SK Hynix Inc Q2 2022 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Min Seong Hwang - Samsung Securities Co. Ltd., Research Division - Analyst : [Interpreted] Now in order to improve profitability, then it appears as if the cost is going up, then in terms of the cost reduction, how much has been the cost reduction Y-o-Y? And a related question is, now the company also mentioned that the various options are being considered when it comes to the inventory. But then in order to meet the low-teen percent growth target for DRAM, the company also mentioned that in the third quarter, it is likely to be flat, meaning that in order to meet this low-teen percent growth, then the company will need to have a significant growth in the fourth quarter, which appears to be too optimistic at this time. And also, considering the equipment lead time, then if the company were to make their decisions about the inventory level after monitoring and waiting and seeing things in the second half, perhaps it is going to be too late to make that adjustment next year. So, what does the company think about making a significant adjustment to the inventory at this time? And another question is, in the presentation, it was mentioned that the company will focus on the core business competitiveness in the year. Then does this mean there has been any change to the company's strategy from previous year, which had been focused more on profitability aspect? Unidentified Company Representative [Interpreted] Well, there were so many questions in there. I do not know where to begin. But now first of all, regarding the comment that if the bit growth for the third quarter is going to be flat, then wouldn't it be difficult to reach the target of low-teen percent for the year for DRAM. Well, it is true that it is going to be a challenge. But then for the fourth quarter, we are expecting the kind of demand that we normally expect at the year-end. So, we do believe that we will be able to achieve a very low-teen percent with shipment growth for the year. So, for both the company and the market. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 27, 2022 / 12:00AM, 000660.KS - Q2 2022 SK Hynix Inc Earnings Call And another part of your question was the cost and for DRAM, except for 2019, when the ASP drop was particularly significant, so except for that 1 year, in the past 3 years, our cost reduction has been to the extent that has been more than enough to offset the drop in the ASP. And likewise, for NAND or even more so. So again, except for 2019, looking at the past 3 years, then the ASP would sometimes go up by single digit drop by like 2 digits. But still, our cost reduction in NAND has been enough to more than offset the ASP drop more so than DRAM. The question is, will this remain so in the future. And I would say that, that depends on the market circumstances as well as the company's effort. And the second part of your question was about our business operation strategy and whether there has been a change in our business focus. In other words, whether we are going to shift away from focus on profitability more towards strengthening competitiveness. I believe that you probably meant more investment in R&D and so forth. And so to give you the straight answer first, our focus on profitability remains unchanged. Now having said that, I must also note that there are slight differences between DRAM and NAND. For DRAM, again, we remain profitably focused, and that is because DRAM is the company's cash cow. So, it is where we can also invest into the future technologies and also even support the NAND business. And it is also vitally important that we remain profitable in DRAM to keep investing into the next memory technologies. Now for NAND, that does not mean that we are going to forsake profitability for to increase market share in order to maintain bit growth that is higher than market. So that is not the case. So, even for NAND, we will maintain our focus on profitability, which actually is lower than DRAM. But again, we will maintain profitability as we continue to increase market share. And also for the medium to longer term, we believe that increasing -- by increasing the economy of scale, we will be able to reduce costs, which will then translate into profitability.

Question: Hyun Kim - Meritz Securities Co., Ltd., Research Division - Analyst : [Interpreted] Now my question is related to the previous question. Now regarding NAND development, the company made the analogy of hiking and also emphasized the importance of maintaining our own pace. But then when we look at the memory environment, the memory industry, then what we see is that the ASP tends to converge on the cost of the leading companies. What this means is that it's not only important to maintain your own pace, but we also have to be mindful of the cost reduction coming from other makers. And another question related to this is now for the acquisition of Solidigm and Solidigm in the first half on a non-GAAP basis, the operating profit margin was in the single-digit. And so we see that, of course, Solidigm has differentiated applications, but then I wonder what the company's plan is to improve profitability of Solidigm? Unidentified Company Representative [Interpreted] Well, before I respond to the question, let me just make a clarification because of the internal miscommunication, this is not going to be the last question. We intend to take a few more questions. Now to your question, perhaps, again, I was not entirely accurate in my explanation about how the company intends to remain on its own path. It does not mean that we will just be single-mindedly remain on our own path being oblivious to other players' development. That was not the case. It's just that the point I was trying to make was about the importance of the economy of scale because when we look at the market, then we see that the competing on the basis of economy of scale is becoming more and more important. Now before acquiring Solidigm, our market share was in the low 10%. And then by the end of the year, we -- our plan is to reach around low 20%. And over the medium to longer term, of course, our target is to reach a much higher market share. And along the way, then it would also require trillions of R&D cost. And so compared to this, then what is important for us is to reach economy of scale so that we will be able to lower the unit cost as much as possible because that is going to be a key source of our competitiveness. So, that was the point that it is important to reach economy of scale, and we intend to remain on that path. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 27, 2022 / 12:00AM, 000660.KS - Q2 2022 SK Hynix Inc Earnings Call And I also mentioned earlier about the importance of customer-friendly product delivery. But of course, speaking purely on the technology front, SK hynix has already become a market leader in terms of tech migration or ramping up leading technologies. But what I was trying to say is that unlike DRAM, NAND is more of a solution-based product. So, it is very important for us to have a good understanding of the customers, to have a good understanding of what the market actually wants. Now Solidigm, having been a division of Intel has been in the ES -- has been very strong in the eSSD business for the server customers. They have very good technological capability and very good understanding of the customers. So through Solidigm, we believe that we will be able to further solidify our market leadership and development capability. And also in the SSD market, now Solidigm's -- now in the SSD market, because Intel was limited, Solidigm was not able to serve as many as customers or as it could have. And -- but it still has the ability to do so because it has the know-how of servicing customers, and they have a very diversified customer base. And so -- and they also have the timely delivery capability as well. So, I believe that such capabilities of Solidigm greatly enhance SK hynix's capabilities in many different ways. And in terms of profitability, on non-GAAP terms, Solidigm is going to be in the black this year and in terms of the U.S. GAAP, which includes one-off cost, then it is going to be slightly in the red. But overall, between SK hynix and Solidigm, the NAND business is going to be profitable for the year. And in this process, we will be focusing all our capabilities to make sure that the integration process is going to be efficient and effective.