Sk Hynix Inc S/Gdr 144A

Good morning, afternoon, and evening. I'm Park Sung Hwan, head of IR at SK Hynix. Welcome to the SK Hynix 2025 First Quarter Earnings Release Conference Call. Allow me to introduce the executives present here with me today. We are joined by CFO Kim Woo Hyun, head of DRM Marketing Kim Kyu Hyun, head of NAND Marketing Kim Seok, and head of HBM Sales and Marketing Kim Ki Tae. Let me issue a disclaimer that all outlets presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we will now begin SK Hynix earnings release conference call for the first quarter of 2025. CFO Kim Woo-hyun will present the earnings, which will be followed by the company's future plans and market outlooks. and a Q&A session with the attending executives. Good morning, everyone. I'm Kim Woo-hyun, CFO at SK Hynix. Allow me to first introduce the company's performance for the first quarter of 2025. Despite the expected seasonal demand weakness and customer inventory digestion, the memory market improved faster than anticipated. driven by Chinese subsidies for consumer electronics, intensified AI development competition, and some restocking demand. In this week's seasonality, we recorded $17.6 trillion in revenue, marketing our second highest quarterly revenue following the last quarter's all-time high. This represents a 11% sequential decrease, but a 42% increase year-on-year. Starting with DRAM, the shipment exceeded guidance. with the sequential decrease of high single-digit percent due to strong sales of high-value added products such as HBM3e and DDR5, as well as higher-than-expected sales for PCs and smartphones. ASP remained flat despite a decrease in conventional DRAM pricing thanks to expanded Thanks to expanded high-value product sales, HBM sales in particular continued growth with the expansion of HBM3E 12 high products as planned. NAND saw some price increase in the spot market due to production cuts in the industry, but demand recovery was relatively weaker than DRAM. Our shipments declined high 10% compared to the previous quarter as planned, and ASP dropped about 20%, mainly due to increased sales of discrete products driven by customer inventory restocking. Our Q1 operating profit was 7.44 trillion won, the second highest following the 8.08 trillion won recorded last quarter. Operating margin improved by 1 percentage points sequentially to 42% despite a decrease in revenue. We believe the improvement in operating margin during a market correction proves not only the structural transformation of the memory business due to AI, but also our strengthened competitiveness. We will continue our efforts to improve business fundamentals to improve to deliver differentiated results even during down cycles in the memory market. Depreciation and amortization expenses for Q1 slightly increased from that of last quarter to 3.33 trillion won. EBITDA stood at 10.77 trillion won with EBITDA margin of 61%. Non-operating gain netted loss reached 1.86 trillion won. Notable items include foreign currency related net gain of 0.12 trillion won due to strong US dollar against Korean won and 1.74 trillion won in other non-operating income such as valuation gains from investment in Kioxia. Pre-tax income was $9.3 trillion, and net profit was $8.11 trillion, with a net profit margin of 46%. In Q1, we completed the second closing of the solid-time acquisition and paid the remaining balance of $2 billion. Cash and cash equivalents, including short-term investments at the end of Q1, 14.3 trillion won, up 0.2 trillion won from the previous quarter. Interest bearing debt rose by 0.6 trillion won to 23.3 trillion won, and net debt increased by 0.5 trillion won to 9 trillion won. Consequently, our debt-to-equity and net debt-to-equity ratios improved slightly, QOQ to 29% and 11% respectively. Next, the company's market outlook and plan. Although we initially expected the memory market to recover towards the second half of the year, Tightened global certainties such as tariff policies have increased volatility in the second half demand projections. We will maintain close communication with customers and strengthen cooperation across the supply chain to meet customers' needs seamlessly amid this evolving environment. Looking at demand by application, We maintain our previous outlook on PC demand that the demand will be driven by replacement of PCs following Windows 10 end of support and the ramp-up of AI PCs. In smartphones, demand for high-performance memory is expected to continue with the adoption of AI models like small LLMs. Upcoming smartphone launches with enhanced AI features are expected to drive replacement demand further increasing demand for high-performance mobile DRAM such as LPDDR5X and LPDDR5T. In Q1, both PC and smartphone segments saw some demand recovery due to China's subsidy program and customer inventories are decreasing. While supply side remains tighter than expected, we have some preemptive purchases due to ongoing market uncertainties. Server market demand is accelerating as big tech companies race to develop high performance AI training and inference models. These companies are actively releasing new AI models and agents highlighting their commitment to investing in AI infrastructure. As a result, demand volatility in the server market is expected to be relatively limited. The release of efficient open source AI models like DeepSeq earlier this year has lowered entry barriers, allowing more companies and research centers to participate in the ecosystem. This is expected to stimulate demand for AI servers further. Additionally, many countries are building AI infrastructure at national level, which should positively impact long-term demand for AI memory. Meanwhile, in NAND, while AI impact has been relatively limited, Market recovery this year is expected to be fueled more from supply side factors. While demand remains somewhat muted, NAND suppliers are adopting conservative investment strategies and even production cuts for certain products, which will continue affecting the market positively throughout the year. In the mid to long term, Enterprise SSDs are expected to lead demand growth. Some big tech companies are considering replacing traditional HDDs with QLC-based enterprise SSDs for certain workloads. When we see more meaningful progress in these efforts, this shift will become a significant growth driver for demand market. Now I will discuss the company's plans for this year. Although market uncertainties are heightening, we currently anticipate a low 10% sequential increase in DRAM shipments and over 20% growth in NAND shipments in the second quarter. HBM demand. which is contracted a year in advance with customers, is expected to roughly double from that of last year as previously forecasted. The transition to HBM3E 12 high is progressing smoothly, and more than half of our total HBM3E shipments in QE will be 12 high products as planned. Due to the strong product competitiveness of our HPM3E12 high product, customer demand remains robust. We are optimizing product mix of our existing fabs and reallocating resources to ensure a stable supply of HPM that meets customer needs. In March, we shipped samples of HBM4, the mainstream product for 2026, to major customers for the first time in the world and reaffirmed our technological leadership. We plan to complete mass production preparation for HBM4 12 high within the year and will maintain our leadership in next-gen HBM markets. We also began shipping LPCAM2 high-performance memory module for AI PCs to certain PC customers in Q1. For SOCAM, low-power DRAM module for AI servers, we are preparing for timely supply of the product through close cooperation with customers. In NAND, While there are positive signs like rising spot prices and declining customer inventories, global uncertainties make it difficult to determine whether the recovery will be sustained. We will continue to focus on profit-oriented operational decisions and maintain a prudent approach to CAPEX spending. Constructions for the first fab in Yongin and M15X are progressing as planned. The Yongin fab broke ground in Q1 and is targeting completion by Q2, 2027, while M15X is scheduled to open in Q4 this year. Our strategy remains to prepare for future growth while maintaining flexibility in fab utilization based on market conditions. Given today's uncertain environment, we will continue to focus our spending on value-added products with high visibility, as we have previously emphasized, and also enhance investment efficiency even more than what we have done. Going forward as an AI memory leader, We will actively cooperate with partners, continuously overcome technological limitations, and maintain industry-leading product competitiveness so that we can continue our profit growth. Thank you.

With that, we are in. 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, that is star and 2 on your phone. The first question will be provided by Sunwoo Kim from Merit Securities. Please go ahead with your question.