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

Good morning, afternoon and evening. Thank you for joining SK Hynix 2025 Q2 Earnings Release Conference Call. [Operator Instructions] With that, we are now ready to begin.

Good morning, afternoon and evening. This is Park, Seong Hwan, Head of IR at SK Hynix. Welcome to the SK Hynix 2025 Second Quarter Earnings Release Conference Call. Allow me to introduce the executives present here with me today. We're joined by President of Corporate Center, Song Hyun Jong; Chief Financial Officer, Kim Woo-Hyun; Head of DRAM Marketing, Kim Kyu Hyun; Head of NAND Marketing, Kim Tae, 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 second quarter of 2025. Song Hyun Jong, President of Corporate Center, will first present the earnings followed by the company's future plans and market outlooks and a Q&A session with the attending executives.

Good morning, everyone. This is Song Hyun-Jong, Head of Corporate Center. Allow me to first introduce the company's performance for the second quarter of 2025. The past quarter began with concerns about a slowdown in demand due to trade tensions and overall economic uncertainty. However, demand for AI memory continued to grow, driven by aggressive AI investments from big tech companies. This was further supported by customers' preemptive purchasing to prepare for external risks, resulting in a more favorable environment than initially expected. Both DRAM and NAND shipments exceeded our original guidance and pricing conditions also improved. As a result, second quarter revenue increased by 26% Q-o-Q and 35% Y-o-Y, reaching an all-time high of KRW 22.2 trillion. For DRAM, sales of our 12 High HBM3E product was expanded in full scale as planned, while server and PC segments saw strong demand, driving sequential Q2 shipment growth above guidance at mid-20% growth. Meanwhile, ASP rose by low single-digit percent due to a considerable increase in sales of relatively lower-priced conventional DRAM products. Coming from a low base of the previous quarter, NAND shipments significantly exceeded guidance by increasing over 70% sequentially as demand rose across all applications. ASP declined by high single-digit percent Q-o-Q due to continued pricing weakness in solution products despite price rise in the spot market. Operating profit rose by 24% Q-o-Q and 68% Y-o-Y, reaching KRW 9.2 trillion, also setting a new quarterly record. The operating profit margin stood at 41%. Depreciation and amortization expenses for Q2 were KRW 3.4 trillion, marking a slight increase from the previous quarter. EBITDA came in at KRW 12.6 trillion with an EBITDA margin of 57%. Nonoperating loss net of gain reached KRW 0.49 trillion. Notable items include foreign currency-related net loss of KRW 0.61 trillion due to depreciation of U.S. dollar against Korean won and KRW 0.12 trillion of other nonoperating income, including valuation gains on investment assets. Pretax income was KRW 8.7 trillion, while net income was KRW 7 trillion, resulting in a net profit margin of 31%. As of the end of the second quarter, cash and cash equivalents stood at KRW 17 trillion, up KRW 2.7 trillion from the previous quarter. Interest-bearing debt decreased KRW 1.5 trillion to KRW 21.8 trillion, resulting in a reduction of net debt by KRW 4.1 trillion to KRW 4.9 trillion. Accordingly, our debt-to-equity and net debt-to-equity ratios reached 25% and 6%, respectively, which is an improvement by 4 percentage points and 5 percentage points, respectively. Now, let me share our market outlook. While the memory market was initially expected to recover towards the second half of the year, we saw strong demand growth and favorable pricing conditions in the first half. Despite increased procurement demand during Q2, system build demand also rose, helping customers to maintain inventories at stable levels. Given demand is expected to grow from new product launches in the second half, we believe the likelihood of sharp demand corrections due to customers' inventory adjustments would be low. Looking at demand by application, we expect healthy demand growth in the server market, driven by increasing investments from big tech companies despite macro uncertainty. Alongside strong AI demand, general-purpose server demand is also projected to rise due to replacement cycles and adoption of new CPUs. In the AI market, big tech companies have begun full-fledged competition by unveiling AI agents with enhanced reasoning models. These models perform iterative thought processes to solve problems autonomously, requiring systems capable of processing significantly more data than conventional AI models. This evolution is expected to further drive demand for high-performance, high-density memory. Additionally, ongoing investments by governments and corporations for sovereign AI are likely to become a new long-term driver of AI memory demand. In the PC and smartphone market, the proliferation of AI applications is expected to drive replacement demand this year. Memory content per device are also expected to grow with wider adoption of high-performance memory required to support the AI functions. Unlike DRAM market, NAND market is yet to see meaningful AI-driven demand growth. However, as power consumption considerations are becoming increasingly important in AI servers, we expect adoption of power-efficient SSD solutions to widen in the near future. Next, I will discuss the company's plans. In the third quarter, given the significant shipment growth in the second quarter, we expect a moderation in shipment growth with DRAM growing by approximately low to mid-single-digit percent and NAND shipment increase being rather limited. Our plan to double HBM sales Y-o-Y remains unchanged, backed by our strong product competitiveness and mass production capabilities. We expect to continue delivering stable performance, leveraging the HBM business despite external uncertainty. Our HBM3E products are receiving high marks from all customers for their performance and supply reliability, and we plan to maintain industry-leading competitiveness as we transitioned into HBM4. In March, we supplied industry's first samples of HBM4 to customers. We are currently working closely with partners to optimize system-level performance and are preparing to deliver products on time for our customers' needs. Beyond HBM, we plan to expand sales of conventional DRAM products where DRAM is increasing. These include high-speed DDR5 products over 8,000 megabits per second that support new CPUs, high-density server modules over 128 gigabytes and LPDDR5X for flagship smartphones as well as LPDDR4X products favored in the Chinese market. We also plan to begin supplying LPDDR-based server modules that enhance data processing speed and power efficiency within this year. Additionally, for GPUs, we are preparing not only the 16-gigabit GDDR7 products currently in supply, but also 24 gigabit-based products to strengthen our leadership in the AI memory market with a diversified product portfolio. For NAND, we will maintain a prudent investment strategy and a profitability-focused approach in line with downstream demand conditions. However, we are continuing product development efforts to respond quickly once market conditions improved. In the second quarter, we began actively expanding sales of ultra-high-density enterprise SSDs exceeding 120 terabytes based on QLC technology. In May, we developed a 321-layer NAND-based USS 4.1 product. with random read and bright speed improved by 15% and 40%, respectively, compared to the previous generation. By the end of the year, we also plan to develop both client and enterprise SSDs based on 321-layer technology, thereby building a competitive NAND product portfolio. Looking ahead, our M15X fab is scheduled to open in Q4 of this year to produce DRAM products, including HBM from 2026. Construction of our Yong-in fab Phase 1 is on track for completion in Q2 2027. And through these facilities, we aim to secure the manufacturing infrastructure necessary to meet future demand. Our total investment for this year is expected to increase compared to the previous plan in accordance with our principle of continuing our investment focus for products with high demand visibility and secure profitability as well as maximizing investment efficiency, although we are yet unable to provide details regarding HBM supply for 2026 as we now have secured visibility on next year's demand figure based on discussions with customers, we assessed that some proactive investment this year is necessary to ensure timely support of our HBM products. In the AI market, memory is increasingly becoming a critical infrastructure as it plays an essential role in defining overall AI system performance. As a leading AI memory provider, we aim to drive both customer satisfaction and market growth by launching innovative products with top-tier quality and performance that meet the needs of the AI system. With that, we are now ready to take your questions.

[Interpreted] [Operator Instructions] The first question will be provided by Dong Hee Han from SK Securities.

[Interpreted] I am from Han Dong Hee from SK Securities. Congratulations on your great performance. My question is about forecast for HBM market. Driven by strong demand for AI, HBM is expected for continuous and rapid growth. How do you forecast to meet the long-term demand for HBM beyond 2025? And what will be important momentums to drive HBM demand?

[Interpreted] As you can see from continuous CapEx expansion by big tech companies, increases in token throughput and high growth rate of AI start-ups, the AI market is growing at a rapid pace. In particular, AI demand is expanding from training to inferencing and inferencing has further divided and advanced into areas like reasoning and agents, which has led to a sharp increase in AI workloads and intensifying bandwidth bottlenecks. In this rapidly growing AI market, HBM is now positioned as a key product that quickly affects performance enhancement. Taking its importance into consideration, we believe there is no doubt about growth potential of HBM demand. As the AI market continue to expand into areas like AI agents and physical AI, computational volume will grow explosively, which will, in turn, drive demand growth in the HBM market. In the future, the HBM market may not sustain the early stage explosive growth rate, but AI technology will rapidly advance and spread, expanding the customer base and driving the continuous launch of new products and services. Therefore, we expect HBM will continue to enjoy strong growth.

[Interpreted] The following question will be presented by S.K. Kim from Daiwa Securities.

[Interpreted] Congratulations on your great performance. My question is also about HBM because market attention is really centered around this product. So my question is about the next year forecast. So how are negotiations progressing for the 2026 HBM supply with major customers?

[Interpreted] Thank you for the question. We cannot provide customer details, but negotiations are proceeding as planned. As customer projects become increasingly diverse, we are engaged in close negotiation for product mix and pricing. As a close partner of our major customers in the AI semiconductor field, we are conducting negotiations and offering optimal supply conditions for a long-term partnership. Furthermore, by delivering the highest quality products that customers require in a reliable and timely manner, we plan to prepare for supply expansion to meet customer demands and grow together with our customers.

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

[Interpreted] So I am Young Ho from NH Securities. My question is about demand. And so to what extent the uncertainties affect pull-in demand in Q2? And how do you assess the resulting increase in customer inventory and its impact on demand for second half?

[Interpreted] Our Q2 shipment volume significantly exceeded the initial guidance, and this was indeed driven by purchasing demand, which was stronger than expected. Initially, customers intended to conservatively maintain inventory levels during the first half of the year, but with growing uncertainty around tariff policies, they shift the strategies towards securing appropriate level of inventory. This led to a great increase in purchasing demand, especially from major customers with previously low stock levels. In addition, with end-of-life plans released for certain legacy products, competition for securing supply intensified among small to midsize customers, including module makers and therefore, further tightening market supply condition. Although shipment volumes in the first half exceeded our original plan, which raises concerns over potential in slowdown in the second half, we believe the likelihood of sharp fluctuation in supply and demand remains low. System build activity also increased in Q2 so customer inventories levels did not rise to a significant level. Moreover, memory suppliers have already reduced their inventories greatly, which means going forward, growth will be only driven by product -- supply growth will be only driven by production growth. Depending on how future tariff policies evolve in the future, purchasing demand can be affected. In response, we will do our best to ensure stable business operation, especially focusing on products with secured demand visibility.

[Interpreted] The following question will be presented by John Kangho from Daishin Securities.

[Interpreted] So once again, congratulations for your great performance. With the U.S. government tightening export controls on China, SK Hynix may face growing restrictions on its fab operations in China. So what are your plans for managing your operations in China going forward?

[Interpreted] Thank you very much for the question. As we all worry about geopolitical situations today, however, there has been no change to our validated end user or VEU status that we obtained in October 2023. We are committed to putting our customers' needs first and we'll work hard to provide uninterrupted supply within the boundaries of regulations, and we'll continue operating our China fabs according to our existing plan. In fact, a recent supply conditions for legacy DRAM can be beneficial for our China fab operations. For example, with increasing DRAM capacity being allocated to expanding HBM production, supply shortages of DDR4 and LPDDR4 legacy products have emerged during the transition to DDR5 and LPDDR5. So in Q2, we responded to this demand growth with our -- for the legacy product with our existing inventory, but we believe that the demand for legacy DRAM will continue to persist for a while. And therefore, we will also focus on providing legacy products for the long-term customer support, and we are going to utilize our China fab to ensure a stable supply for the legacy product. Our China fabs are not only critical to our operations, but also play a key role in the global memory semiconductor supply chain. As such, we will continue to closely monitor U.S. regulatory developments and maintain close communication with governments around the world.

[Interpreted] The following question will be presented by Jay Kwon from JPMorgan.

[Interpreted] My question is about NAND products. It seems your NAND shipment growth in this quarter significantly outperformed prior guidance. Can you please elaborate on which customer segment drove this growth?

[Interpreted] In the previous earnings call, we guided for over 20% NAND shipment growth in Q2. At the time, we observed the signs of rising spot prices and declining customer inventories, but demand visibility for certain products remain fairly limited. However, in Q2, demand for enterprise SSDs increased as hyperscale customers expanded their AI investments while pulling demand for individual components also rose due to tariff-related uncertainty. Additionally, mobile set build demand in the China region grew due to promotional event leading to shipments that significantly exceeded our expectations. With the Q2 sales increase, our inventory levels have now normalized. Moving forward, we'll continue to manage production and inventory flexibly in accordance with market demand.

[Interpreted] The following question will be presented by Hyun Kim from Meritz Securities.

[Interpreted] I would like to ask about HBM4 as HBM4 entails a greater cost increase compared to previous HBM products. There are some concerns about potential profitability decline. What is SK Hynix' perspective on this?

[Interpreted] As you may know, HBM4 exhibits major technological changes, including increased I/O count for higher bandwidth, new designs for improved power efficiency and the adoption of logic processes in the baseline. Accordingly, we are striving to reflect this cost increase in our pricing strategy for HBM4, and we aim to stimulate the AI market by establishing optimal pricing with customers while maintaining current profitability levels.

[Interpreted] The following question will be presented by Jong Wook Lee from Samsung Securities.

[Interpreted] My question is about DRAM. So DDR4 supply appears to be quite tight recently. What is your outlook on future DDR4 demand? And what is DDR4's current revenue share at SK Hynix? And what are your plans regarding its end-of-life timing and future operations?

[Interpreted] The recent spike in DDR4 prices has been primarily driven by short-term supply concerns following announcements from some suppliers to discontinue DDR4 production. However, as we are currently in a transition phase from DDR4 to DDR5, we view this as a temporary demand concentration rather than a structural shift in underlying demand for DDR4. Speaking of the DDR4 share in SK Hynix' revenue, since 2023, DDR4 has seen a steady decline in our share -- in our revenue share triggered by growing demand for DDR5 and HBM. In fact, its contribution has dropped from a double-digit percentage last year to a single-digit level this year. Going forward, we plan to phase out DDR4 for the mass market. However, for selected customers who require long-term support, we'll continue our supply based on mutually upgrade volume.

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

[Interpreted] So my question is about CapEx investment. You mentioned that this year's investment will exceed initial plans. So to what extent will it increase? And will most of the additional investment be allocated to equipment or infrastructure?

[Interpreted] We are pursuing investments for future growth in tandem with efforts to maintain financial soundness. This year, our investment focus is on ensuring seamless support for the supply volumes agreed upon with customers. At the same time, infrastructure investment, such as M16X and the new fab in Yong-in are underway to lay the foundation for long-term growth. As mentioned earlier, we now have visibility into next year's HBM supply, which calls for proactive investment to ensure a timely response. Accordingly, our total investment for this year will increase from the original plan with the majority of the additional spending allocated to HBM-related equipment. The final investment scale, however, will be confirmed once negotiations with major customers are concluded. So we'll continue to comply with CapEx discipline while improving investment efficiency going forward.

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

[Interpreted] So a recent article suggests that M16 is already operating at full capacity with no additional capacity for production expansion. In that case, to what extent do you expect the new M15 fab to be utilized by the end of next year given the current investment level? And my second question is that as for the 1C Nano DRAM ramp-up, when will we be able to see the significant level of the expansion at least by 15% to 20%?

[Interpreted] So let me first answer the first part of your question regarding the new fab. As the HBM market expands and demand increased, we have reallocated a significant portion of our capacity from general DRAM to HBM. In this process, due to HBM's nature of requiring more capacity compared to general DRAM, the cleanroom space needed to produce the same output volume has increased substantially. So our existing fabs are currently being utilized for product mix optimization, technology migration and TSV line operations. At the same time, to secure mid- to long-term production infrastructure, we are simultaneously developing the M15X, Yong-in fab and advanced packaging fab in Indiana, the U.S. Among these, the M15X is scheduled to open in Q4 of this year and will begin full-scale mass production next year. We will primarily focus on next-generation HBM products to meet rising customer demand. We plan to gradually ramp up capacity in line with the visibility that we gained on customer volume requirements throughout the next year. And also for your question on that, how much space can actually be utilized, where space increase can be realized through the M15X at the end of next year, I understand your intention for the question, but I believe there will be no cadence where we will not be able to supply product because of the fab-based restrictions. And also for the conversion into the MC nano, I believe this conversion will begin from the second half of this year, but the full-scale conversion will take place only in next year. Right now, we are in the process of establishing management plan for this. So we will share the details later.

[Interpreted] The following question will be presented by [indiscernible] Kim from Hanwha Securities.

[Interpreted] So the long-term growth potential of the NAND market has slowed down compared to the past. Despite suppliers, maintaining a conservative production stance, profitability has not shown significant improvement. How long do you expect this market condition to persist?

[Interpreted] So the slowdown in the NAND market today is mainly due to stagnant demand for consumer devices as well as the fact that customers transitioning to AI servers have yet to extend their investment into storage devices. However, we believe that the need for storage equipment investment will begin to surface in the not-too-distant future. As HBM director mentioned at the beginning of Q&A session, this is because AI units and the results in volume of token generation is expected to grow at an astronomical pace far beyond what we can imagine today. And traditional data processing methods will not be able to handle this exclusive surge in demand. That's why there is a growing attempt to offload AI inference data caching to eSSD. And as that, we expect initial demand to materialize within the next 2 to 3 years. If this trend becomes a reality, eSSD will no longer remain as a mirror storage device or whether it will evolve into part of the compute cash and their roles and positions within the AI system will be changed. And we expect this will mark the beginning of significant demand growth in the NAND market.

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

[Interpreted] So my question is about technologies for the next-generation DRAM production. So when will they be introduced? And what will be the timing for mass production, and how they can contribute to improving efficiency for HBM DRAM production?

[Interpreted] So while memory suppliers have thus far pursued the transition to finer process nodes, their efforts are now approaching the limits in terms of performance and capacity enhancement. And so in response, we are exploring the application of vertical gate platforms and 3D DRAM technologies based on breakthrough changes in architecture, materials and components of sub-10-meter -- 10-nanometer nodes. 3D platform is a next-generation memory technology that minimizes DRAM cell area and vertically structured the gate that function as a transistor switch, thereby dramatically enhancing area efficiency and power characteristics compared to existing architecture. And 3D DRAM is another next-generation memory policy that enables high density by vertically stacking DRAM cells without miniaturization. And in order for the second local innovation to overcome current limitations and become the new industry standard, we are focusing on securing technological stability. However, as it will take time for such innovative approaches to become technologically stable and ready for mass production. So we'll continue to advance conventional miniaturization effort such as 1bnm development to maintain our technological leadership. As you know, our competitive adds in HBM comes from our strong foundational technology for DRAM. And, therefore, if we could -- so as we step-by-step, develop the next-generation memory technology, I believe, this will also be the source of our future HBM production.

[Interpreted] The following question will be presented by Yeong-Min Ko from DAOL Investment & Securities.

[Interpreted] So there have been reports that a major GPU customer has resumed shipments of AI chips with performance just for the export to China. And I believe that this could also be beneficial for the future supply expansion and so on. So can you -- could this lead to an upside in HBM demand?

[Interpreted] So it was only recently reported that a major GPU customer has resumed shipment of AI products bound for export to China. We are currently in the process of assessing concrete information regarding how HBM demand will shift in relation to this product. However, as we were a primary HBM supplier for this product prior to the export control, we believe that if customer demand and our internal supply conditions are aligned, we are well positioned to respond swiftly and capitalize on this opportunity. And leveraging the close partnership that we have built with our customers, we will do our best to generate win-win outcomes for both our customers and the company.

[Interpreted] The last question will be presented by Minsook Chae from Korea Investment & Securities.

[Interpreted] Congratulations on your great performance. My question is back to HBM. SK Hynix has emerged as a leading HBM supplier backed by strong product technology and manufacturing capabilities. However, concerns continue to mount over intensifying competition and uncertainty due to changes in business environment with the AI semiconductor ecosystem. So as an HBM leading supplier, what is your strategy moving forward to navigate these challenges?

[Interpreted] Right. So it is very natural to worry about intensifying competition, especially given the situation that the number of suppliers are growing. But I believe that as long as we are in the memory business, competition is something that we have to take. And I believe this is our mission to deliver good performance despite the fierce competition as well as provide great values to our customers and investors. So with the emergence of the HBM product, I believe memory market has also shifted from the pure computing stories, and we believe that this can also affect, and as a result, the leading suppliers now has greater leveraging power. HBM influences over computing chips for AI, where HBM is directly employed as well as broader AI computing system performance and cost basis, far greater than conventional general memory products. As a result, the demand for HBM has become very sticky. And leading players now have greater advantage in having all the engagement with customers. SK Hynix, despite its previous minimal presence in the HBM market, we have been able to grow as a leading player today, and I believe this comes from our corporate culture. We put customer before anything else to address customer pain points in product design, production and supply. We are also backed up by strong teamwork. Such competitive adds in corporate culture cannot easily be innovated or mimicked by others. Going forward, based on such solid corporate culture, we'll make sure SK Hynix will continue to stay top of mind of HBM customers, and we believe this is the way to secure and solidify our leadership in the future in the AI memory market. Due to various restrictions in AI computing infrastructure today, we are required to develop further granular HBM products as well as design new memory products. Through all engagement with customers, SK Hynix will continue to provide customized HBM products catering to the needs of customers in AI ecosystem and solidify our strong leadership in new memory products for AI, including PIM.

[Interpreted] This will conclude the conference call for the SK Hynix for the second quarter of 2025. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]