SK Hynix Inc Q4 2024 Earnings Call Transcript

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

Question: Kim Sun Woo - Meritz Securities Co., Ltd - Analyst : So the question is commodity memory prices have started to decline from Q4 due to weak demand and increased supply from chinese manufacturers. And this trend seems likely to continue into the first half of the year. So how do you view the memory market for this year? And do you see it as a short term adjustment or do you expect the correction similar to 2023? Unidentified Corporate Representative Thank you very much for the question. I will first answer the part related with the DRAM. As you mentioned commodity memory prices began to decline from Q4 last year due to a continued sluggish demand from major applications. The price decline has been particularly evident for DDR4 and LPDDR4 product, which are impacted by high inventory levels and increased supply from Chinese manufacturers. And we anticipate that commodity memory market will continue to show weak pricing trend in the short term because of the influence from the slow seasonal demand in the first half and inventory adjustment by customers. However, starting in the second half, we expect increased demand for high-end, high-density memory in AI PCs and smartphones. And this demand, coupled with supply expansion of DDR5 from memory manufacturers is unlikely to cause significant imbalance between supply and demand. So therefore, we predict that there will be a continuous growth in HBM AI memory market, whereas conventional DRAM market will go through a gradual smooth correction. And most suppliers are focusing investment in HBM where demand visibility is high and profitability is secured. This cautious investment focusing on HBM and prioritizing AI memory production over commodity products with limited capacity, so that the cycle this time will be different from past downturns. Let me also touch upon the NAND. NAND has been more significantly affected by demand slowdowns in traditional applications and some suppliers have already announced production cuts. We also plan to continue our flexible investment and production strategies that we have maintained since 2023 to focus on profitability. So in this slide, we anticipate that NAND will also experience a milder correction compared to previous downturns. However, for the market situations to improve both supply adjustments and a recovery in end demand are critical and the pace of NAND market recovery will ultimately depend on how quickly demand for general proposed applications rebound.

Question: Nicolas Gaudois - UBS - Analyst : Regarding HBM, could you give us a bit more details on your preparation status for HBM4, in particular, when would production actually start for HBM 12Hi? And when do you expect to ship in volumes to customers initially with the ramp in 2026? Do you have also a broad time line from when 16Hi HBM4 would come? And lastly, for the logic based die, would you -- can you confirm you would use TSMC from the start for HBM4 12Hi? Unidentified Corporate Representative So thank you for the question. As we mentioned earlier, our HBM4 product is being developed based on the proven 1b nanometer technology, which ensures both technical stability and mass producibility. We aim to complete development and be ready for ramp-up by the second half of this year. HBM4 supply will initially begin with 12Hi products and 16Hi products will follow based on customer demand and shipments are expected in the second half of next year. And regarding 16Hi packaging technology, we anticipate that we can leverage our experience with the advanced MIMO process, which was first applied in HBM3E to mass-produce HBM4 16Hi products. And for the first time in HBM4, we plan to use logic foundries for the base die to enhance performance and power efficiency. To achieve this, we are collaborating closely with TSMC as one team.

Question: Jay-Hyun Kwon - JPMorgan Chase & Co. - Analyst : You mentioned that the CapEx investment will increase this year compared to last year. Considering the current demand environment, is there any possibility of reducing the planned CapEx? And what will be the approximate breakdown for infrastructure investment versus the fab investment this year? And can you also compare the investment this year to last year? Unidentified Corporate Representative So thank you for the question. Let me answer your question. This year, we plan to have a slight increase in investment compared to last year, and this will be mainly driven by HBM investment that we agreed upon with customers and the construction of M15X and Yong-in fab that lay foundation for future growth. So as we mentioned before, when making investment, we put priority on products with proven profitability and we are guided by principles of responding to market changes with agility and flexibility. And this year, our primary focus will be on investment essential to meet market demand. And at the same time, we'll work hard to lay groundwork for future growth, including fab construction to ensure that our leading technologies will turn into business at the right time. So the majority of investment this year will be concentrated on HBM and infrastructure, and infrastructure investment is expected to increase significantly compared to last year. So we'll continue to optimize resource allocation for each product to expand FCF and maximize investment efficiency by prioritizing technology transitions and also see growth opportunities through agile market responses.

Question: Kim Dong-won - KB Securities Co Ltd - Analyst : So how much DDR4 and LPDDR4 proportion be reduced compared to last year? Unidentified Corporate Representative So this year, in the DRAM market, high-performance, high-end products like HBM and DDR5 are expected to see tight supply because of increasing demand. Whereas legacy products, such as DDR4 and LPDDR4 they are likely to experience an accelerated decline in demand, which will deepen the decoupling trend between product types. So our competitiveness in HBM and DDR5 underpinned our leading position in the DRAM market and in order to focus on leading the demand for these products, we'll continue to scale down the production of legacy products like DDR4 and LPDDR4 and streamline and clear inventory. As a result, the share of legacy products, such as DDR4 and LPDDR4 in our revenue is projected to drop significantly from around 20% last year to single digit this year.

Question: SK Kim - Daiwa Securities Capital Markets - Analyst : First of all, congratulations on your great and excellent performance. I do have a question regarding HBM. As AI growth trends shift from the training phase to the inferencing phase, there are concerns that demand for high-performance HBM may also slow down. What's your view on this? Unidentified Corporate Representative Thank you for the question. I don't really think so. In the only AI market, GPUs equipped with high-performance HBM were essential for training AI and it was expected that the inferencing phase may require relatively low end HBM, but that was only the expectation. With the recent development of inference AI, the market is now shifting towards a more advanced inference, and this only highlights the growing importance of higher memory capacity and bandwidth. So to ultimately develop artificial general intelligence, or AGI that resemble human intelligence, substantial computational power is required even during the inferencing phase. And therefore, rather than slowing down demand, we expect that the expansion of the AI market toward inference will become a critical driver for HBM growth. Moreover, we anticipate that major tech companies' ongoing competitive investment will continue to secure AI leadership and also to achieve precise training and inference results. AI investment plans are now being announced not only by corporations but also at the national government level, indicating that AI demand will continue to surpass our growth expectation. In addition, the technologies presented at CES this year, such as physical AI and various AI agents, they are expected to serve as long-term growth driver for HBM demand will continue push forward the development of both processors and software.

Question: Ryu Young Ho - NH Investment & Securities Co., Ltd - Analyst : So I would like to ask a question in relation with servers. Server DDR5 demand last year was very strong. And are there any signs of slowdown in customer demand recently? And what's your assessment of the hyperscale customers DRAM inventory level? Unidentified Corporate Representative So thank you for the question. Hyperscale customers have continuously expanded investment to secure high-performance computing infrastructure. And accordingly, AI servers has also continuously exhibited strong demand growth and also investment in conventional servers have also been made alongside in tandem, which ensure robust server DRAM demand this year following last year. Also, when establishing AI data center, there is a growing emphasis on efficient space utilization and high energy efficiency. Taking into consideration the replacement cycle of servers where base investment was made in 2017 and '18, we expect that this will -- this year, we will see a strong surge in replacement demand. In addition, with new CPUs that support DDR5 ramping up this year and customers holding low DDR5 inventory levels, server DRAM demand, particularly for DDR5, is expected to remain very strong. Even if DDR5 prices undergo temporary adjustments, server customers will still have opportunities to build inventory at favorable price. And therefore, we don't really have a serious concern about potential slowdown in DDR5 demand. So by proactively addressing the demand for high-performance, high-density server DRAM models this year, we will continue to secure our leadership in the server market.

Question: Peter Lee - Citigroup - Analyst : So once again, congratulations for your excellent performance despite the deepening pickup trend in the memory market demand. There is a perception that your 10-nanometer process is superior to competitors. What is the SK Hynix' status of 10-nanometer development? And what are your plans for expanding investments? Unidentified Corporate Representative So based on our excellent 1b nanometer technology, we completed the development of 10-nanometer products in the second half of last year, and we also built potential for mass production. Our 1c nanometer-based DDR5 product supports a maximum operating speed of 9.2 giga bps approximately 28% faster than the previous generation with over a 9% improvement in power efficiency. As we transition to the AI era, which demands vary data processing and low power consumption, these products are designed to be optimized to meet future server demand. In addition, 1c nanometer product exceeded the target yield for the initial ramp up has already in the development stage, indicating that the expanded production and ramp-up could lead to significant cost savings. So while we will begin applying 1c nanometer to ramp up conventional DRAM products starting from the second half, a significant portion of investment this year will focus on HBM and infrastructure, where we already secured customer demand. And therefore, we will keep a close eye on future demand and supply dynamics in order to make the right investment decisions for ramp-up. And also, as for the 1c nanometer process that shows the excellent performance and stable initial yields we are going to apply that to the HBM4E in the future in order to ensure the timely development and supply of the next-generation HBM products to secure and maintain market leadership. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 23, 2025 / 12:00AM, 000660.KS - Q4 2024 SK Hynix Inc Earnings Call

Question: Han Dong Hee - SK Securities Co., Ltd - Analyst : So I have one question regarding NAND. If the current downward trend in NAND price continue, there is a possibility that the industry might return to losses in the second half of the year, do you have any additional plan for NAND production cut? If so, to what extent and for how long? Unidentified Corporate Representative So during the previous downturn, we cut production, mainly in legacy technologies while increasing wafer production in 2024 to meet rising eSSD demand. However, for products other than enterprise SSD, we have maintained limited production considering the delayed recovery of demand in general applications. Moving forward, until we see clear signs of demand improvement for NAND will continue to maintain (current approach) and flexibly adjust production in line with market conditions and we'll focus on normalizing inventory levels.

Question: Young-Gun Kim - Mirae Asset Securities Co., Ltd - Analyst : When do you expect to finalize HBM supply volumes for 2026? And do you think the strong growth trend of HBM be sustained in the future? Unidentified Corporate Representative So we at SK Hynix have already initiated discussions with some customers regarding HABM supply volumes for 2026. So we expect that we'll be able to gain some visibility for most of the next year's volumes by the first half of this year. And considering the high investment costs and long TAT associated with the HBM business, we aim to enhance business stability and visibility by securing a long-term contract through a proactive negotiation with customers. And as we mentioned earlier, the AI market holds significant growth potential, far exceeding our expectations, and they're mainly driven by advancements in learning and inference technologies as well as the integration of AI services across different industries. The fourth industry evolution previously represented by Big Data, artificial intelligence, robotics, and autonomous vehicle is now transforming industries with strong and visible AI innovation. This accelerating industrial transformation is expected to continuously generate high computing demand. And therefore, we have no doubt about the sustained long-term growth of HBM demand.

Question: Bo-Young Choi - Kyobo Securities Co., Ltd - Analyst : So let me ask you a simple question. In this year's performance, could you please elaborate on the significant non-operating profit recredit and the factors that influence it? Unidentified Corporate Representative So our subsidiary, SK hynix System held a 100% stake in system ICUs, and they completed the process of converting the system ICUs into a joint venture last November. And during this process, some of our stakes were divested, resulting in approximately KRW1.3 trillion in gains, and it was recognized as nonoperating income in Q4.In addition, in December, Kioxia went public, and our investment assets in Kioxia were reevaluated to reflect the year-end closing price, and this resulted in the evaluation loss of approximately KRW100 billion -- sorry, KRW200 billion. In addition, due to rising exchange rate, we were credited a net foreign exchange gain of approximately KRW600 billion. And overall, all in all, the total nonoperating profit for Q4 amounted to about KRW1.5 trillion.

Question: Giuni Lee - Goldman Sachs LLC - Analyst : Again, congratulations for your good performance, and thank you for giving me this opportunity. There are increasing debates on the Chinese DRAM companies nowadays. So how does the SK hynix assess the technological capabilities of these Chinese DRAM companies? Do you think that they can enter the DDR5 and HBM market. Unidentified Corporate Representative So since the second half of last year, Chinese DRAM manufacturers have expanded the supply of DDR4 and LPDDR4 products and coupled with slow demand, the prices of these legacy products have continuously dropped. And recently some reports even suggest DDR5 development and sales by Chinese manufacturers, reaging concerns about potential market impact. However, the technologies applied by these latecomer companies are significantly behind the advanced nodes used by major leading suppliers. And therefore, this will lead to a clear wide gap in quality and performance of DDR5 products. Moreover, was ongoing restrictions against Chinese companies and China, Chinese manufacturer is expected to face heightened uncertainties in developing advanced nodes and technologies. So by focusing on advanced node development and ensuring timely readiness for high-performance products and developing various AI memory products, including HBM we'll continue to maintain a strong lead over competitors in various aspects, including product portfolio, performance, quality and customer services.

Question: Simon Woo - Bank of America - Analyst : My question is about your prediction for the production growth rate for DRAM, excluding HBM because there is an ongoing CapEx investments centering around HBM. So I want to know about your plans for general conventional DRAM. Unidentified Corporate Representative So over the past two years, we have utilized the advanced notes with priority in order to reduce conventional DRAM production in response to market downturn and also to mass produce profitable HBM products. And therefore, we have seen a very limited increase in the production of conventional DRAM, except HBM. Starting in the second half of last year, we have scaled down the legacy DRAM production due to worsening supply and demand conditions. But at the same time, we are expanding the adoption of 1a nanometer processes to increase supply for DDR5 and LPDDR5, which show strong demand. And therefore -- and the wafer production for conventional DRAM is expected to grow slightly this year. So considering the production increase due to migration to advanced process and wafer production increase for conventional DRAM product we expect that general DRAM production this year is expected to grow at a rate aligned with market demand. So this year, with solid and strong HBM demand in AI market, we'll maximize HBM production and for conventional DRAM products we will have a product mix prioritizing profitability within limited capacity. And by pursuing transitioning to advanced nodes, we'll ensure timing supply for our customers and maintain healthy and sound inventory levels for legacy products.