SK Hynix's (HXSCL) Management on Q1 2016 Results - Earnings Call Transcript

| About: SK Hynix, (HXSCL)
This article is now exclusive for PRO subscribers.

SKY Hynix, Inc. (OTC:HXSCL) Q1 2016 Earnings Conference Call April 25, 2016 8:00 PM ET


Kim Jun-Ho - President, Head of Corporate Support


Peter Seicheol Lee - NH Investment and Securities

Ricky Seo - HSBC

Min-sung Hwang - Samsung Securities

Claire Kyung Min Kim - Daishin Securities


[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call.

And now we will begin the conference of the fiscal year 2016 first quarter earnings results by SK Hynix. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions]

Now we shall commence the presentation on the fiscal year 2016 first quarter earnings results by SK Hynix.

Unidentified Company Representative

[Interpreted] Good morning and good afternoon and evening to those calling in from abroad. This is Cha Seong-Geun, the Head of IR at SK Hynix. Welcome to SK Hynix 2016 first quarter earnings release conference call.

Before starting the conference call, allow me to introduce the executives present here with me today. First, President Kim Jun-Ho, Head of Corporate Support; Executive Vice President and CFO, Lee Myeong Yeong; Vice President [Pang Me Hak], in charge of the DRAM Marketing Group; and Vice President [Jin Yong Mei], in charge of the Flash marketing group.

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 2016 first quarter earnings release conference call. Let me now turn over to President Kim Jun-Ho to present the first quarter earnings and the Company's plan and outlook.

Kim Jun-Ho

[Interpreted] Hello everyone. This is Kim Jun-Ho, in charge of SK Hynix corporate support. Let me begin with a review of our financial performance in the first quarter of 2016.

Consolidated sales in the first quarter totaled KRW3.656 trillion, a 17% decrease from the previous quarter. Despite Korean won remaining weak against the U.S. dollar during the quarter, bit shipment fell for both DRAM and NAND as memory demand remained sluggish, which was also led by a continuous price drop.

As for DRAM, demand for PC stayed weak, while demand from server and mobile applications grew at a slower pace, which led prices to drop faster across almost all DRAM products. The company responded flexibly to the weak demand and falling prices, thereby the Company's DRAM shipment fell by 3% quarter on quarter, slightly below the Company's plan, while ASP fell by 14% quarter on quarter.

For NAND flash, bit shipment fell by 11% quarter on quarter as demand for mobile embedded products slowed down. ASP fell by 12% from the previous quarter as prices declined and the sales portion of discrete products increased.

For MCP, sales portion increased from 18% in the previous quarter to 20% as demand moved to higher density EMCP in the Chinese market.

So the sales portion of MCP increased from 18% in the previous quarter to 20% this quarter.

In terms of profitability, our operating profit in the first quarter was KRW562b and operating profit margin was 15%. Although there was cost reduction in both DRAM and NAND flash as a result of ongoing effort to reduce input costs, due to the sales reduction, which is driven by rapid ASP drop, the profit amount fell subsequently.

Depreciation and amortization expense for the quarter was KRW1.078 trillion, a slight increase from the previous quarter. EBITDA was KRW1.64 trillion, representing an EBITDA margin of 45%.

On the non-operating line, net non-operating expense was minimum. The transaction gain from collection of account receivables offset the net interest expense. There was recognition of KRW110b in corporate tax for the first quarter. Therefore, our net profit for the quarter KRW448b, with a net profit margin of 12%.

Consolidated cash and cash equivalent balance as of the quarter-end was KRW4.257 trillion, a decrease of approximately KRW534b from the previous quarter. Our interest-bearing debt stood at KRW4.381 trillion, an increase by KRW563b from the previous quarter as the Company increased low interest-bearing debt. Debt-to-equity ratio and net debt to equity ratio at the end of the first quarter were 20% and 1%.

Next I would like to discuss the Company's market outlook and its plan.

The DRAM market in the first quarter saw falling PC DRAM prices due to lower-than-expected demand for PC. Demand for server DRAM was also weakened from the previous quarter as inventory adjustment continued among datacenter customers that have been leading the server demand. Meanwhile, demand for mobile DRAM fared better. The fall in demand due to seasonal factors and inventory adjustment by some customers was offset by new Android smartphone launches and increase in the memory content. But it was not enough to turn around the overall DRAM demand.

Looking ahead to the second quarter, DRAM demand is not expected to dramatically recover. However, we are anticipating more positive demand momentum around the second half as inventory levels for major customers is not too high today and demand from new smartphone launch toward the end of the quarter is expected to stimulate mobile DRAM demand with adoption of higher-density DRAM to continue, and launch of new server chipsets is expected to drive system buildup demand for servers.

On the supply side, supplier's CapEx execution is projected to decrease as we move into the second half. In fact, migration will start in earnest only after they secure sufficiently stable yield. Thus, supply/demand dynamics are expected to gradually stabilize in the second half.

In the NAND market, demand/supply remained more stable than expected in the first quarter despite seasonally low demand for smartphones and inventory adjustment by major mobile customers. The growing SSD market led channel demand despite sluggish PC shipment. And suppliers remained conservative in their management of 2D NAND capacity.

The positive demand/supply trend is expected to continue into the second quarter while no new 2D NAND capacity is expected. System buildup demand is expected to start from major mobile customers ahead of their new product launch, NAND content to increase as more people begin to use 4G LTE in emerging markets, and demand for high-density SSD is expected to increase as well as the demand as the demand from China companies as the SSD is more broadly used.

But in the second half, 3D NAND production is expected to begin in full across the NAND industry, which could affect the demand/supply balance, mainly in the SSD market. However, the actual extent of the impact will be determined by suppliers' 3D NAND capacity.

Under such challenging market situation, SK Hynix will keep trying to strengthen its market position and profitability by remaining focused on its core competitiveness.

For DRAM, 2Z nano wafer inputs will meaningfully increase, and thus we will expand sales of 2Z nano-based computing products from the second quarter, and start sales of 2Z nano based mobile products in the second half. Meanwhile, we will keep building up our R&D capability to make sure that 1X nano development stays on track in terms of development timing.

For NAND, we will migrate to 14 nano and secure competitiveness in 3D. For 3D, we expect to start business from the middle of this year using the current second-generation products for customers that require MLC features. Third-generation products will be developed and validated to start the business in the second half. As we recently announced, the 1-terabyte NVMe SSD based on second-generation 3D product has customer qualification and is ready to be supplied. Thus, for 3D, we are moving along with our plan to secure capacity of 20,000 to 30,000 per month in the second half of this year.

Meanwhile, DRAM bit shipment growth in the second quarter is expected to be in the mid-10% level, led by growth in the mobile and server products. For the year, it is planned at low to mid-20% level, largely on par with the market level. For NAND, bit shipment growth in the second quarter is planned at more than 30%. There will be some base effect from the first quarter and sales growth driven by demand for new mobile products. For the year it is planned at mid to high 30%, corresponding to the market level.

There are growing concerns about the memory market as demand slows down and competition increases. But for SK Hynix, it is in our DNA to thrive under pressure. We will keep striving to turn SK Hynix into a stronger company.

I thank all our shareholders, investors and analysts for their unending support and interest and kindly ask for more of the same going forward. This concludes my report. Thank you.

Unidentified Company Representative

[Interpreted] And with that, we are ready to take your questions.

Question-and-Answer Session


[Interpreted] -- session will begin. [Operator Instructions]

The first question will be provided by Peter Seicheol Lee from NH Investment and Securities. Please go ahead, sir.

Peter Seicheol Lee - NH Investment and Securities

[Interpreted] Now as you have mentioned in your presentation, yes, there are some concerns in the market about the overall industry situation of the DRAM. So I wonder what your strategy is amidst such market condition. And then the second question is about the 2Z nano portion for Hynix in the second half. So, what do you believe is going to be the portion of 2Z nano in the second half?

Unidentified Company Representative

[Interpreted] Now let me respond to the first question about the overall DRAM market situation. Now first of all, this is a well-known fact to everyone, that on the supply side, the bit growth tends to be stable on a quarter-to-quarter basis. But then from the demand side, because mostly of the seasonality, usually the first quarter is the most sluggish.

Now in the first quarter there was some adjustment in the supply volume by the suppliers. And then moving into the second quarter we expect the NIM content to increase as new CPUs are adopted for servers. And then also there are, on the mobile front, there are the new Android products that are now beginning to sell in earnest. And then also there would be some new non-Android launches as well. So overall we expect the market situation to begin to pick up in the second quarter, but still it would take some time for the market to recover and to become a good market in full.

And now the Chinese market especially which is the focus of SK Hynix. We expect the memory to -- the mobile memory to increase along with the gigabytes per system increasing, and also the Chinese government has the policy of protecting its domestic servers. And with this, the memory is increasing so this also bodes well for SK Hynix.

Next is about our current situation for 2Z DRAM.

Now we are going to start mass production for the computing customers, so we will start mass production in the second quarter for the computing customers who have completed their qualification in the first quarter, and then moving into the second quarter, now we would go into ramp-up for the major OEMs who complete the qualifications.

And then also in the second quarter, for the -- so as we have more qualifications for mobile products in the -- for 2Z, we expect to start the mobile business in earnest. And then -- so, going into the second half, we believe that we would be providing 2Z products for most of the customers -- most of the mobile customers. So -- and also for the customized products as well, they will be now mostly in the form of 2Z. So, overall in the second half we will providing 2Z products in earnest.

So by the end of the year, we believe that, on a volume basis, 2Z products will be the most meaningful among the DRAM product line.

Peter Seicheol Lee - NH Investment and Securities

[Interpreted] So you also briefly touched upon SSD in your response earlier, but then [inaudible] in the second half, most of the suppliers would be moving on to 3D NAND. So what is the development plan for SK Hynix in 3D NAND?

Unidentified Company Representative

[Interpreted] Now let me answer this question about the 3D NAND in terms of the Company's development plan as well as the qualifications plan.

Now the application where the 3D NAND has been adopted first in all the system environment is SSD.

So as we have already announced earlier, now for the 3D NAND, using the second generation, so we have actually already developed over 1 terabyte PCIe, NVMe SSD and we have already received the qualification for this. And we expect the sales to occur within this quarter.

But now in the mobile market, which tends to be a bit more conservative, the ecosystem for the system environment has not been sufficiently built up. So the conservative mood of the 2D continues in the market.

But then, now as the memory for the smartphones continues to grow, we believe that now there would be more consumers who are going to use more EFS or EMMC solutions that would have a higher content per chip.

For SK Hynix, we have already undergone our internal qualifications and we have completed our internal qualifications of the EMMC, EFS and EMCP using 3D NAND and we are currently working together with the customers to undertake customer qualifications.

Now for the third-generation 3D NAND products, the plan is to undertake internal qualification of discrete products within this quarter.

And then for solution products like the client SSD, our plan is to complete ES within this quarter and move into mass production in the second half.


[Interpreted] The following question will be presented by Ricky Seo from HSBC. Please go ahead, sir.

Ricky Seo - HSBC

[Interpreted] Now my question is regarding CapEx. Early this year the guidance I believe was that CapEx for this year would be largely similar to the level of last year. But then given the demand in the DRAM market recently, especially in the PC DRAM market, perhaps there is a need to drastically adjust the CapEx level. So I wonder whether you have any plan to do so in terms of the CapEx level. Is there any plan for adjustment?

And more specifically, the ramp-up plan for M14, do you also plan to adjust this plan?

Unidentified Company Representative

Now first of all, about the CapEx plan, last year it was KRW6.6 trillion and for this year we believe that it is going to fall short of that. So of course we would have to watch things carefully and try to make a flexible judgement as we move on from the first quarter into the fourth quarter. But overall the projection is that for this year the CapEx level is going to be below that of last year.

And then for the DRAM side, we are going to invest more on the R&D to reduce the development time for 1X nano. And then as you would have also expected, we would also start investment into the 3D NAND more in earnest going into the second quarter and the third.

Now the question about M14, now we plan this M14 as a 2Z nano centric fab, so right now we keep moving the equipment and facilities from the M10 to M14. But in order to increase utilization rate, this means that we would have to have mass production of 2Z nano, which would begin in the second quarter or the third quarter. So, along with -- in this process, there will be more transition of capacity from M10 to M14.

Ricky Seo - HSBC


Now, second question. First is that, regarding 3D NAND, it seems as if there has been more tangible progress since the early part of this year, especially for the smartphone side, then I wonder what -- does SK Hynix have any ideas about the timing of the 3D NAND becoming -- being used on smartphones? So when do you believe that 3D NAND will be more used on the smartphones? Is it going to be in the second half of this year or next year?

And the second question is about the M14 capacity for the [38-step] products. So you mentioned that in the second quarter there's going to be a ramp-up of the 3D NAND. So on the basis of [48-step] products, what is going to be the maximum capacity?


[Inaudible] if you would like to join the earnings conference call by SK Hynix, please press the pass code and the pound key.

Please enter your PIN code followed by the pound key. If you don't have the PIN code, please press star and zero.

Welcome to the Compumedix audio conferencing system. Please hold for an operator.

Can I have your name please? Can I have your name please?

Can I have your name please?

Capital Finance. Now you can join. Hold on please.

Unidentified Participant

[Interpreted] Now the question is about the 3D NAND profitability. Perhaps this is a premature question given that 3D NAND -- you're only going to start mass production of the third-generation product in the second half. But then, when do you believe that the profitability of 3D NAND is going to be on par with 2D NAND?

Unidentified Company Representative

[Interpreted] Right. So as we move on from 2D to 3D, and also on the 2D we continue to develop finer technology, but -- and this is going to be helpful in -- this is going to be helpful in reducing the cost. But then, whether the cost saving is going to fully translate into profitability, would depend on which product it is.

Of course, compared to 2D, 3D would have more bits per wafer, and of course this would be helpful in reducing the cost. But then for the time being, most of the 3D NAND products would be sold for SSD, and especially for a client, it's going to be difficult for us to expect a higher profitability compared to mobile products for the time being.

Unidentified Company Representative

[Interpreted] Because of the time limit, we are going to take two more questions.


[Interpreted] The following question will be presented by Min-sung Hwang from Samsung Securities. Please go ahead, sir.

Min-sung Hwang - Samsung Securities

[Interpreted] Now looking at the profit and loss statement, then it seems as if the sales and amortization and depreciation, SG&A are largely in line with my expectations. But then since the gross profit margin has increased, so I wonder how much of this is the impact from the exchange rate? So you did mention the exchange rate factor earlier so I wonder whether most of it -- most of the higher gross profit margin, does it come from exchange rate or are there any other factors involved?

Unidentified Company Representative

[Interpreted] Of course, in terms of the lower cost of goods sold, now on one hand there was lower sales, so this of course has had an impact in reducing the cost of goods sold. And also at the same time it is true that there was increase in the exchange rate, and this also would have had an impact on the COGS. But then we do not believe that impact was that large. So, looking at other factors, then we have been trying to improve our operational excellence, meaning that we want to improve the economics of our utilization, so we believe that that has also contributed to this. And then the second -- another major factor is the reduction in cost that came from transition to 25 nano.

Min-sung Hwang - Samsung Securities

Now the next question is about the DRAM price hitting the bottom. And so some are looking at the cash cost and think that perhaps it's at the bottom now, but then some are saying that we have -- we also need to look at the cash cost of the other peers, other companies. But then also at the same time, we see that in the industry we only have three players left and there are no substitute products either, so perhaps the pricing is at a too low level, so perhaps we could adjust the output by adjusting the inventory level and also by adjusting the input level by reducing the investments.

So what is going to be -- so what is the view by SK Hynix regarding the DRAM price?

Unidentified Company Representative

[Interpreted] Basically in the second half -- starting in the second half of last year, there has been oversupply in the market, mostly not by supply increase but rather a more dramatic decrease in demand.

In terms of adjusting the supply level, I believe that that is also going to have some limitations because, for semiconductor products, what is important is to reduce cost. So we would have to watch the demand situation, and in terms of how the oversupply is going to be corrected and how each player is going to maintain their competitiveness at the maximum level, I believe that that is going to depend on each player, depending on the strategy and the positioning.

Now for SK Hynix, of course on one hand we will continue to try to receive the appropriate pricing for our products in the market, but then at a more fundamental level we will keep trying to strengthen our cost competitiveness so that we will be able to have a stronger bargaining power in the market.

In order to achieve this, we put technological development at the forefront. So by -- so our goal is to keep reducing the technological gap from the leading company.


[Interpreted] Our last question will be presented by Claire Kyung Min Kim from Daishin Securities. Please go ahead, ma'am.

Claire Kyung Min Kim - Daishin Securities

[Interpreted] Now regarding the DRAM bit growth for the second quarter, now I was looking at the bit growth on a quarter-to-quarter basis in 2015. And the highest bit growth you achieved was 11%. So the DRAM bit growth guidance that you gave for the second quarter is not low by any means. Now of course, from the sell side, the projection has been more conservative, because we have been focusing more on the capacity as the M10 line relocation continues, and then also the 2D nano is going to -- 2D NAND is going into mass production in the second half. So at any rate, now then it seems as if there is a difference in terms of the expected DRAM bit growth between the company and us. So if you could elaborate a bit more about your strategy on bit growth.

Unidentified Company Representative

[Interpreted] Now the -- what seems to be high bit growth expected for the second quarter, now a lot of it actually comes from the base effect of the very low bit growth in the first quarter. So I would say that the bulk of the increase would come from the base of it, and also the fact that the 2D nano would be provided for computing products in the second quarter in earnest. Now this also has an impact as well.

But then now for the -- so for the year and also the projected bit growth for the second quarter, we believe that this is going to be achievable given the changes and the new developments emerging in the market starting in the second quarter. For example, mass production and sales of the Android models in the mobile phone and then also the new launch of non-Android models, as well as the introduction of new system and new CPUs on the server side, and increase in the gigabyte persisted as well.

Unidentified Company Representative

[Interpreted] Thank you very much. And this concludes the SK Hynix 2016 first quarter earnings release conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!