this quarter, the cost of the low-end evaluation and the cost of the high-end evaluation have been slightly affected, and the cost of the low-end evaluation, which affects the profitability other than the low-end evaluation,

Regarding the one-off expenses such as inventory valuation losses or reversals, most of the inventory valuation provisioning recognized during the downturn has already been reversed. So the impact of inventory valuation and profit or loss was minimal this quarter. And other than this factor, there was no significant increase in one-off expenses that affected profitability.

We will now receive the last question.

The last question will be presented by Youngho Ryu from NH Investment and Securities.

Please go ahead with your question. I may be a little lost, but I would like to ask you a question related to HBM4, which is being developed in the future. I wonder if the current development status and technology leadership such as now can continue to be maintained. And from HBM4, I know that one of the biggest changes is this logic die. For this logic die, I know that the cooperation between customers and people is very important. I wonder if there has been any change in this cooperation in the past.

First of all, I would like to congratulate you on your record high quarterly performance this quarter. And I have a question on HBM4. So what is the HBM4 development status, and do you believe you can maintain the technical leadership in HBM4 as well? And one of the biggest differences that we see forthcoming related to HBM4 is, of course, the logic die. And so with regard to logic die, it seems that the cooperation with the customers and the foundries will be even more important going forward. So would this mean that there would be any changes in the way that you cooperate with your customers and foundries going forward?

Yes, thank you for the question. Thank you very much for your questions.

In the case of our company, in order to develop HBM products with the best characteristics and quality, we have been identifying technical issues from the very pre-planning stage of HBM products with our customers, and using the customer feedback, we have been improving our internal baseline, increasing consistency, and enhancing the completeness of our products.

In HBM4, the number of I.O.s has increased by twice, and the

HBM4 will see a lot of technical changes, including the doubling of the I.O., new schemes for using less power, and utilizing a logic foundry for the first time.

This requires a much more deeper technical exchange going beyond the scope of traditional testing.

And this is the reason why we and our foundry partners and the teams involved in the project are working together in a one-team structure.

I think that providing fewer next-generation products with improved performance at the speed of AI semiconductor technology that develops rapidly is a key factor in securing the leadership in the future HBM market.

We believe that timely delivery of next-generation products with improved performance in line with the rapidly evolving technology pace of semiconductors for AI is a key factor in securing leadership in the HBM market going forward.

Unlike the general DLM with a commodity personality, HBM determines the production size based on the demand of the customer.

Unlike general DRAMs, which are by nature a commodity product, the scale of production for HBM is determined based on customer demand, so it is more important to reliably supply quality products that meet customer requirements in a timely manner rather than to use advanced processes to reduce cost by reducing chip size.

And because the cell area of the HBM chip structure is relatively small, the benefit of reducing the chip size is limited even if the first stage process is applied. Therefore, the company has already verified the stability and productivity of HBM4 products

In addition, since the chip structure of HBM has a small area for the cell, the benefit of reducing the chip size by applying advanced processes is limited. So we are preparing to supply HBM-4 products with stable quality in a timely manner by applying the 1B nanometer and advanced MRMUF technology to stability and mass production capabilities, which have been already proven. And our aim is to ship to customers the HBM-4 products in the second half of 2025, as was planned.

Through this, we will not only provide low-cost supply, but also ensure investment efficiency,

This will ensure not only supply but also investment efficiency so that we can continue to defend our market leadership and profitability.

Thank you.

Thank you very much. With this, we'd like to conclude the SK Highness 2024 Q3 Earnings Release Conference call. Thank you very much.