Sk Hynix Inc S/Gdr 144A

Good morning, afternoon, and evening. Thank you for joining SK Hynix 2025 Q3 Earnings Release Conference Call. Following SK Hynix presentation, there will be a Q&A session. If you have a question, please press star and one on your phone. Please note that presentations will be interpreted simultaneously and Q&A session consecutively. With that, we are now ready to begin. Good morning, afternoon, and evening. This is Park Sung Hwan, Head of IR at SK Hynix. Welcome to the SK Hynix 2025 Third Quarter Earnings Release Conference Call. Allow me to introduce the executives present here with me today. We're joined by Chief Financial Officer Kim Woo Hyun, Head of DRAM Marketing Kim Kyu Hyun, Head of NAND Marketing Kim Seok, and Head of HB and Sales and Marketing Kim Gi Tae. 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 SK Hynix Earnings Release Conference Call for the third quarter of 2025. CSO, Mr. Kim Woo-hyun, 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 2025. Earlier in the year, we expected more moderate demand conditions in Q3 due to external uncertainties and impacts of some preemptive purchases in the first half. However, we ended up witnessing a highly favorable market environment with a spike in demand for memory products for servers, including HBM, driven by surging AI infrastructure investments by big tech companies. Third quarter revenue again recorded record quarterly revenue of 24.4 trillion won, up 10% QOQ and 39% YOY. This was driven by stronger DRAM and NAND pricings, as well as increase in DRAM shipments from rising demand. DRAM speed shipments exceeded guidance by increasing high single-digit sequentially, driven by growing sales of HBM3E 12 high products and server DDR5 to support AI demand, as well as seasonal demand recovery for LP DDR5 products. In particular, shipments of high-density DDR5 modules of over 128GB doubled QoQ for two quarters in a row, clearly demonstrating robust growth in HPC-related DRAM demand. ASB rose by mid-single-digit QoQ, with strong ASB growth for conventional DRAM products. For NAND, rich shipments decreased by mid-single-digit QoQ, given high base from the previous quarter, but enterprise SSD shipments grew by double digits, amid rising demand from AI servers. ASP increased by low 10% compared to previous quarter, supported by NAND price recovery and higher mix of enterprise SSDs with pricing premiums. Operating profit reached 11.4 trillion won, up 24% QOQ and 62% YOY, also marking an all-time high. Operating margin improved by 5 percentage points QOQ and 7 percentage points YOY to 47%, driven by strong sales of leading edge products such as HBM, high-performance DRAMs, and enterprise SSDs. This marks the first time in the company's history that quarterly operating profit has exceeded 10 trillion won. Depreciation and amortization expenses in Q3 were 3.6 trillion won, resulting in EBITDA of 14.9 trillion won and an EBITDA margin of 61%. Non-operating income net of expenses was $3.4 trillion, including $0.21 trillion of foreign currency-related net gain due to stronger U.S. dollar at the end of the quarter, and $3.3 trillion of valuation gains on investment assets. Pre-tax income was $14.8 trillion, net income was $12.6 trillion, and net profit margins stood at 52%, again reaching record high levels. At the end of Q3, cash and cash equivalents stood at 27.9 trillion won, up 10.9 trillion won from debt of last quarter. Interest-bearing debt increased by 2.2 trillion won to 24.1 trillion, resulting in a net cash position of 3.8 trillion won. Accordingly, debt-to-equity ratio improved by 1 percentage point QOQ to 24%. Now, let me share our market outlook. In 2025, despite ongoing geopolitical and macroeconomic uncertainties such as tariffs, the memory market saw mixed expectations, optimism regarding explosive AI growth alongside concerns about monetization. Recently, however, global investments in AI infrastructure have become the top priority for AI market expansion driving significant demand growth not only for HBM, but for broader memory demand such as DRAM for general-purpose servers and enterprise SSDs. The AI market is now shifting rapidly from the training phase of large models to the inference phase where users actively utilize AI services. As AI models evolve into multimodal forms, and inference-based AI services spread across industries, the number of concurrent users, and the need for faster, more accurate responses are rising dramatically, causing an exponential increase in the number of tokens processed. While the training stage primarily involved computation on large-scale AI servers, the evolution toward inference requires handling vast numbers of tokens with low latency. This is driving efforts to distribute computing workloads across not only AI servers, but variety of infrastructures such as general-purpose servers and edge devices. KV cache, or key-value cache, which is intermediate computation results generated during inference, grows proportionally with context length. When HBM alone cannot store all of this data, it is offloaded sequentially to conventional DRAM and SSDs. With AI systems processing multiple user requests in parallel, the combination of growing output tokens and longer context windows is exponentially increasing memory usage during inference. As a result, expansion of the AI inference market is driving demand not only for HBM and high-performance DDR5, but also for enterprise SSDs, signaling a structural shift in both DRAM and NAND demand. Leading AI companies are now accelerating investments backed by monetization and forming strategic partnerships to support this growth. This trend will lead to further expansion of AI data centers creating robust demand across a wide range of memory products from HVM to conventional VRAM and NAND. Meanwhile, the smartphone and PC markets are expected to show moderate growth, reflecting ongoing inflationary and macroeconomic uncertainty. However, as users increasingly experience on-device AI, AI functionality is spreading even to low- and mid-end smartphones. While AI PCs are expected to account for over half of total PC market, therefore, we expect content growth will continue to drive memory demand for consumer applications. Reflecting such demand environment, DRAM demand growth is expected to rise from high 10% this year to over 20% next year, while managed device growth is projected to improve from new 10% this year to high 10% in 2026. Next, I will discuss the company's plans. In the fourth quarter, we plan to continue to expand sales of HVM, server DRAM, and enterprise SSD. However, considering our normalized levels of inventory, we expect DRAM and NAND bit shipments to increase by low single-digit QOQ for both products. For HBM, we have completed discussions with key customers for next year's HBM supply. Our HBM-4, which we have completed development and mass production preparation in September, not only fully meets customer performance requirements, but also supports highest speed in the industry. We will start HBM-4 shipments in Q4 this year with further expansion planned for 2026, reinforcing our leadership position in the HBM market. For conventional DRAM, we plan to meet increasing customer demand by securing a full lineup of the most advanced 1C nanometer-based products across server, mobile, and traffic segments. Mass production of 1C nanometer is already ongoing smoothly, and we plan to accelerate migration in 2026 to maintain our technology and cost leadership. For NAND, Where demand recovery has been slower, we are deploying world's highest 321-layer technology on various solution products to be ready when market conditions improve. We will also focus on supporting the growing enterprise SSD demand, all the while continuing to operate with a profitability-focused approach. Furthermore, in line with growing demand opportunities in AI servers, We are investing in tech migration to expand supply of both TLC and QLC products based on the 321 layer platform next year. Meanwhile, we have secured customer demand across all DRAM and NAND products, including HBM through next year. While we are currently doing our utmost to meet customer demand, AI memory demand is significantly exceeding expectations. and this trend is expected to continue for the foreseeable future. To respond swiftly, we have recently opened a clean room ahead of schedule at M15X and begun equipment installation to rapidly secure new capacity. For conventional DRAM and NAND, we will accelerate the transition of existing capacity to advanced nodes to ensure robust responsiveness to rising demand. As a result, Our CAPEX in 2026 is expected to increase from this year's level. While continuing to maintain CAPEX discipline, we will plan our investments in an optimal manner to support market demand. AI technological innovation is heralding fundamental changes across industries and society as a whole. The memory market is transitioning into a new paradigm with the emergence of HVM, and AI-driven demand is now beginning to expand across all product lines. We have led the market from the inflection point of this AI-driven industrial transformation, leveraging our HBM competitiveness to deliver differentiated performance. Moving forward, we will further strengthen our technology and product competitiveness and solidify our leadership in the AI memory market by delivering products with the highest quality and performance. 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. 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. Thank you very much for taking my question.