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 2025 Q4 Earnings Release Conference Call. Today, we are joined by President of Corporate Center, Song Hyun Jong, Chief Financial Officer, Kim Woo Hyun, Head of DRAM Marketing, Park Jun Deok, Head of NAND Marketing, Song Chang Seok, and Head of HBM Sales and Marketing, Kim Ki 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 fourth quarter of 2025. Song Hyunjong, President of Corporate Center, 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. This is Song Hyang-jong, President of Corporate Center. Allow me to first introduce the company's performance for the fourth quarter of 2025. During the fourth quarter, strong demand for memory products continued, driven by intensifying global investment in AI infrastructure. Demand increased significantly not only for HBM but also for conventional server memory. The pace of industry supply growth could not keep up with demand, leading to broad-based price increases and the formation of a highly favorable market environment. As prices for both DRAM and NAND rose sharply and NAND bit shipments increased, fourth quarter revenue reached 32.8 trillion won of 34% QOQ and 66% YOY, thereby achieving the highest quarterly revenue. DRAM shipments grew by low single-digit percent, driven by increased sales of HBM3E125 products and DDR5 for servers. Shipments of high-density DDR5 modules increased by approximately 50% QOQ, leading demand growth centered on AI and HPC. ASP rose mid-20% QOQ, reflecting a significant increase in conventional DRAM prices. For NAND, with the base effect from lower shipments in the previous quarter, demand growth in mobile products and ESSD led to approximately 10% increase in shipments QOQ, exceeding guidance. ASP also increased low 30% QOQ as price increases accelerated. Driven by substantial price increases, profitability improved for both DRAM and NAND. As a result, fourth quarter operating profit reached 19.2 trillion won, up 68% QOQ and 137% YOY, marking a record high-quality operating profit with the operating margin of 58%. Depreciation and amortization for Q4 was 3.6 trillion won. EBITDA amounted to 22.7 trillion won with an EBITDA margin of 69%. Net non-operating loss reached $1.5 trillion, including $6.6 trillion in valuation gains on investment assets and $8.4 trillion in loss on derivatives related to exchange rights on exchangeable bonds. Pre-tax income amounted to $17.7 trillion, net profit totaled $15.2 trillion, and net profit margin was 46%. Now moving on to the annual performance for 2025. The year 2025 marked a fundamental shift in the structure of memory demand driven by the broad adoption of AI. The memory market has moved beyond increasing contents, with growing demand for multidimensional performance that simultaneously meets requirements for speed, efficiency, and reliability. The bar for product competitiveness has been raised significantly. The company proactively strengthened its technological competitiveness with a focus on AI memory, while expanding the share of high value added products in the portfolio, successfully securing both profitability and growth. As a result, full year 2025 revenue reached 97.1 trillion won and operating profit totaled 47.2 trillion won, representing YOY growth of 47% and 101% respectively. These achievements are not merely the result of short-term favorable market conditions, but rather the outcome of our strategic execution aligned with an increasingly AI-focused demand environment. The year 2025 is also a milestone year in which the company once again demonstrated its world-class technological leadership. In DRAM, following world's first sample shipments of HBM4 to major customers in March last year, we were also the first in the world to secure mass production readiness in September, further solidifying our technology leadership in the AI memory market. HBM revenue more than doubled YOY, driven by a significant increase in HBM3E 12i sales and contributed to record high annual DRAM revenue and operating profits. In conventional DRAM, we commenced full-scale mass production of 1C nanometer DDR5, which delivers industry-leading performance and cost competitiveness. Through the development of the industry's highest density 256 gigabyte DDR5 RDEM based on 1B nanometer 32 gigabit die, we have further demonstrated our leadership in several modules. In NAND, despite a challenging demand environment, we continued to strengthen our technology leadership including the successful development of three 21-layer QLC products in the first half of last year. In particular, by responding proactively to the recovery in enterprises taking land in the second half, we achieved record high annual land revenue. Cash and cash equivalents amounted to $34.9 trillion at the end of 2025, an increase of $20.8 trillion from the end of 2024, While borrowings decreased by 0.4 trillion won to reach 22.2 trillion won, the debt ratio declined significantly to 18%, and the company transitioned to a net cash position, resulting in a substantial improvement in our financial structure. Now let me share our market outlook. AI models are rapidly transitioning to an inference-centric base in which large volumes of user requests are processed in real-world service environments. Computing workloads are shifting from architectures with a focus on high-performance servers toward more distributed architectures. The core of system design is no longer limited to compute performance alone, but increasingly focuses on end-to-end system efficiency, including data movement and storage. Accordingly, demand is expected to continue expanding not only for high-performance memory, but also across server DRAM and NAND. In particular, server-set shipments are expected to grow by high teens percentage range in 2026, with solid growth anticipated over the mid to long term. A key driver of this growth is not only AI servers, but also the specification upgrades of general-purpose servers. To support AI workloads, requirements for memory density and bandwidth in general-purpose servers are rapidly increasing. As a result, demand for server DRAM and enterprise SSDs is expected to grow structurally at a pace well above the overall market growth. PCs and mobile devices are expected to see short-term shipment adjustments due to rising component costs and weakened consumer sentiment. Memory content per device is expected to grow at a slower pace due to price increases and supply constraints. Memory demand for PCs and mobile applications is expected to grow at a slower pace than the overall market. Reflecting such market conditions, despite the explosive increase in memory demand driven by the server market, demand growth for DRAM and NAND in 2026 is expected to remain at over 20% and high 10% respectively. Next, I will discuss the company's plans. Despite first quarter generally being a weak season, customer demand remains strong. However, given constrained supply conditions, we plan to maintain DRAM shipments at similar levels to that of last quarter, while NAND shipments are expected to decline somewhat due to the base effect of the previous quarter. As demand continues to surge, both AI and conventional memory, the industry has accelerated capacity additions and tech migrations to advanced process nodes. However, considering Physical limitations in production space and the ongoing tech migration, we expect tight supply-demand conditions to persist for the time being. We are capable of supplying both HBM3E and HBM4 in a reliable manner, and through our technological leadership, proven quality, and mass production capabilities, we have earned strong customer trust. As a result, we have consistently collaborated with our customers to introduce new products in a timely manner, and HBM4 is progressing under the same collaborative framework in line with the schedule agreed with our customers. After securing mass production readiness in September last year, we are currently in mass production of the volume requested by customers. Looking beyond HBM4, competition is expected to evolve beyond simple stacking toward custom HBMs. We are actively engaging in custom HBM technology discussions with key customers, and through one-team collaboration with our partner companies, we are progressing seamlessly to ensure optimal product supply. For conventional DRAM, we plan to increase the production of high-value added products. While accelerating tech migration to the 1C nanometer process, we plan to expand our AI memory product portfolio, including SOCAM2 and GDDR7. For NAND, we will maximize product competitiveness through the transition to 321 layer technology. In particular, through the development of next generation 245 terabyte products, we aim to secure leadership position in the ultra high density storage market driven by the expansion of AI inference workloads. We plan to maximize production within feasible limits to meet customer demand. This year, we will ramp up N15x capacity earlier than planned. while accelerating tech migration to 1 cNm DRAM and 3 21-layer NAND. Over the mid-to-long term, we aim to rapidly expand our production base in Yongin Phase 1 FAP, while also proceeding without delay in the preparation of Changjo P&T 7 and the Advanced Packaging Facility in Indiana. We will strengthen our globally integrated manufacturing capabilities, enabling flexible responses to changes in customer demand. In 2026, CAPEX is expected to increase considerably from that of last year, reflecting the expansion of production capacity and infrastructure. We will continue to adhere to our CAPEX discipline based on a comprehensive assessment of demand visibility and investment efficiency. Ultimately, we aim to go beyond being a simple product supplier and further strengthen our role as a full-stack AI member creator that enables customers AI performance requirements from a system-level perspective. By integrating our capabilities in a high-performance memory with process technology, packaging, and solutions capabilities, we will maximize customers' computing efficiency and generate sustainable earnings growth. Finally, let me explain shareholder returns for 2025. The company introduced a new shareholder return policy applicable from 2025. under which securing financial soundness was identified as our top priority. Our objective was to transition to a net cash position and to maintain an appropriate level of cash reserves. We also stated that should meaningful free cash flow be generated, we would consider shareholder returns even before the expiration of the policy period. Based on the financial flexibility secured in 2025, the BOD has resolved an additional shareholder return package in response to our shareholders' continued trust and support. First, in addition to the fixed dividend, we will pay an additional cash dividend of $1,500 per share. Accordingly, the year-end dividend per share will be $1,875. As a result, the total cash dividend per share for fiscal year 2025 will amount to $3,001, and the total dividend payout will be approximately $2.1 trillion. Second, excluding the portion of Treasury shares reserved for employee compensation, the company plans to retire all remaining 50 million Treasury shares, equivalent to 2.1% of total shares outstanding. Based on the closing share price of the day prior to the Board meeting, this Treasury share retirement represents a value of approximately $12.2 trillion. This action is intended to enhance per share value and demonstrate the company's long-term commitment to shareholder value creation. The company remains committed to a disciplined capital allocation framework that seeks to maintain an optimal balance among future growth investments, financial stability, and shareholder returns. We will continue to make efforts to enhance shareholder value.

Going forward, we will close.

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 Peter Lee from Citigroup. Please go ahead with your question.