SK Hynix Inc Q3 2023 Earnings Call Transcript

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

Question: Subin Lee - CIMB Research - Analyst : [Interpreted] I also have 2 questions. First is about the DRAM bit growth, which I see that has once again outperformed the guidance in the third quarter following the second quarter as well. So given that the downstream demand recovery continues to be sluggish, what were the reasons or the factors that made it possible for the company to overachieve on the DRAM bit growth for 2 consecutive quarters? And the next question is, now to improve profitability and the free cash flow, what is the company's plan on operating the NAND business? Unidentified Company Representative [Interpreted] I will respond to the first part of your question, which is about the DRAM bit growth in the third quarter. Now it is true that, overall, the recovery in demand has been slow. But then in the third quarter, in the smartphone market, especially after the inventory correction, there has been growth in demand among the customers to rebuild their inventory for the finished products. And I will say that the first factor was the fact that the company was able to very effectively respond to this demand. And the second factor that I would like to point out is the fact that in the products where we have stronger competitiveness, like, for example, DDR5 and high-density servers as well as the HBM, the growth in these products was higher than average, which I believe was also quite conducive to driving bit growth for the company. I will respond to the second part of your question. Now about NAND profitability, yes, it has been sluggish. Now NAND has been characteristically showing high price sensitivity where demand surges with falling prices. The industry tried to reduce cost through high bit growth, but the pace of cost-cutting decelerated with increasing investment burden from higher stacking. We have particularly seen demand growth fall short of expectations over the past 2 years despite a sharp decline in prices. But supply growth had continued, leading to a sharp rise in inventory level and worsening profitability, prompting all companies to begin cutting production. We are now working on strategies for development production and investment for NAND that will allow us to respond to the changing market environment. First, faced with constraints of cost reduction and profitability improvement, we plan to reduce business volatility by strengthening the high ASP premium product lineup and maximizing investment efficiency through appropriate resource allocation. So driven by the activities that I have just explained so far, I hope that we will be able to turn NAND into a sustainable business structure. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 26, 2023 / 12:00AM, 000660.KS - Q3 2023 SK Hynix Inc Earnings Call

Question: Dong Hee Han - SK Securities Co., Ltd., Research Division - Analyst : [Interpreted] I also have 2 questions on HBM3E. The HBM3E market is set to take off next year, and I wonder whether the company is ready to lead in the HBM3E market as it has done so in HBM3 market? And if yes, then could you also explain how and why? And the second question is, with the takeoff in the HBM3E market, is it expected that the prices in the other HBM or HBM3 products are going to fall? Unidentified Company Representative [Interpreted] Thank you. Let me first respond to the question about whether we can continue our leadership in HBM3E market. Now this is 1 area where I can be quite confident, including both 3 and 3E. Our capacity for next year has been sold out, and we are still getting additional requests for additional demand. So at least on the demand side, we have a very strong visibility into next year. And what we are hearing from the customers and other market stakeholders is that the company has an overwhelming dominance in terms of the market share in the HBM3E capacity. And now for the longer term, including next year, the company is currently engaging with various companies, both the AI players and other potential customers, about further expanding our business areas. And also what we are getting from the customer VOC is that the company inspires confidence and trust, thanks to our product competitiveness and our track record of large-scale mass production. And based on this performance, we are currently discussing with potential customers about becoming the primary vendor. Now when we look at the evolution of the HBM demand, then going from 2E to 3, then 3E now to 4, we see that the product migration has been very fast. And in this process, the mass production quality as well as the product performance and also the overall experience have served the company very well in building up our advantage in this segment. And as a result, we are discussing the potential technical cooperation and also capacity with our key partners not only for 2024 but also all the way into 2025. Now let me respond to your question about the potential decline in prices in the legacy products as we shift into a new gen product. Now looking at the product development cadence, then in terms of the HBM pricing, we can see 2 characteristics. One is that it is mostly large project-based and also that it is based on long-range planning. As a result of this, what we are seeing is that, in most cases, it is not a parallel development, meaning that it's not the kind of situation where we have the commodity, product and then the next-generation product existing together. So for the new products, they would come with higher performance and also come from higher cost. And as a result, the ASP would be higher. And on the other side, this also means that the old products are not going to fall behind the market price. Now especially given the fact that next year, the DRAM market is set to recover and grow very fast, then for the customers who would be adopting the HBM3 newly, then we can set the price according to the market situation. And then for those who are shifting from 3 to 3E, then I would say that this is going to be a different arrangement of supply. But then when we look at the general cadence -- when we look at the general situation, then it is usually in terms of the generation change. Then it is usually on a 1-year cadence, meaning that from 2E to 3 and 3E. And again, in this process, the company has maintained leadership and superiority. So I believe that we are still in the position to do so. Now then to sum up, in the conventional DRAM, then perhaps there had been price interference between old tech and new tech, but that is not what we will be seeing in HBM.