Samsung Elect Ltd

Good morning and good evening, everyone, and welcome to the Samsung Electronics 2024 First Quarter Financial Results Conference call. I'll be your coordinator. At this time, all participants are in a listen-only mode until we conduct a question-and-answer session following the presentation. As a reminder, this call is being recorded. Now I'd like to turn the conference over to Daniel Oh, EVP and Head of Investor Relations. Please go ahead.

Thank you, Coordinator. Greetings, everyone, and welcome to Samsung Electronics' 2024 First Quarter Earnings Call. Thank you for joining us today. For today's call, the following representatives from business units are participating. Starting with EVP Jaejun Kim, representing memory. VP Tommy Kwon for system LSI. Joining the call for the first time, for Foundry, VP Taejong Song. For Samsung Display Corp, EVP Charles Hur, for the mobile experience business VP Daniel Araujo and last but not least for VP visual display VP Kale Rowe. We also have other business representatives joining the call to answer any questions if necessary for the Q&A session later. Please also note that on Samsung electronics investor relations website at www.samsung.com backslash global backslash IR, you can find our earnings press release and presentation deck which are intended to supplement our prepared remarks during today's call. I want to remind you that some of the statements we'll be making during today's call are forward-looking based on environment we currently see. They are subject to certain risks and uncertainties that may cause our actual outcomes to differ materially from those expressed in today's discussion. A webcast of this call will be also archived on our website, and the information we are giving you on today's call is as of today's date. First, I will start with our 2024 first quarter consolidated financial performance. Our revenue came in at $71.9 trillion of 6% quarter-on-quarter thanks to strong sales of flagship Galaxy S24 smartphone series and the effects of higher ASPs in memory led by improved memory market conditions. Our gross profit was $26 trillion of $4.4 trillion sequentially attributable mainly to improvements in the cost of goods sold in memory and the smartphone mix in the MX business. Gross margin was up 4.2 percentage points to 36.2%. SG&A expenses increased 0.6 trillion won quarter on quarter to 19.4 trillion won as R&D expenses increased. However, as a percentage of sales, SG&A expenses decreased by 0.8 percentage points to 27% due to the increase in sales. Operating profit increased $3.8 trillion sequentially to $6.6 trillion, mainly thanks to improving IT market conditions. And operating margin increased by 5 percentage points quarter on quarter to 9.2%. We attribute the gains mainly to the memory business returning to profit as it achieved strong growth by addressing the demand for high value-added products such as LPDDR5X and Enterprise SSD, and to the MX business booking higher profits driven by robust sales of flagship smartphones. In addition, the visual display and digital appliances businesses recorded higher profitability, while displays saw profit decline quarter-on-quarter due to week seasonality. Regarding currency effect, the Korean won showed overall weakness against major currencies during the quarter, resulting in approximately 0.3 trillion won of consolidated operating profit compared to the previous quarter. Now moving on to capital expenditures. CapEx in the first quarter increased by 0.6 trillion won from the same period last year to 11.3 trillion won, of which $9.7 trillion was invested in the DS division and $1.1 trillion was invested in display. For memory, we continue to invest in R&D to solidify our technological leadership. In the quarter, our investments focused on facilities and packaging technology to address the demand for HBM DDR5 and other advanced products. For foundry, investment focused on establishing the infrastructure to meet medium to long-term demand and on advanced R&D while we adjusted facility investment in line with the market conditions. In display, we continue to invest in preparations for IT OLED products and advancing technology and flexible displays. I will now share some of our key activities in sustainability management. First, Samsung Electronics earned an overall rating of AA in the MSCI ESG ratings during this quarter, the highest level among peers in the Korean ICT industry. We improved our overall rating by one notch as our commitment to sustainability management led to improvements in the social and governance categories. Specifically, we made substantial gains in the areas of human capital development, raw material sourcing, and corporate governance. Second, regarding our water resource management, and building on last year's achievement at the Hwasong Campus, our manufacturing site in Kiheung, Pyeongtaek, Suwon, Gumi, and Gwangju, along with Xi'an in China achieved platinum certification from the Alliance for Water Stewardship, which is a testament to our standing water stewardship. Furthermore, we continue to progress on numerous other fronts in water resource management, including signing MOUs with government agencies and local governments. to achieve zero increase in DS Division's water intake and restore water 100% for the amount used by DX Division by 2030. As a responsible corporation to our stakeholders, we maintain committed to strengthening sustainability management and expanding ESG initiatives throughout our business. Next, I would like to address the first quarter dividend. Today, the Board of Directors approved a quarterly dividend of Korean Won 361 per share for both common and preferred stock. Based on current dividend policy, the total quarterly payout is 2.45 trillion won, which will be paid toward the end of May. Now, without any further ado, I will turn the conference call over to the representatives of each business unit to present first quarter performances and outlooks for their respective business segments in more detail. The memory business will start the next session, followed by system LSI, foundry, Samsung display, mobile experience, and visual display. We will start with EVP Jae-Joon Kim of the memory business.

Good morning. This is Jae-Joon Kim from Memory Global Sales and Marketing. In the memory market in the first quarter, we saw customers' overall purchase demand was strong. due to market expectations that price will keep rising. For server and storage, the demand for generative AI showed solid trend, and the demand for DDR5 and high-density SSD stayed strong following the previous quarter. In particular, the high-density SSD linked with generative AI showed additional demand growth as customers' upside demand surged. In the case of PC and mobile, contents per box continue to grow for both DRAM and N. Furthermore, demand remains strong following the previous quarter, thanks to an active selling mainly driven by Chinese mobile OEM customers. Along with the increase in ASP, we achieved a qualitative growth of the business by addressing the demand, focusing on high-value-added products such as HBM, DDR5, sub-SSD, and UFS 4.0, and so on. As a result, our memory business returned to profit. Now let's move to the outlook for the second quarter. We expect the industry recovery trend to continue throughout the quarter, mainly led by the demand for generative AI. In particular, the continuous increasing supply of AI servers and subsequent expansion of associated cloud services should increase the demand for not only HBM, which is directly linked with AI, but also conventional servers and storage in parallel. Therefore, we expect overall server-related demand to remain strong. And for mobile, as the selling drive mainly led by Chinese OEM customers continues, demand is expected to be stable in the second quarter as well. However, for PC, under the effects of slow seasonality, it appears that in the second quarter, customers are likely to temporarily adjust their finished goods inventory in the distribution channels, in preparation for new product launches focused on on-device AI in the second half of the year. Thus, in the second quarter, it is expected that the demand centering on server and storage products will be getting strong. And in addition to this, as supply constraints for cutting-edge products are expected in the second half of the year, The overall increase of market price is predicted, although there might be differences by application. In this market environment, in order to optimize our business portfolio, we plan to allocate production more to server and storage-related products, such as HBM, DDR5, and high-density SSD, than to PC and mobile products. From a product deployment standpoint, we started mass production of HBM3e 8i this month to address the demand for generative AI, and we plan to mass produce 12i products within the second quarter. Also, in the second quarter, we plan to strengthen our leadership in the server market by mass producing 128GB products based on 1B nanometer 32 gigabit DDR5 and shipping it to customers. Also for NAND, we plan to expand SSD sales for server and timely response to AI demand by developing and providing samples of ultra high density 64 terabyte SSD during the second quarter. In addition, we will enhance our sustainable technology leadership by mass producing for the first time in the industry. Now I'll share our outlook for the market in the second half of the year. We expect business condition to stay positive despite some volatility related to macroeconomic trends, geopolitical issues, and so on. As industry supply of HBM improves in the second half, We expect the spread of AI servers to accelerate, and thanks to this, associated cloud services are also expected to expand further. Sequentially, this should lead to increased demand from not only AI servers, but also conventional servers and storage, and we expect this virtual circle to clearly occur. As for PC, replacement cycle of some products that showed significant sales growth during the pandemic is expected to be approaching. In addition, we expect to see positive impact on session month and contents per box, thanks to growth in the number of on-device AI feature models, which will be newly launched in the second half. For mobile, we expect the demand in terms of contents per box to be robust with the spread of on-device AI. But there are chances that growth in set demand will be limited in the second half as customers' inventory in distribution channels have increased somewhat due to the customers' active selling in the first half of the year. Likewise, we expect memory demand to stay strong in the second half, mainly around generative AI. However, on the supply side, we expect to see constraints in overall bit production as capacity concentrates on HVM in DRAM, and industry's limited execution of CAPEX in NAND has continued since last year. Therefore, we plan to flexibly adjust our product mix in accordance to demand for each application and actively respond to demand for high-value-added products for AI. In the case of HBM, we will continue increasing supply and expanding our capacity in order to respond to growing demand for generative AI. In addition, we also plan to accelerate the ramp-up of our industry-first developed HBM3E 12 high product in line with the increasing needs for high-density products in the industry. In DRAM, we plan to accelerate a 1B nanometer-based 32 gigabit DDR5 supply with faster ramp-up speed and further strengthen our competitiveness in the high-density DR5 module market, which is linked with the AI servers. In NAND as well, with the growth of AI demand, we will improve our profitability by proactively addressing the demand for high-value added server products, such as V8-based Gen5 SSD, high-density V7 QLC SSD, and so on. In addition, based on our industry-first experience entering the UF 3.1 market with QLC technology, we plan to introduce a QLC solution further to the UFS 4.0 market in the second half, thereby strengthening our product competitiveness in the mobile market. For V9, following the industry-first mass production of QLC in the second quarter, We plan to further enhance our technology leadership by mass-producing QAC in the third quarter. We will continue to strengthen our market leadership based on leading-edge technology and timely execution of investment. Thank you.

Good morning. This is Tommy Kwan from the system LSI business. In the first quarter, the U.S. manufacturing PMI exceeded 50. indicating a rebound in market sentiment in manufacturing industries as well. This, along with the reduced semiconductor inventory levels, has helped stabilize component prices upward. However, macroeconomic uncertainty has been exacerbated by global conflict, volatile oil prices, and fluctuating exchange rates. Although smartphone production increased in the fourth quarter, all indicators this year suggested a slowdown in sellout rates. During the first quarter, we increased our supply of SoCs and sensors for key product launches. Demand for on-device AI and high-resolution features continued to drive our production. However, displayed driver IC sales have dropped due to due to decrease of panel demand, and overall performance improvement has been slower than anticipated. In the second quarter, the external economic pressure on consumer spending could challenge smartphone manufacturers in passing increased bill of material costs onto consumers. The need to reduce component prices is becoming more acute, as manufacturers may use early early slow sellout rate to justify price negotiation. Despite a slow start, smartphone sellout is now showing sign of recovery, highlighting on-device AI as a significant growth opportunity for us. We remain committed to ensuring a stable supply of flagship SoCs. We are gearing up to deliver more advanced process product for new wearable device. For mobile sensors, channel inventory is at a healthy level, and major set manufacturers selling target continue to grow year over year. We anticipate high utilization rate in the second quarter as well, including the mass production of 50-megapixel sensors. Our fast-life strategy will bolster our ability to meet timely pixel wafer demands. Regarding DDIs, we are focused on maintaining market leadership with 22 nanometer low-power chips, expecting performance enhancements from upcoming IT and TV product releases. Looking at the year as a whole, the increased bill of material costs associated with the adoption of on-device AI, we are encountering intensified pressure for component pricing. The impact of this pricing pressure are likely to be uneven across components, influenced by selective specification downgrade within the smartphone lineup. We are proactively planning to adjust our product mix to navigate these challenges effectively. Thank you.

Hello, everyone. This is Taejoong Song from Foundry Business. In the first quarter, weak market demand due to seasonal effects caused a delay in sales improvement, in addition to the continued inventory adjustment and major customers. Even so, we narrowed our losses slightly by operating FAP efficiently. Advanced technologies such as 3 and 2 nanometers are under development smoothly. And in particular, yield of 4 nanometer technology has been stabilized, and significantly expanded product output of Tier 1 customers. Thanks to this improvement in advanced technologies, we achieved our highest-ever order backlog for the first quarter. In the second quarter, amid a likely gradual recovery in market conditions, the winding down of inventory adjustment at customers and increases in our line utilization should lead sales to rebound and reach double-digit quarter-to-quarter growth after bottoming in the first quarter. In addition, we'll strive to keep expanding business in advanced technologies by completing the development of 2nm design infrastructure and preparing for 3D-based 4nm technology. For the mature technologies, we will also strive to enhance the infrastructure for various applications. To be specific, 14 and 8 nanometer technologies. Meanwhile, in June, we plan to hold Samsung Foundry Forum event in the US to share our vision for Samsung AI solution. In the second half of this year, As uncertainties are likely to exist in finished goods market, we expect limited growth for foundry market. Despite the uncertainties, we expect to outpace the market growth rate in annual sales thanks to increased sales of leading-edge technologies. In addition, we will start mass production of the second generation of GAA 3-nanometer technology. and improve the maturity of 2nm technology to expand orders focusing on AI, HPC, and mobile applications. That concludes the key message from Foundry Business. Thank you.

Good morning. This is Chul-Seo from Corporate Strategy Team at Samsung Display. I will now brief you on our results for the first quarter of 2024. For the mobile display business, even though our performance declined quarter-on-quarter due to intensifying competition, we responded to the launches of major customers' high-end smartphones with a timely supply. In rigid displays, we improved our utilization rate based on our sales increase. For the large display business, despite weak demand and off-season effects, we narrowed our losses by introducing new QD OLED monitors and strengthening our customer base. Next, I will share outlooks and strategies for second quarter and second half. For the mobile display business in the second quarter, it is expected for sales to increase ahead of the launch of major customers' affordable smartphones and growing demand for IT products. However, intensifying competition among panel makers is likely to limit earnings growth. For the large display business, we'll address demand for TV panels from major customers. Also, we strive to boost sales of premium monitors where market expansion is expected. For the mobile display business in the second half of this year, in regards to the smartphone market, we expect the market to grow moderately and, in particular, the OLED penetration rate is likely to keep rising. For flexible displays, we'll remain committed to maintaining our competitive edge and expanding sage through our differentiated technologies with deliver low power consumption, enhanced durability, and more. In rigid displays, we'll continue to replace LCD by acceleration cost reductions. In addition, we strive to diversify our business portfolio by increasing IT and auto business, thereby strengthen operational stability. Finally, for the large display business, we expect to achieve year-on-year revenue growth. Firstly, we'll increase capacity without additional investments, but instead, we'll focus on improving production efficiency. Secondly, we'll enhance our product mix around high value-added offerings. Thank you.

Hi, everyone. This is Daniel Araujo from the Mobile Experience Division, and I'll be sharing our results for Q1 and discussing the outlook for the MX business. As the smartphone market entered into the seasonally lower Q1, their premium and mass segments decreased sequentially in both volume and value. The MX business recorded smartphone and tablet shipments of 60 million units and 7 million units, respectively, and smartphone ASP was $336. Despite the market decline, we achieved revenue and operating profit growth due to strong sales of our first AI phones, the S24 series. In particular, Galaxy AI features in the S24, such as Circle 2 Search, have seen continued high usage rates and contributed to sales expansion. Through this, MX's overall revenue grew, and even as we see component prices beginning to rise, we maintain solid double-digit profitability with our efforts to streamline resources. Moving forward to Q2, the overall demand for smartphones will decrease quarter on quarter due to continued seasonality effects. The MS business in Q2 expects to see a decrease in smartphone shipments and ASP, while tablet shipments should stay similar sequentially. We plan to maintain our flagship-oriented sales and upselling approach as we apply the S24's AI experience to other flagship models and maximize product competitiveness. And we'll push for continuing sales of the Galaxy S series by strengthening communication, especially around Galaxy AI functionality. Externally, with escalating geopolitical instability as well as price hikes in key components that are likely to materialize, we'll strive to secure solid profitability by continuing to streamline operations. At the same time, even in this difficult environment, we remain committed to investing in R&D, including in AI. Looking further ahead to the second half of the year, while the smartphone market contracted in 2022 and 2023 amid prolonged economic uncertainty, it's expected to turn around this year thanks to stabilizing consumer sentiment following the Fed's signaling of interest rate cuts this year and expansion of AI products and services and economic growth in emerging markets. Similarly, the tablet market is expected to bounce back after contracting in 2022 and 2023, following the surge in demand related to remote work and education in 2021. Both volume and value are projected to rise in 2024, in line with the replacement cycle. For wearables, a double digit increase in value is expected in the smartwatch market, driven by consumers looking to upgrade given the increased interest in health-related features since the pandemic. Meanwhile, TWS is expected to experience double-digit growth in both volume and value due to continued mass market volume growth, as well as the release of new models from major vendors in the second half. In the MS business, we are aiming for annual smartphone sales growth as we maintain sales momentum by applying Galaxy AI beyond the S24 to existing flagship products. For our new foldable devices in the second half, we're planning to once again drive forward with the mainstreaming of foldables by improving the user experience and optimizing AI functionality for these form factors. In tablets, we started providing Galaxy AI functionality in the Tab S9 series, and we'll continue to improve the user experience as we pursue sales growth focused on premium devices. For wearables, we plan to strengthen the Galaxy ecosystem experience by expanding sales of new models that will be launched in the second half. First of all, we plan to release the Galaxy Ring, a product with a new form factor designed to be worn comfortably 24-7. With the Galaxy Ring, we expect to improve our customers' sleep and overall daily health care. We also plan to release new premium smartwatch models, which will meet upgrade demand. And in TWS, we aim to expand sales with new products in the second half that have highly improved competitiveness thanks to an innovative design and exceptional sound performance. To address rising component costs, we'll continue to make efforts to realize operating efficiencies so that we can secure solid annual profitability. And even if the external situation is not favorable, We're committed to our role as a first mover pioneering the mobile AI experience. We will continue R&D and proactive AI investments in order to advance and expand Galaxy AI as we prepare for the future. Thank you.

Hello, everyone. This is K.L.O. from the sales and marketing team of Visual Display. Let me brief you on the market condition and our result in the first quarter of 2024. TV market demand decreased quarter-on-quarter after the year-end peak season, but the demand for QLED, OLED, and Big TV above 75 inches remained solid. Samsung solidified its leadership in the premium market and increased profitability quarter-on-quarter by focusing on premium products, such as Neo QLED, OLED, and Big TV above 75 inches. However, profitability decreased decreased year-on-year due to stagnant TV market demand overall and increased cost caused by intensified market competition. Next, I will share our market outlook and strategy for the second quarter and 2024. We expect overall market demand to continue to decrease as TV demand is projected to decline in emerging markets. However, we believe there are still chances to achieve sales growth via opportunities such as global sporting events. We will work to secure profitability by increasing sales of strategic products with our differentiated launch of 2024 model, and also by strengthening operational management in each business segment. As for the second half of this year, We believe overall TV demand will recover gradually, but macroeconomics and geopolitical uncertainties are likely to continue. Despite the uncertainties, we will continue to target the demand in various segments while promoting AI screen leadership, driven by the innovation of premium TV and lifestyle screen. Also, we will provide differentiated customer experience through synergies with connected devices. To lead the market growth, we will actively promote our advanced features involving security and sustainability, and boost our competitiveness in service business such as TV+. Thank you.

Thank you, everyone. That wraps up our prepared remarks. The following Q&A session will be held in Korean and translated simultaneously to English. With that, let's open the line for questions. Operator?

We will now begin the Q&A session. Please press star 1 on your phones if you wish to ask a question. If you would like to cancel, press star 2. First question will be Mr. Sunggyu Kim from Daiwa Security. Please go ahead. Yes, hello. Thank you. Congratulations for your good performance. I have one question for memory and display each. Could you provide more details about first quarter performance for memory? And then what is your outlook for second quarter performance as well? And also for display, recently it seems that For foldable display, there's some concerns that the gap between you and the next competitor is narrowing. So can you explain your strategy in terms of how you intend to maintain that competitive gap? So let me answer your question on our memory performance first. In the first quarter, we saw a surge in demand from generative AI. And so we expanded our mix of high value added products, including HPM and server SSD. And we focused mostly on improving profitability through improved ASP over BIT shipment growth as we undertook a qualitative improvement of our business portfolio. So for BIT growth, DRAM declined by mid-10%, NAND by a low single digit. But the rise in ASP was actually above market expectations, nearly 20% for DRAM, low 30% for NAND. So this helped. turnaround of memory business to profit for both DRAM and NAND. Due to rising pricing, we were able to write back provisioning on inventory valuation loss, which also contributed to our profits. In the second quarter, we expect the business cycle to continue to improve, and the rising SP trend is also expected to continue, and so we will maintain the same operational stance as we did in the first quarter. As inventory levels improve and amid limited available supply, We also expect most of the production capacity to be focused on HBM. So we expect additional supply constraint for advanced node processes for DRAM. So we intend to focus mostly on addressing real demand. So bid growth for the company, we're expecting to be in the low single-digit to mid to high single-digit range for DRAM, maybe similar to prior quarter for NAND. In terms of the PMICS, To address the surge in demand for advanced products driven by generative AI, we intend to expand our sales of advanced products for a server application. And so DRAM big growth is expected to be over 50% YY, over 100% for server SSD. And so we hope to maintain our momentum for improved earnings into the second quarter. Thank you.

I'll take your second question on SDC. We started mass production of foldable displays in 2019 on Industry First and have since been growing by accommodating launches of new products by various customers, including Samsung Electronics. One of the most crucial points requested by our customer is to minimize the crease. We are developing various ways to reduce the crease, such as by improving materials and optimizing the curvature, radius, and foldable stacked structure. The foldables to be released this year will reflect our latest technologies, bringing visible effects to the products. SDC will reduce the crease, increase durability against scratches and marks, and improve functions such as low power. Through this, we will expand the quality gap between our competitors. We are developing new form factors beyond existing products, including outfolding, in- and outfolding, and slideable through discussions With our customers, we will timely launch new product. Thank you.

Yes, thank you. We'll move on to the next question please. The next question will be by Mr. Sator Lee from Citi Securities. Please go ahead. Yes, this is Sator Lee from Citi Group. I have a question on memory and your founder business as well. First on memory. Recently regarding HBM, there's a lot of market interest. So for next year, what is the size in terms of your HBM supply? How much supply expansion are you planning? And could you provide us an update in terms of your HBM 3E business? And the second question has to do with Foundry. So your U.S. investment in the Foundry fab, what is the direction for that investment? And what is your mass production timeline for the Taylor fab in the short term? Yes, let me address your question on HBM first. In 2024, our HBM bid supply actually has expanded by more than threefold versus last year. And we have already completed discussions with our customers for that committed supply. In 2025, we will continue to expand supply by at least two times or more year on year, and we're already in smooth talks with our customers on that supply. For HBM3E business initiative, everything is moving along smoothly in line with customer timelines. We've already commenced early mass production for eight layer, and we expect revenue to start recognized, to be recognized at the end of the second quarter at the early end. And the main trend in generative AI is an increase in parameters and multimodality service expansion, leading to greater needs for high-density HBMs. So we have already shipped samples of our 12-layer HBM3E, which was the first in the industry, with planned mass production for the second quarter of the year. And for a 12-layer product that supports a high capacity, 36 gigabyte capacity, well, we are deploying TCNCF technology, which is very strong in stacking. So this gives us a very leading product competitiveness. So with this product lineup, including the 12-layer, we intend to address the surge in demand as we expand our HBM business more quickly. We're going to make a quick transition to 3E in the second half of the year and focus on preemptively capturing high-capacity HBM demand. We expect the HBM 3E mix to account for more than two-thirds of the total HBM sales volume by the end of the year. We will continue to build on our HBM capacity, supply capacity, and establish strong leadership in HBM. Let me take your second question on our foundry investment in the U.S. The purpose of the investment is to respond to demand for leading-edge semiconductor chips and also to contribute to global supply chain stability, which is why we decided on the Taylor FAB investment in 21. We have signed a preliminary agreement with the U.S. government, and the scope of investment was expanded to include R&D and advanced packaging lines and we're expecting to execute $40 billion USD going forward. However, final talks with the U.S. government still remain, and so things are subject to change. And so we are mindful of changing market conditions in Foundry, and given our approach of gradual investment in line with customer orders, we expect mass production to begin maybe 2026. Next question, please. The next question will be made by Mr. Nicolas Godreau from UBS Securities. Please go ahead, sir.

Yes, good morning. Thanks for taking my question. The industry has perceived DRAM as being the main beneficiary for generative AI and memory, but we recently see hyperscale customers asking for high-density, fast write speed, solid state drive solutions for AI servers, in particular to support training. Could the use of Flash for AI training and inference become a more meaningful demand driver, and how is Samsung preparing for it? Thank you.

So the impact on NAND demand from expansion of generative AI was your question. Well, recently, generative AI models continue to evolve. In both training and inference, we're seeing an increase in requests for SSD supply. First, for training, so as AI parameters increase, the size of training data becomes proportionally bigger, leading to higher performance and data storage needs. So we're seeing a lot of incoming requests from the customers for Gen 5, 8 terabyte, 16 terabyte solutions, which have more than double the IO performance and capacity of Gen 4, 4 terabyte SSD. Inference, in order to improve coherence, vast amounts of database storage is required. So we're seeing increase in inquiries from customers for 64 terabyte, 128 terabyte, ultra-high density SSD solutions. Traditionally, we are very strong in server and storage SSD with strong market leadership, so we expect to be able to address this demand as a priority. And so, as the generative AI market grows, leading to demand growth not only for HBM, DDR5, and DRAM products, we see clearly that it is impacting the rise in SSD demand as well. So we have a full lineup of SSD products, including TLC, Gen 5, and ultra high density QLC. So we will respond to rising demand using our products. Our server SSD shipments this year is expected to grow 80% YYY, and also BIT sales volume for QLC server SSDs is expected to surge three times in the second half versus the first half of the year. Thank you for the answer. I will take the next question.

The next question will be presented by from Uanta Securities. Please go ahead, sir. Good morning. I'm from Uanta Securities. Thank you for the opportunity. Second quarter has shown a trend of having the lowest profitability.

How about this year?

How do you think about the profitability and sales this year? Will BOM stay on its trend and can you reach double-digit profitability?

Profitability in Q2 is expected to be down slightly compared to Q1 and Q3, which is when we release new flagship products each year. In Q2, continuing from the first quarter, we expect to see cost increases of major components for memory in particular. and there are also risks of rising geopolitical instability. In response, we're focusing on cost competitiveness throughout the R&D, manufacturing, and sales processes to achieve solid profitability. At the same time, we're continuing to work on mixed improvements, including by boosting flagship sales through the expansion of models that support Galaxy AI, promoting upselling within our smartphone lineup, and expanding sales of ecosystem products. Despite the difficult environment, we will continue to invest in AI, including AI R&D, to strengthen and further mainstream Galaxy AI, all aimed at securing sustainable growth in the mid to long term.

Thank you. I will take the next question.

The next question will be by Mr. Dongwon Kim from KB Securities. Thank you for the opportunity to ask a question, one on memory and one on display. So this year, in your view, what is the outlook for supply and demand? And we're seeing a recovery in the business cycle. So what is your strategy on the supply side? And then for Samsung Display, large-sized QDOLDD business. What is your overall strategy for this business this year? So, in terms of our supply demand outlook, let me start there. Demand this year is expected to continue to recover, driven by strong generative AI demand. We think server will continue to show solid demand. Also, AI-based storage as well. And then conventional server replacement had actually been postponed for many years, but that is set to accelerate amid a transfer to new CPUs and will reach the replacement cycle. Likewise for PC mobile, a lot of the products that were sold early on during the pandemic are going to need replacement, and it will drive decrease in on-device AI-driven demand. For mobile, due to aggressive sell-in by customers in the first half of the year, There is a bit of increase in distribution inventory, so this may act as a constraint on set demand growth in the second half. On the supply side, for the industry, bid growth is likely to be limited. For DRAM, as most of the advanced process capacity is focused on HBM from generative value demand, we think that non-HBM products will likely see constrained bid growth. Also for NANDs, there was constraint from CAPEX starting last year. And there's a natural production decrease from node migration of legacy product lines. And so this will also act as an additional constraint on production bid growth. Now, as we see a rapid surge in advanced process demand, we are seeing for certain leading products a shortfall in supply relative to demand. And likely, supply conditions may see additional tightening. Given the current market conditions, We expect the profitability of conventional DRM products like DDR and LP DDR to continue to improve. For NAND, as we see growing demand for server SSD, we expect sales to increase and a mid-rising ASP. We expect performance improvement as well. So building on the CAPEX initiatives over the years, we want to continue to reinforce our capacity to supply so that we can smoothly capture and respond to customer demand.

I'll take your second question on display. For QD OLED, we plan to expand the scope of the self-emitting market, especially in premium TVs and monitors. Based on talks with key customers, we are building a stable sales base for TVs and for monitors. We focus on tapping new markets by continually expanding functions in the lineups. To give more details on QDOLD TVs, our products are positioned in the top segment of customers' lineups based on superior picture quality and functionality. We are diversifying product lineups with our customers. Our monitors offer excellent low gradation, wide color gamut, and high response speed. Necessary for swift scene changes and clear representations in dark backgrounds for immersive gaming experiences. Through this, we are leading expansion of the gaming monitor market. We plan to go beyond that and enter the B2B market by further improving the afterimage and the lifespan of the products. Thank you for your answer.

Due to the time, we will accept our last question. The last question will be from Mr. Chae-yeon Kwon from JPMorgan Securities. Please go ahead. Yes, thank you for the opportunity to ask. I also have two questions. First, regarding the image sensor market, it seems that the downturn is winding down and we're seeing some improvement in market conditions. So what is the strategy in terms of your image sensor business? There is growing interest in AI in the electronic appliance space. So what is your business strategy in terms of AI-enabled appliances? So let me answer the question regarding image sensors. Well, channel inventory has largely been depleted. And since then, we have seen increased utilization rise among major camera module providers, and same for us in the first and second quarter. And more set makers are demanding more differentiated camera functionality. So we're seeing rising demand for our one megapixel, two megapixel type solutions. Through a FAB light transition, For the pixel line, we are expanding our own production capacity while expanding our supplier base for logic line through outsourcing. So regarding pixel wafer, we will be able to benefit from better production efficiency and also cost efficiency as well to allow for more added supply flexibility.

VP Sangyong Kim representing digital appliances will answer the questions. I'll take the second question. According to a market research firm, as technology continues to develop and more people are changing their lifestyles that prioritize convenience and connectivity at home, the AI appliance market is anticipated to grow an average of 10% annually. Our connected appliances can detect situations and learn patterns, providing consumers with optimal solutions. We globally launched new Beespoke AI products featuring such AI functionality on April 3rd. Reliable security lies at the core of AI appliances. For Beespoke AI appliances, in order for our customers to safely use products and services, we apply Samsung NOX and NOX metrics a blockchain-based security solution to build a safer ecosystem. In the second half, through Samsung 4's service, our consistent software upgrade service based on SmartThings, we will implement a large language model to realize natural voice control similar to conversations between people and elevate AI functionality. We will also lead the AI market and 45 AI leadership with unique connectivity experiences across mobile, TV, and digital appliances. Thank you. Thank you for your answer. Finally, we will answer questions that were submitted online in advance. We received a wide variety of questions for this quarter as well. And I believe the majority of the submitted questions were sufficiently answered during the Q&A session. We will answer one more question on a topic that garnered a high level of interest from our shareholders but was not addressed during Q&A. The question is, are those strong sales of S24 due to AI functionality? Which AI functions do customers usually use? And what are some new AI features that will be introduced in the future?

The S24 has outpaced its predecessor by double digits in terms of both volume and sales and the consumer response has been positive thanks to the series differentiated AI functionality. Word is spreading about Galaxy AI given the elevated customer interest in the technology and its utility and the overall product experience. We assess consumer interest to be higher in the S24 than it was in its predecessor and that Galaxy AI is driving this uptrend. We ran a customer survey and found that almost half of S24 buyers purchased the device with the intention of using AI functionality. Of course, the improved AP, display, camera, gaming experience, and design also contributed to the S24's strong sales. Around 60% of S24 customers regularly use AI functionality, And the most used feature is circle to search in intuitive search experience. The next most used features are photo assist, which provides convenient photo editing, and live translate. And in particular, we observed that Gen Z is more receptive to Galaxy AI and use the new features more often than other age groups do. Looking at the unit growth by age group for the S24 compared to its predecessor, Gen Z shows growth that is much higher than the average for all age groups, and their usage rate of AI features also exceeds the average. We're using big data analysis and consumer research to assess user satisfaction and usage patterns of each AI feature, and we're looking to use these findings to improve AI functionality and introduce new experiences. We're also preparing to introduce AI features that are optimized to the form factor of each device, including foldables, large screen tablets, and wearables. Thank you.

Thank everyone who shared their valuable opinion, and we will be sure to refer to them in our decision-making process. That completes our conference call for this quarter. We wish all of you and those close to you stay strong and in good health. We thank everyone for joining us today. Thank you.