SK hynix Inc. (A000660) Earnings Call Transcript & Summary

Good morning, afternoon and evening. Thank you for joining the SK hynix 2025 First Quarter Earnings Release Conference Call. Today, SK hynix will first make their presentation and then we'll have a Q&A session with the participants. [Operator Instructions] Also, the company's business performance will be simultaneously interpreted, and the following Q&A session will be consecutively interpreted. Let us begin today's earnings release conference call.

[Interpreted] Good morning, afternoon and evening. I'm Park Seong Hwan, Head of IR at SK hynix. Welcome to the SK hynix 2025 First Quarter Earnings Release Conference Call. Allow me to introduce the executives present here with me today. We are joined by CFO, Kim Woo-Hyun; Head of DRAM Marketing, Kim Kyu Hyun; Head of NAND Marketing, Kim Seok; 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' earnings release conference call for the first quarter of 2025. CFO Kim Woo-Hyun will present the earnings, which will be followed by the company's future plans and market outlook and a Q&A session with the attending executives.

[Interpreted] Good morning, everyone. I'm Kim Woo-Hyun, CFO at SK hynix. Allow me to first introduce the company's performance for the first quarter of 2025. Despite the expected seasonal demand weakness and customer inventory digestion, the memory market improved faster than anticipated, driven by Chinese subsidies for consumer electronics, intensified by -- intensified AI development competition and some restocking demand. Amid weak seasonality, we recorded KRW 17.6 trillion in revenue, marking our second highest quarterly revenue following the last quarter's all-time high. This represents an 11% sequential decrease but a 42% increase year-on-year. Starting with DRAM. That shipments exceeded guidance with a sequential decrease of high single-digit percent due to strong sales of high value-added products such as HBM3E and DDR5 as well as higher-than-expected sales for PCs and smartphones. ASP remained flat despite a decrease in conventional DRAM pricing, thanks to expanded -- thanks to expanded high-value product sales. HBM sales, in particular, continued growth with the expansion of HBM3E 12Hi products as planned. NAND saw price increase in the spot market due to production cuts in the industry, but the NAND recovery was relatively weaker than DRAM. Our shipments declined high teens percent compared to the previous quarter as planned, and ASP dropped about 20%, mainly due to increased sales of discrete products driven by customer inventory restocking. Our Q1 operating profit was KRW 7.44 trillion, the second highest following the KRW 8.08 trillion recorded last quarter. Operating margin improved by 1 percentage points sequentially to 42% despite a decrease in revenue. We believe the improvement in operating margin during a market correction proves not only the structural transformation of the memory business due to AI, but also our strengthened competitiveness. We will continue our efforts to improve business fundamentals to deliver differentiated results even during down cycles in the memory market. Depreciation and amortization expenses for Q1 slightly increased from that of last quarter to KRW 3.33 trillion. EBITDA stood at KRW 10.77 trillion with EBITDA margin of 61%. Nonoperating gain net of loss reached KRW 1.86 trillion. Notable items include foreign currency-related net gain of KRW 0.12 trillion due to strong U.S. dollar against Korean won and 7.7 -- KRW 1.74 trillion in other nonoperating income, such as valuation gains from investment in Kioxia. Pretax income was KRW 9.3 trillion, and net profit was KRW 8.11 trillion with a net profit margin of 46%. In Q1, we completed the second closing of the Solidigm acquisition and paid the remaining balance of $2 billion. Cash and cash equivalents, including short-term investments at the end of Q1 were KRW 14.3 trillion, up KRW 0.2 trillion from the previous quarter. Interest-bearing debt rose by KRW 0.6 trillion to KRW 23.3 trillion, and net debt increased KRW 5.5 trillion to KRW 9 trillion. Consequently, our debt-to-equity and net debt-to-equity ratios improved slightly Q-o-Q to 21 -- 29% and 11%, respectively. Next, the company's market outlook and plan. Although we initially expected the memory market to recover towards the second half of the year, heightened global uncertainties such as tariff policies have increased volatility in the second half demand projections. We will maintain close communication with customers and strengthen cooperation across the supply chain to meet customers' needs seamlessly amid this evolving environment. Looking at demand by application. We maintained our previous outlook on PC demand that the demand will be driven by requirement of PCs following Windows 10 and support and the ramp-up of AI PCs. In smartphones, demand for high-performance memory is expected to continue with the adoption of AI models like small LLMs. Upcoming smartphone launches with enhanced AI features are expected to drive replacement demand, further increasing demand for high-performance mobile DRAM such as LPDDR5X and LPDDR5T. In Q1, both PC and smartphone segments saw some demand recovery due to China's subsidy program and customer inventories are decreasing. While supply side remains tighter than expected, we have some preemptive purchases due to ongoing market uncertainties. Server market demand is accelerating as big tech companies race to develop high-performance AI training and inference models. These companies are actively releasing new AI models and agents, highlighting their commitment to investing in AI infrastructure. As a result, demand volatility in the server market is expected to be relatively limited. The release of efficient open source AI models like DeepSeek earlier this year has lowered entry barriers, allowing more companies and research centers to participate in the ecosystem. This is expected to stimulate demand for AI servers further. Additionally, many countries are building AI infrastructure at national level, which should positively impact long-term demand for AI memory. Meanwhile, in NAND, while AI impact has been relatively limited, market recovery this year is expected to be fueled more from supply side factors. While demand remains somewhat muted, NAND suppliers are adopting conservative investment strategies and even production cuts for certain products which will continue affecting the market positively throughout the year. In the mid- to long term, enterprise SSDs are expected to lead NAND demand growth. Some big tech companies are considering replacing traditional HDDs with QLC-based enterprise SSDs for certain workloads. When we see more meaningful progress in these efforts, this shift will become a significant growth driver for the NAND market. Now I will discuss the company's plans for this year. Although market uncertainties are heightening, we currently anticipate a low teen percent sequential increase in DRAM shipments and over 20% growth in NAND shipments in the second quarter. HBM demand, which is contracted a year in advance with customers, is expected to roughly double from that of last year, as previously forecasted. The transition to HBM3E 12Hi is progressing smoothly. And more than half of our total HBM3E shipments in QE will be 12Hi products as planned. Due to the strong product competitiveness of our HBM3E 12Hi products, customer demand remains robust. We are optimizing product mix of our existing fabs and reallocating resources to ensure a stable supply of HBM that meets customer needs. In March, we shipped samples of HBM4, the mainstream product for 2026, to major customers for the first time in the world, and reaffirmed our technological leadership. We plan to complete mass production preparation for HBM4 12Hi within the year and will maintain our leadership in next-gen HBM market. We also began shipping LPCAMM2 high-performance memory model for AI PCs to certain PC customers in Q1. For SOCAMM, low-power DRAM module for AI servers, we are preparing for a tiny supply of the product through close cooperation with customers. In NAND, while there are positive signs like rising spot prices and declining customer inventories, global uncertainties make it difficult to determine whether the recovery will be sustained. We will continue to focus on profit-oriented operational decisions and maintain a prudent approach to CapEx spending. Construction for the first fab in Yong-in and M15X are progressing as planned. The Yong-in fab broke ground in Q1 and is targeting completion by Q2 2027, while M15X is scheduled to open in Q4 this year. Our strategy remains to prepare for future growth, while maintaining flexibility in fab utilization based on market conditions. Given today's uncertain environment, we will continue to focus our spending on value-added products with high visibility as we have previously emphasized and also enhance investments -- investment efficiency even more than what we have done. Going forward, as an AI leader -- AI memory leader, we will actively cooperate with partners, continuously overcome technological limitations and maintain industry-leading product competitiveness so that we can continue our profit growth. Thank you. With that, we are...

[Foreign Language] Now Q&A session will begin. [Operator Instructions] The first question will be provided by Sun Woo Kim from Meritz Securities.

[Interpreted] I'm Sun Woo Kim from Meritz Securities. I do have a question regarding U.S. tariff policy. With the U.S. tariff policy, it seems the uncertainty in the business environment is growing. While we still need to keep an eye on how things are unfolding, how do you currently expect memory demand to change this year as a result of the tariff impact?

[Interpreted] While reciprocal tariff measures between some countries are currently suspended, there are growing concerns that tariff can be applied to semiconductor products. Given the high level of uncertainty surrounding tariff policy direction and its potential impact, we currently ask for your understanding that it is difficult to provide a definitive answer at this point of time. To share our current ongoing discussions with customers regarding supplies, global customers are generally maintaining their planned memory demand, as previously discussed with us. In fact, some customers are even requesting short-term supply pull-ins to expedite their demand. For IT consumer goods such as PC and smartphones, tariffs are on temporary on hold for now. We are anticipating the positive impact of new product launches this year that feature AI functionalities. Additionally, from the perspective of end customers, there is a possibility that some of them may rush purchases before price increase, which could, in turn, stimulate replacement demand. As for AI servers, we expect the impact of tariffs on demand to be relatively limited. We plan to respond in close cooperation with our customers to minimize potential disruption.

[Foreign Language] The following question will be presented by Simon Woo from Bank of America.

[Interpreted] My question is about the changes in HBM demand and supply plans. As you know, there is ongoing speculation about the potential changes in the road map of major customers. And given export restrictions of certain GPU products to China, HBM product demand can also be affected. So from your perspective, do you anticipate any changes in this year's HBM demand and supply plans?

[Interpreted] Due to recent changes in U.S. tariff policies and regulations, uncertainties have increased surrounding the demand for semiconductors, including memory as well as the semiconductor-based application products. Accordingly, we are engaging in closer communication with customers than ever before to stay aligned with market changes. Regarding our HBM business, one thing that we can state clearly is that our sales plan for major customers this year remain unchanged from the levels agreed upon in existing contract. As the primary HBM vendor, we are supplying a full lineup of HBM products, including the most cutting-edge HBM3E 12Hi. Additionally, we maintain internally mass production capacity that allows us to flexibly respond to changes in customer demand. Our plan to more than double our HBM revenue year-on-year remain unchanged. Furthermore, there is also no change in our initial plan for HBM3E that the 12Hi product would constitute the majority of this year's HBM3 revenue will account for over half of the HBM3E sales in the second quarter.

[Foreign Language] The following question will be presented by Peter Lee from Citigroup.

[Interpreted] So I'm Peter Lee from Citi Securities. First of all, congratulations on your excellent first quarter performance. My question is about the high-capacity server DRAMs. So due to DeepSeek impact, demand for high-capacity server DRAMs is increasing, such as 96-gigabyte models. So can you explain the reasons behind this trend? And what's your outlook for the future?

[Interpreted] DeepSeek utilizes multi-head latent attention, or MLA, which significantly reduces AI model development cost and enable the development of AI with the same performance with much fewer hardware resources. This has significantly lowered barriers to entry for AI development. With development costs decreasing, initiatives for AI development have surged, which has led to a sharp increase in demand, not only for HBM, but also for high-capacity server DIMMs. During the first quarter, we also experienced rising demand for DDR5-based 96-gigabyte models. And this year, we anticipate continued growth in demand for high-capacity DIMMs for AI model development and inference workloads. Additionally, reasoning AI models, such as OpenAI's o3 and DeepSeek's R1 extend inference persisting time to achieve greater accuracy, which requires more memory. As AI models require more hardware resources to deliver more precise results, the AI market is transitioning from model training to inference-focused approach, which create additional demand for high-capacity memory. To ensure high-quality infra services, continuous model training will be needed, which will inevitably lead to the expansion of high-capacity server infrastructure. In this slide, we believe high-capacity servers will be a key driver for mid- to long-term server demand. So DeepSeek has acted as a catalyst to broaden the foundation for AI development. As a result, AI development and applications are expected to expand further, which will drive long-term growth in AI server demand and increasing memory demand.

[Foreign Language] The following question will be presented by Young Ho Ryu from NH Investment & Securities.

[Interpreted] I'm Young Ho Ryu from NH Investment & Securities. I have a question regarding tariff. So what percent of sales in SK hynix is directly exported to the U.S? Although you previously mentioned, uncertainties still persist and nothing has been determined and finalized yet. And therefore, how significant do you expect the biggest impact from tariff to be? And what's your strategy for responding to this?

[Interpreted] Taking into account the AI-related products represent a high proportion of our sales, the percentage of revenue from U.S. customer is quite significant, approximately 60%, 6-0 percent, based on the corporate locations stated in our audit report. However, as you know, tariffs are imposed on shipments and to the U.S., and sometimes even customers headquartered in the U.S., their memory product shipment often go to location outside the United States. Therefore, the actual percentage of direct export to the U.S. is not that high. Given the complexity of the global semiconductor supply chain, detailed information such as tariff criteria or the methods are required to precisely assess the impact. Therefore, it is difficult to assess the impact accurately at this point of time. So in the future, around the time when the tariff becomes effective, we'll talk and collaborate with customers to ensure most stable supply possible.

[Foreign Language] The following question will be presented by Giuni Lee from Goldman Sachs Securities.

[Interpreted] I'm Giuni Lee from the Goldman Sachs Securities. I have a question regarding the demand pull in and its impact as well as the inventory adjustment. So how much impact did tariff-related pull-in demand have on Q1 performance and Q2 guidance? If demand is pulled in during the first half of the year, this will lead to increased customer inventory, then is there a risk that demand will decline in the second half due to inventory adjustments at the customer side?

[Interpreted] So in Q1, tariff policies were not finalized. As a result, while some pull-in demand from customers may be reflected in the results, it did not come in a significant way and the impact was relatively limited. So our Q1 DRAM shipment exceeded original projection, but not by a significant margin, and the increase was mostly limited to client products such as mobile and PC. In addition, we understand that customer inventory levels did not show significant changes either. In Q2, our key details such as country-specific tariffs and the scope of items subject to tariffs, they are still not yet finalized which means customers will continue to have limited visibility into their demand. Therefore, it is unlikely that pull-in demand will increase significantly to a level that will trigger concerns about inventory adjustments. In addition, suppliers are also expected to reflect market uncertainties and their investment and production operation, which suggests that a drastic demand adjustment like the one that we saw during the pandemic is unlikely to occur in the second half of the year.

[Foreign Language] The following question will be presented by Nicolas Gaudois from UBS.

Yes. It seems to us that you may actually have recently decided to up your CapEx budget for 2025 and 2026 with a slight pull-in in schedule for equipment delivery for M15X within Q4, as you suggested in the call. Could you confirm this and clarify rationally, how does this factor in, in particular, the current uncertainty around tariffs? And where would that put your total CapEx in 2025? And directionally, where would you be going into 2026?

[Interpreted] Thank you for the question. Our company adheres to CapEx discipline prioritizing investment only in product with secured profitability. With the expansion of protectionist policies such as tariff regulations and export restrictions, it has become more challenging than ever before to predict future market conditions. To mitigate these uncertainties, we plan to maintain a cautious yet flexible investment approach this year. While prioritizing essential investments to meet market demand, we'll focus on future infrastructure investments such as fabs to ensure that our technology leadership and competitiveness can be monetized at the right time. Our overall investment this year will see a slight increase compared to last year, which is in line with our existing investment direction. In order to ensure a stable business operation in the midst of highly uncertain external environment, we will optimize product mix for existing fabs, reallocating resources away from low demand and low profitability products to enhance investment efficiency and strengthening financial soundness through continuous debt reduction and increased cash reserves.

[Foreign Language] The following question will be presented by Minsook Chae from Korea Investment & Securities.

[Interpreted] So my question is similar to the previous question, but it is NAND spot prices have rebounded and some believe that such increase in spot price comes from the customer demand for temporary investment buildup increase. Do you think NAND price recovery and demand growth will continue?

[Interpreted] So thank you for the question. In Q1, demand in the NAND market for major applications remained weak due to seasonal factors. However, there were signs of preemptive purchasing, particularly for some channels and discrete products, mainly driven by tariff considerations and potential inventory reductions. Coupled with suppliers' production cutbacks, this resulted in a price increase, especially in the spot market. In Q2, following the announcement of tariff policies, uncertainties have increased around the recovery of demand, both for discrete products, where demand had increased in Q1, as well as for major applications. Having said that, NAND suppliers have maintained a conservative production stance since the second half of last year, which has helped ease downward pressure on prices. With the combination of our production cuts by suppliers and increasing demand for higher capacity, the price recovery trend is likely to continue in the short term. While the pace of recovery in set demand will depend on how macroeconomic uncertainties unfold, the mid- to long-term trend towards higher capacity enterprise SSD is expected to continue. Therefore, we believe NAND demand will continue to grow.

[Foreign Language] The following question will be presented by Ricky Seo from HSBC.

[Interpreted] I have a question regarding the HBM market demand. Regarding the HBM market in 2026, there are mixed views. Some believe demand will grow due to inference AI, while others are concerned that slowdown in HBM adoption will hinder growth. So what's SK hynix' outlook on the HBM market in 2026? And how is the progress of your supply and contracting? Are there anything that you can update?

[Interpreted] So the DeepSeek announced early this year demonstrated that if AI services are incorporated into various industries using an efficient AI model, it will have the potential to grow beyond existing forecast and expectations. While uncertainties will persist going forward, global enterprises continue to expand investment in AI infrastructure. Not only enterprises, but even government are actively working to build their own AI ecosystems. This has led us to believe with no doubt that HBM will continue to experience strong long-term demand growth. Based on demand visibility, we currently anticipate an average HBM growth rate of approximately 50% per year between 2024 and 2028. Next year, HBM4 is expected to be our flagship product as the number of I/O channels for HBM4 will double compared to the previous model. HBM4 will significantly enhance bandwidth efficiency and therefore, they are expected to drive sustainable demand growth. As for 2026 supply volume, we plan to secure visibility for our annual supply volume with major customers within the first half of the year, in line with our existing plan. We will also finalize agreement with other customers thereafter.

[Foreign Language] The following question will be presented by Dong Hee Han from SK Securities.

[Interpreted] So I have a question regarding profit and profitability. Despite a decline in revenue during Q1, your margin improved. Can you please elaborate on the background and provide more details on product-level profitability?

[Interpreted] So seasonal weakness led to a decline in sales volume, and falling NAND prices reduced revenue. Operating profit also saw a slight decrease compared to the previous quarter. However, in the highly profitable DRAM segment, operating profit margin improved slightly, and DRAM share of total revenue grew from 74% to 80% quarter-to-quarter. As a result, the overall operating margin also improved compared to the previous quarter. Turning to product-level profitability for DRAM segment, despite a decline in conventional product prices, the overall profitability improved from the previous quarter mainly driven by expanded sales of high-margin products, such as HBM3E and DDR5. As for NAND, the revenue declined due to falling prices and lower sales volumes. However, the NAND segment remained in the black with positive profitability.

[Foreign Language] The following question will be presented by [ Logo Kim from Hana Securities ].

[Interpreted] So I have a question regarding NAND. Last year, enterprise SSD demand drove the NAND market growth. Do you expect this trend will continue this year? And what are your plans for eSSD products for AI application?

[Interpreted] With the rapid surge in AI demands last year, there was a sharp increase in the need for high-capacity, high-performance enterprise SSD. Leveraging our leadership in high-capacity QLC eSSD products, we actually responded to this demand, achieving over 300% growth in eSSD sales compared to year 2023. While external uncertainties are growing this year, global investment in AI is expected to continue, and we anticipate that demand for eSSD will remain resilient and strong compared to other applications. This year, demand has grown for generative AI inference services and for high-quality performance in terms of accuracy and speed. As a result, data center servers now require expanded infrastructure, not only for memory, but also for storing retrieve knowledge. We expect this will drive demand both for HBM and DRAM as well as for high-performance TLC enterprise SSD. Significant shifts are also expected in the high-capacity QLC eSSD market with demand transitioning from 61 terabytes last year to 122 terabytes this year. We plan to actively respond to this growing trend for higher-capacity eSSDs. For example, leveraging our world's high 321Hi technology, which was introduced last November, we are advancing the development of 244 terabyte products to continuously lead the ultra-high capacity eSSD market going forward.

[Interpreted] We'll take the last question.

[Foreign Language] The last question will be presented by S.K. Kim from Daiwa Securities.

[Interpreted] A chance to ask the last question, and congratulations on your excellent performance. I do have a question regarding DRAM strategy. A recent market research report -- recent market research report announced that SK hynix ranks first in the DRAM market, not only in terms of profitability but also in market share. Given HBM's growth potential and premium positioning, SK hynix' leadership in this market is expected to continue. So my question is about your response strategies for HBM and commodity markets.

[Interpreted] The announcement that our company ranked first in the DRAM market in Q1 2025, both in terms of profitability and revenue, reflects that our portfolio strategies that focused on highly profitable AI memory was well executed. It also demonstrates our leadership in DRAM technology. The HBM market is critical in AI semiconductor and competitiveness is determined by technological leadership and the ability to cater to customer needs. It is essential to proactively develop products that meet customer needs and ensure stable mass production. Based on our extensive experience in HBM development and manufacturing, we are actively pursuing development and customer qualification for HBM4 to accelerate mass production. We also work in close collaboration with our customers to ensure meticulous product quality. Furthermore, we plan to strengthen our production infrastructure by expanding fabs that are dedicated to produce high-performance DRAM such as M15X in order to secure differentiated market responsiveness. In the general DRAM market, managing a product portfolio which are aligned with high performance, high capacity trend is essential, and we'll continue focusing on profitability-driven product mix. To that end, we are rapidly increasing the share of high-value products such as DDR5 and transitioning to high-density solutions like 24 gigabytes or 32 gigabit DRAM to enhance cost competitiveness and power efficiency. Additionally, with our sales strategies closely aligned with customer needs, we will enhance our demand forecasting capabilities and ensure stable market operation through flexible investment and production planning based on market conditions. Thank you very much. This will conclude the 2025 conference call. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]