SK hynix Inc. (000660.KS) Earnings Call Transcript & Summary

Good morning, afternoon and evening. Thank you for joining SK hynix' 2025 Q4 Earnings Release Conference Call. Following SK hynix presentation, there will be a Q&A session. [Operator Instructions] With that, we are now ready to begin.

[Interpreted] Good morning, afternoon and evening. This is Park Seong 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 Chan-Dong; Head of NAND Marketing, Kim Kyu-Hyun; and Head of HBM Sales and Marketing, Kim Jeong 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's earnings release conference call for fourth quarter of 2025. Song Hyun Jong, 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.

[Interpreted] Good morning, everyone. This is Song Hyun 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 KRW 32.8 trillion, up 34% Q-o-Q and 66% Y-o-Y, thereby achieving the highest quarterly revenue. DRAM shipments grew by low single-digit percent, driven by increased sales of HBM3E 12-high products and DDR5 for servers. Shipments of high-density DDR5 modules increased by approximately 50% Q-o-Q, leading demand growth centered on AI and HPC. ASP rose mid-20% Q-o-Q, 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 Q-o-Q exceeding guidance. ASP also increased low-30% Q-o-Q as price increases accelerated. Driven by substantial price increases, profitability improved for both DRAM and NAND. As a result, fourth quarter operating profit reached KRW 19.2 trillion, up 68% Q-o-Q and 137% Y-o-Y, marking a record high-quality operating profit with the operating margin of 58%. Depreciation and amortization for Q4 was KRW 3.6 trillion. EBITDA amounted to KRW 22.7 trillion with an EBITDA margin of 69%. Net nonoperating loss reached KRW 1.5 trillion, including KRW 6.6 trillion in valuation gains on investment assets and KRW 8.4 trillion in loss on derivatives related to exchange rights on exchangeable bonds. Pretax income amounted to KRW 17.7 trillion. Net profit totaled KRW 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 content 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 KRW 97.1 trillion and operating profit totaled KRW 47.2 trillion, representing Y-o-Y growth of 47% and 101%, respectively. These achievements are not really 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 assembled shipments of HBM4 to major customers in March last year, we were also the first in the world to secure mass production revenues in September further solidify our technology leadership in the AI memory market. HBM revenue more than doubled Y-o-Y driven by significant increase in HBM3E 12-high sales and contributed to record high annual DRAM revenue and operating profit. 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 gigabit DDR5 RDIMM based on 1b-nanometer 32 gigabit die, we have further demonstrated our leadership in server modules. In NAND, despite a challenging demand environment, we continue to strengthen our technology leadership, including the successful development of 321 layer QLC products in the first half of last year, in particular, by responding proactively to the recovery in enterprise SSD demand in the second half, we achieved record high annual NAND revenue. Cash and cash equivalents amounted to KRW 34.9 trillion at the end of 2025, an increase of KRW 20.8 trillion from the end of 2024, while borrowings decreased by KRW 0.4 trillion to reach KRW 22.2 trillion. The debt ratio declined significantly to 18% and the company transition 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 environment. Computing workloads are shifting from architectures with a focus on high-performance servers towards more distributed architectures. The core of system design is no longer limited to compute performance online 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, servers that 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 workload requirements for memory density and bandwidth and 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 smaller 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-teen percent, 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 a similar level 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 proceed 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 HBM We are actively engaging in custom HBM technology discussions with key customers and through one in 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 SoCAMM2 and GDDR7. For NAND, we will maximize product competitive through the transition to 321-layer technology. In particular, through the development of next-generation 245 terabyte products, we aim to secure a 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 M15X capacity earlier than planned while accelerating tech migration to 1c-nanometer DRAM and 321 layer NAND. Over the mid- to long term, we aim to rapidly expand our production base in Yongin Phase 1 fab while also proceeding without delaying the preparation of Cheongju 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 memory creator that enables customers AI performance requirements from a system level perspective. By integrating our capabilities in the 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 will 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 KRW 1,500 per share. Accordingly, the year-end dividend per share will be KRW 1,875. As a result, the total cash dividend per share for fiscal year 2025 will amount to KRW 3,000, and the total dividend payout will be approximately KRW 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 KRW 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... [Foreign Language] Now Q&A session will begin.

[Operator Instructions] The first question will be provided by Peter Lee from Citigroup.

[Interpreted] First of all, congratulations on the record high performance for the company. Now my questions are pertaining to the HBM4. So recently, especially last month, there has been some noise about SK hynix's progress on HBM4. So can the company share your current status of the HBM4 development and the expected timing for mass production? And also what are the plans to maintain HBM performance and mass production competitiveness?

[Interpreted] Thank you very much for your questions. Now SK hynix has been a leading pioneer in the HBM market since HBM2E, working together as one team with customers and infrastructure partners. And it is not only about superior technology, our mass production experience and customer trust in our quality built up over time are not something that can be overtaken in a short period of time. Likewise, for HBM4, customers and infrastructure partners show strong preference and expectations for our products, prioritizing our products over others. And we aim to extend this to HBM4 to take up overwhelming market share, just as we did with HBM3 and HBM3E. As mentioned in the presentation, preparations for HBM4 are underway as planned, according to the time line agreed with customers, and we are currently mass-producing volumes requested by customers. SK hynix HBM4 represents a major technical achievement that will enable customers' requirements based on existing 1b-nanometer process. Using our proprietary packaging technology, Advanced MR-MUF, we plan to secure yields comparable to the 12-high HBM3E products. Even as we maximize production, we cannot meet HBM demand 100%. So some competition is expected to enter the market. Such developments notwithstanding, our market leadership and leading supplier position will continue based on performance, producibility and quality. Next question, please.

[Interpreted] The following question will be presented by Hyung-keun Ryu from Daishin Securities.

[Interpreted] Congratulations on the performance. The question is about the LTA. So now with the growth -- continued growth of the market, there are talks of LTAs being reached, so can the company share some content -- can the company share an update about the LTAs that are underway for the year 2026. And how are the LTAs different from past LTAs?

[Interpreted] Thank you. Please understand that I cannot divulge details about LTA is currently under discussion with our customers. But to your question on how the long-term supply agreements or LTAs are different today, now as you know, LTAs already existed, but they were generally loose contracts on volumes and tended to be quite fluid, depending on market conditions. The LTAs being discussed today are expected to reflect strong mutual commitments between customers and suppliers, not simply indicating the intent to buy because memory production today requires cutting-edge technology and far bigger investment, compelling suppliers to seek high visibility into demand. And this is also why customers now prefer multiyear contracts, but capacity constraints make it difficult to accommodate all customer requests. And bearing this in mind, SK hynix will keep exploring ways to enhance both our customers and our own long-term operational stability.

The following question will be presented by Dong Hee Han from SK Securities.

[Interpreted] Now regarding the unprecedented surge in memory demand, some suggest that it could be driven by pull in demand to secure inventory, but most see this as growth in real demand due to tight customer inventory. So what is the customers' inventory level in key applications as seen by the company? And what is the company's own inventory status?

Thank you. Now as you would know, memory market today is experiencing explosive demand growth along with continued expansion in AI infrastructure investment, but supply cannot keep pace with demand, resulting in a severe supply-demand imbalance. Most customers are struggling to secure memory volumes and are persistently demanding increased supply. So it appears that customer inventory levels are -- have decreased overall. Server customers, in particular, as soon as they secure volume, move on to building sets, which apparently keeps driving down inventory. Customers can hardly secure enough volume to build up inventory and set builds use up memory fast. With memory being seen as debottleneck in data center infrastructure expansion, server customers are expected to keep trying to increase purchase to secure their volume. At the same time, PC and mobile customers are also experiencing supply constraints as well as the direct and indirect impact from the strong server side demand and their inventories also continued to decline. For the company, even as we strive to increase production, DRAM inventory decreased in Q4 Q-o-Q. The tight inventory trend, particularly for server DRAM, is expected to continue throughout the year. With memory selling out as soon as it is produced, our inventory is projected to decline even further in the second half of the year. And now about NAND. NAND inventory is also observed to be falling rapidly among server customers. This trend of falling inventory is expected to continue, particularly for enterprise SSD products. And the company's inventory level is also declining rapidly with NAND inventory weeks at the end of last year, nearly matching that of DRAM.

The following question will be presented by Simon Woo from Bank of America.

[Interpreted] And also, congratulations on the record high performance. Now my question is pertaining to the company's plan on managing the tight capacity by customer or product. And this is because while the sharp rise in memory prices coming from tightening supply/demand positively affects the company's performance, SK hynix' customers may be struggling to secure enough volume to sustain their operations. So the question is how the company plans to manage its both existing and newly acquired capacity.

[Interpreted] It is true that the AI industry's explosive growth has brought unprecedented changes to the memory market as well. In particular, it has deepened the supply-demand imbalance because while demand for AI memory has surged, ramping up supply takes time. And at a time like this, we believe it is important to prioritize meeting customer needs and building trust in the market, not focusing solely on short-term results. And that is why although the space is limited, we are working to maximize production to accommodate the rapidly increasing demand. To meet the HBM demand, we are adding new capacity for 1d-nanometer at M15x, which was completed last year, while enhancing productivity through yield improvement, not only that, to address demand for conventional DRAM and NAND, we are accelerating tech migration to 1c-nanometer and 321 layer. As a memory leader, Hynix remains committed to creating a sustainable semiconductor ecosystem where we grow together with our customers.

The following question will be presented by Sun Woo Kim from Meritz Securities.

[Interpreted] The company's performance is also expected to improve significantly this year as well. So then my questions are twofold. Are there any plans to continue with the extra dividends and share cancellations going forward? And the second question is the company also recently canceled the treasury shares. Then in order to further enhance the shareholder value, are there plans to issue ADRs? And if yes, then through what approach.