SK Hynix Quarterly Sales Surpass 13 Trillion Won for the First Time...Second Half Demand Slump and Inevitable Investment Reduction Next Year (Comprehensive)

Q2 Performance 'Holding Up' Amid Challenging Business Environment
Inventory Levels Expected to Rise in H2
Various Considerations on Reducing Capital Investment Next Year

[Asia Economy Reporters Sunmi Park and Hyunseok Yoo] Despite global inflation, the prolonged Russia-Ukraine war, and China's city lockdowns, SK Hynix has recorded quarterly sales exceeding 13 trillion won for the first time. This marks the largest quarterly figure in the company's history. Although prices for some memory semiconductors such as DRAM have declined worldwide, the overall increase in sales volume and improved yield of key products contributed to enhanced profitability. However, the outlook for the second half of the year remains uncertain as memory semiconductor demand is expected to further weaken. SK Hynix plans to carefully review investment plans and respond flexibly to changes in the business environment.

SK Hynix Soars in Q2 Performance

On the 27th, SK Hynix announced its Q2 earnings, reporting sales of 13.811 trillion won, a 33.8% increase compared to the same period last year. Operating profit rose 55.6% to 4.1926 trillion won (operating margin 30%), and net profit increased 44.7% to 2.8768 trillion won (net margin 21%).

This is the first time SK Hynix has achieved quarterly sales exceeding 13 trillion won. The previous quarterly sales record was 12.3766 trillion won, set in Q4 of last year.

A company representative explained, "DRAM product prices declined in Q2, but NAND prices rose, and overall sales volume increased, leading to higher sales. The continued strength of the US dollar and the addition of Solidigm's performance also contributed positively."

Solidigm, the NAND business unit acquired from Intel and incorporated as a subsidiary at the end of last year, has played a significant role in improving SK Hynix's performance. According to market research firm Omdia, combined NAND flash sales of SK Hynix and Solidigm reached $3.229 billion in Q1. Of this, $987 million was from Solidigm. Although SK Hynix ranks third in overall market share behind Samsung and Kioxia, the acquisition of Solidigm has nearly closed the gap with Kioxia. Moreover, despite the decline in memory semiconductor prices, Solidigm's high-value-added enterprise SSDs helped defend against average selling price declines.

Another notable aspect of SK Hynix's results is the improved profitability due to yield enhancements. SK Hynix recovered operating profit above 4 trillion won and an operating margin in the 30% range within two quarters after Q4 last year. This was driven by improved yields of key products such as the 10nm-class 4th generation (1a) DRAM and 176-layer 4D NAND.

An SK Hynix official stated, "Despite challenging business conditions including inflation, the prolonged Russia-Ukraine war, and COVID-19 lockdowns in parts of China, profitability has actually improved."

Uncertain Outlook for the Second Half

SK Hynix expects memory semiconductor demand to weaken in the second half. Shipments of PCs, smartphones, and other devices containing memory are forecasted to decline more than initially predicted. Demand for server memory supplied to companies operating data centers is also being closely monitored for potential slowdown as customers prioritize inventory depletion.

While demand for IT devices surged due to the expansion of non-face-to-face systems during COVID-19, recent inflation and recession concerns have intensified, leading to simultaneous contraction in consumer sentiment and corporate cost-cutting efforts.

According to market research firm TrendForce, DRAM prices are expected to fall by more than 10% in Q3. NAND price decline forecasts have also been revised from 3-8% to 8-13%. Securities firms anticipate a downward trend in memory prices in the second half. Choi Doyeon, a researcher at Shinhan Financial Investment, said, "Set shipments are falling short of expectations, leading to increased inventory among upstream companies. These companies are reducing order volumes compared to original plans to alleviate inventory burdens, which will likely cause production companies' inventories to rise in Q3."

However, SK Hynix remains optimistic about the medium to long-term steady growth in memory demand for data centers. The company also expects some benefit from exchange rate increases. SK Hynix stated, "The average exchange rate in Q2 rose 5% compared to Q1, resulting in an effect of over 500 billion won in sales. Even after accounting for exchange rate offsets on raw material imports, we estimate an operating profit increase of over 400 billion won, with a similar effect expected in Q3."

SK Hynix: "Second Half Demand Weak... Reduction in Capital Expenditure Next Year Unavoidable"

"Memory semiconductor demand will weaken in the second half. We are strategizing to expand high-capacity and differentiated (advanced) memory semiconductor products. Given the environment where inventory levels are inevitably rising, we are seriously considering reducing capital expenditures (CAPEX) next year."

During the conference call held that day, questions focused more on concerns and countermeasures regarding the bleak memory semiconductor outlook for the second half rather than praise for strong sales. This reflects the significant uncertainty in semiconductor companies' growth prospects amid high inflation and declining IT product consumption. Regarding future management plans, SK Hynix expects Q3 shipments to be significantly lower than originally forecast and plans to carefully review next year's investment plans while monitoring product inventory levels in the second half.

Jang Jongwon, SK Hynix's Business Officer, said during the conference call, "DRAM and NAND flash inventories increased by about one week's worth compared to Q1, raising inventory burdens. We are mindful of continued memory semiconductor demand weakening and the resulting inventory pressure in the second half."

He added, "Although shipment targets have been lowered, due to the nature of the memory industry, production volumes from already decided capital investments cannot be reduced immediately. Considering economic uncertainties, we are carefully reviewing next year's investment plans and even considering scenarios to reduce capital expenditures."

SK Hynix also expressed a sense of crisis amid increasing signals of uncertainty in the memory semiconductor market outlook for the second half.

However, the company noted it is fortunate that as the COVID-19 situation has somewhat eased, semiconductor equipment lead times (time from order to delivery) have shortened compared to the past. This means there is greater flexibility to adjust investments in response to market conditions going forward.

Meanwhile, despite the challenging business environment, SK Hynix revealed goals to achieve bit growth of just over 10% for DRAM and 20% for NAND flash this year.

Since memory semiconductor demand is weakening and Q3 shipments are not expected to increase significantly, whether the annual shipment targets are met will depend on how much IT product demand recovers in Q4. If Q3 bit growth remains nearly flat, achieving just over 10% annual bit growth for DRAM will be challenging, but with expected year-end demand in Q4, the company is hopeful it can ultimately exceed 10% annual shipment growth.

Regarding strategies to strengthen market competitiveness by expanding high-capacity and differentiated (advanced) memory semiconductor products, SK Hynix commented on competitor Micron's world-first mass production of 232-layer NAND flash, stating, "SK Hynix plans to complete trial production of 238-layer NAND within this year and begin mass production in the first half of next year." The company added, "Market trends show that AI, machine learning, and HPC markets require high-performance, high-capacity workloads, and there is no doubt about the medium to long-term growth potential in these areas. We expect the transition to DDR5 to accelerate from next year. Based on the competitiveness of our 1A-nanometer products, we plan to actively prepare for DDR5 and expand our market presence."

This content was produced with the assistance of AI translation services.