samsung electronics 1q earnings callirsvc.teletogether.com/sec/pdf/2019q1_script_eng.pdf ·...
TRANSCRIPT
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【Samsung Electronics 1Q Earnings Call】
Robert M. Yi
Good morning.
This is Robert Yi from Investor Relations
Thank you for joining our earnings call for the first quarter of 2019.
With me,
representing each of the business units, are
Mr. Se Won Chun, Executive Vice President of the Memory Marketing Team,
Mr. Ben Hur, Senior Vice President of the System LSI Marketing Team,
Mr. Sang Hyun Lee, Vice President of the Foundry Marketing Team,
Mr. Kwon Young Choi, Vice President of Samsung Display,
Mr. Jong Min Lee, Vice President of the IT and Mobile Business,
Mr. Louis Kim, Vice President of the Visual Display Business,
and Mr. Ben Suh, Senior Vice President and Mr. Tae Gyu Kang, Vice President of
Investor Relations.
I would like to remind you that some of the statements we will be making
today are forward-looking, based on the environment as we currently see it,
and all such statements are subject to certain risks and uncertainties that may
cause our actual results to be materially different from those expressed in
today’s discussion.
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Before we go over the results, I would like to address the first quarter dividend.
The Board of Directors today approved a first quarter dividend of 354 won per
share to be paid in May for both common and preferred stocks.
As announced in October 2017, our shareholder return policy covering 2018–
2020 promises annual dividends of 9.6 trillion won. Accordingly, the payout for
the first quarter is 2.4 trillion won, or one-fourth of the annual total.
With that, I would like to move on to our results.
During our 4Q18 earnings call and in our March earnings disclosure, we had
shared our concerns regarding unfavorable memory market conditions and
display business challenges in 1Q19. These concerns are the main causes for
the weak performance in the earnings result that I am presenting today.
Total revenue in the first quarter decreased 14% year-on-year to 52.4 trillion
won, the decline primarily due to weaker demand and prices for memory and
display products.
Gross profit contracted approximately 9 trillion won year-on-year to 19.6
trillion won with a corresponding decrease in gross margin.
SG&A expenses remained similar compared to the same quarter last year.
Operating profit in the first quarter was 6.2 trillion won, a significant year-on-
year decrease, mainly due to challenges in the memory business. Operating
margin decreased to 11.9%.
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Financial impact from foreign currency exchange movements were minimal as
weakness in the US dollar and euro were mainly offset by strength in emerging
market currencies.
I will now briefly review the performance of each business unit.
In the semiconductor business,
Memory prices declined considerably due to weak demand caused by a continuation
of inventory adjustments at major data centers, which began in 4Q18.
On the mobile memory side, we actively responded to increased demand for
high density products in new flagship smartphones. In the System LSI and
Foundry businesses, earnings improved quarter-on-quarter as we addressed
demand for APs used in flagship smartphone products.
The display business recorded a loss due to low utilization and price declines
for flexible products in the mobile display segment as well as unfavorable
supply and demand conditions in the large display business.
In the IM Division, despite solid sales of the Galaxy S10, profitability in the
mobile business declined as competition intensified in the low-to-mid-range
segment; in addition, the process of revamping of our mass-market lineup
amid softer overall smartphone demand led to a year-on-year decrease in sales
volume.
In the Network Business, earnings grew due to accelerated commercialization
of 5G networks in Korea.
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For the CE Division, sales growth of premium TVs, which include our QLED and
ultra-large-screen models, resulted in year on year earnings improvement.
Next, I would like to share our second quarter business outlook.
In the component business, even though memory demand from major
applications such as mobile may start to recover, such improvements are likely
to be dampened by continued price declines and weak seasonality.
In the non-memory businesses, we expect AP and CIS demand to continue to
improve. For the OLED business, increased demand of our infinity display rigid
panels is expected to help improve results.
In the Set business, we bolstered our flagship leadership by introducing the
world’s first 5G smartphone; and in the mass market, we will continue to
enhance specs in areas such as camera and display to differentiate our lineup in
an extremely competitive environment.
The network business will keep growing its presence in global 5G and LTE
network installations.
In the CE Division, we expect earnings improvements due to strong seasonality
for products such as air conditioners as well as positive response to our new
premium TV lineup.
In the second half of this year, demand for high-density memory products is
expected to increase in most market segments, however, global
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macroeconomic uncertainties may persist. In the display business, earnings are
expected to improve as multiple companies release new smartphones utilizing
flexible OLED displays, including key flagship products by our major customers.
In the set business, we will focus on maintaining our leadership by increasing
sales of premium products amid a challenging environment caused by growing
competition in a stagnant market for TVs and smartphones.
In the mid- to long-term, we aim to strengthen competitiveness of our key
businesses by diversifying applications and continuously delivering innovations
in component technology and set form factor. We will also continue to enhance
the capabilities of our emerging business areas: for automotive solutions, by
expanding the synergies between our component technology and Harman’s
capabilities; and for AI, by expanding the Bixby-based service platform to
solidify its foundation.
Now, I will address capital expenditures.
Capex in the first quarter was approximately 4.5 trillion won, with 3.6 trillion
won allocated to semiconductor and 0.3 trillion won to display.
We will continue our capital expenditure strategy of investing flexibly with the
changes in market conditions.
As we previously mentioned, we expect our investments in memory equipment
to decline significantly in 2019. However, we will continue to make
infrastructure investments to address mid-to long-term demand.
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Before we move on to presentations from each business unit, I would like to
share several data points in key business areas.
Q1, our DRAM bit growth was flat Q-on-Q with about mid-20% ASP decline.
And for the second quarter, we expect the market demand to grow low teens,
and we expect our bit growth to be similar.
For 2019, annual demand DRAM bit growth is expected to be roughly mid-
teens, and we may come in slightly over that.
For NAND flash, in Q1, our bit growth was mid-single digit with about mid-20%
ASP decline. For the second quarter, our -- we expect the market demand
NAND bit growth to be mid-teens, and we will grow our bits in line with the
market. For 2019 annually, we expect NAND demand bit growth to be low 30%,
and we expect our bit growth to be slightly over that.
For the display panel business, the revenue mix pertaining to OLED was about
mid-70%.
For our Mobile business, our total handset sales in Q1 was 78 million units, and
we sold about 5 million tablets. The blended ASP for our Handset division was
about high $240, and the mix of smartphone within our total handset was low
90%. For second quarter for total Handset shipment, we expect slight increase
over first quarter. We will -- we expect a similar level of shipment for tablets in
second quarter. We expect slight decline in blended ASP for our handsets in
second quarter, and the mix of smartphone within total Handset will remain at
low 90%.
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In Q1 this year, our TV set sales declined by mid-20%, and we expect mid-
single-digit decline in second quarter. But for the year, we expect mid-single-
digit increase of TV shipments this year.
Now I'll turn the call over to the gentlemen from each business units starting
with the Memory.
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Good morning, This is Sewon Chun from the Memory Marketing Team.
In the first quarter, demand from major applications weakened steadily under
high macro uncertainties.
For NAND, Overall demand was soft because of seasonality and inventory
adjustments by server companies, However, demand for high-density eStorage
remained solid thanks to the launch of Flagship smartphones alongside server
transitions from HDD to SSD.
However, increasing supply of 64-Layer OEM Solution Products and expanding
supply in the channel market led NAND ASP to decline continuously, especially
in the Channel market,
As a result, we proactively addressed demand for 128GB and higher eStorage
that focused on us and the growing demand for high-end, high density SSD.
For DRAM, demand from overall applications weakened and ASP showed a
sharp decline due to seasonal effects.
For server, in particular, inventory adjustments by datacenter firms caused
demand to slow continuously, while a CPU shortage and seasonally weak Set-
build reduced PC demand.
For mobile, however, launches of new models, growing adoption of high-density
products, and a strengthening trend toward high-density memory from Chinese
major customers partially offset the decline in Set demand, similar to the case for NAND.
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Our company actively addressed rising demand for high-density mobile
products, which led sales to beat our previous expectations.
In the second quarter of 2019, the market is likely to remain slow due to
seasonality, yet we expect overall demand for applications to recover gradually.
For NAND, the high-density trend and HDD replacement demand seems to be
expanding continuously as prices decrease.
Demand for high-density server SSD is increasing in overall market, and we
expect the All-Flash-Array replacement trend to continue especially in the
Enterprise market.
For Client, we also expect price declines to boost the attach ratio, and to
strengthen the trend toward high-density.
For Mobile, we expect the high-density trend to continue as price softens.
Also, launches of high-end smartphones that adopt more than 256GB storage
will keep demand steady.
For each application, our company will closely monitor demand changes
triggered by price declines, and with our competitiveness in solutions products,
we will actively address demand for high value-added products such as server
SSD and high-density eStorage.
Moreover, we are currently mass-producing 5th generation V-NAND for Brand
SSD as planned.
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By accelerating expansion deeper into server and mobile, we will continue to
enhance our product competitiveness and strengthen market leadership.
For DRAM, We expect a demand recovery in server from the end of the 2nd
quarter, mainly from datacenter companies as their inventory adjustment
process completes.
Also, we expect PC demand to grow due to an increase in contents per box,
while set build is likely to show a decline as a CPU shortage is expected to
persist in the 2nd quarter.
For Mobile, we expect the overall high-density trend, along with the newly
launched smartphones from Chinese companies, will lead demand.
We will actively address demand for high-end differentiated products, such as
LPDDR4X.
On the other hand, we will also focus on the transition to 1Ynm in major
applications, based on our technology leadership.
Now, I’m going to talk about the second half of 2019.
For NAND, Although the situation that the supply surpass the demand is likely
to continue throughout the year, the demand from most applications is
expected to increase as prices soften.
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For SSD, we expect to see increasing high-density SAS portion in Enterprise.
And for Client SSD, we expect attach-rate to grow, and steady demand growth
mainly from NVMe.
For mobile, although overall set demand is likely to be slow, launches of high-
density Flagship models by major customers will drive demand growth.
We will actively generate new demand while responding to high-density memory
demand based on our customers’ need to differentiate their products and services.
At the same time, we will strengthen our cost competitiveness by expanding
supply of 5th generation V-NAND.
For DRAM, the macro environment has created overall industry uncertainty, yet,
we expect demand to grow because of seasonality.
For server, due to expanded adoption of new CPUs by datacenter companies,
demand mainly for high-density products is likely to be solid.
For mobile, Although set volume for smartphones is expected to be stagnant,
we expect demand to increase solidly across all segments.
In the High-end and above segments, adoption of over 8GB high-density
mobile DRAM is expanding.
And in the mid-range and below segments, the trend toward high-density is
strengthening.
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We will continue to monitoring changes in market demand, caused by
uncertainties, and flexibly manage our investments and capacity.
We will also actively react to rising demand mainly for differentiated, high-
density products, and make every effort to generate a sustainable profit.
Moreover, as a leader in technology while enhancing the quality of cutting-
edge products, we will focus on ramping-up production of 1Y nm products and
mass production of 1Z nm products.
Thank you.
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Good morning, this is Ben Hur from the System LSI Business.
In the first quarter, despite slowing demand for image sensors related to the
Chinese smartphone market entering weak seasonality, overall earnings
improved thanks to increased supply of APs and modems adopted by a key
customer’s 2019 flagship model.
Notably, we secured technological leadership by commercializing the world’s
first 5G chipset solution, offering modem chips, radio frequency chips, and
power management chips.
In the second quarter, our earnings are expected to improve slightly as demand
for mobile image sensors and DDIs is expected to recover slightly thanks to
seasonality. In addition, demand for 5G chipset solutions is also expected to
rise on the back of increasing sales of 5G enabled smartphones.
In this quarter, we will seek to secure new multiple customers in the US and
China for 5G chipset solutions and commercialize them in a timely manner. We
also concentrate on developing the next 5G chipset solution by integrating an
application processor and a 5G modem into one single chip.
In the second half of this year, even amid a likely stagnant smartphone market,
set makers are expected to continue to adopt high-spec components amid a
shift toward 5G and increased adoption of multiple cameras and high-
resolution sensors, and we expect these environment have positive impact on
our business.
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Looking ahead, we plan to expand our line-up of 5G chipset solutions and
image sensors to address demand for high-specs in the smartphone market;
and we will also expand our mid- to long-term business scope by diversifying
our product offerings through the development of 3D/FOD sensors and
automotive/IoT chips.
Thank you.
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Good morning, this is Sanghyun Ryan Lee from the Foundry Business.
In the first quarter, Foundry earnings were stagnant quarter-on-quarter due to
sluggish global foundry market conditions as well as slowing mobile demand
related to the start of weak seasonality in the smartphone market in China.
Positively, we firstly started mass production of mobile products for 5G and IoT
products adopting the eMRAM process. In addition, we secured new orders for
computing chipsets from a major customer by promoting our Finfet based 8-
nano process. By doing so, we have diversified our business areas into
computing, AR, VR, 5G, and automotives.
In the second quarter, even if mobile demand recovers slightly as expected,
Foundry earnings are likely to remain mostly flat under soft overall demand for
semiconductors.
However, in this quarter, we started shipping EUV 7-nano process based mobile
products to major customers. In addition, we will continue to strengthen our
process competitiveness through the tape-out of EUV 6-nano process and by
completing the development of the 5-nano process.
In the second half of this year, based on our successful mass production of the
EUV 7-nano process, we will concentrate on developing the EUV 4-nano
process and gate-all-around architecture, which is anticipated to overcome
physical scaling and performance limitations of FinFET architecture.
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By leveraging our EUV process leadership, we will focus on increasing advanced
node customer bases in mobile and high performance computing.
In addition, we will use our specialty processes, including FD-SOI and 8-inch,
and advanced nodes to take leadership in newly emerging areas such as 5G, AR,
and automotive technology.
Thank you.
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Good Morning. This is Kwonyoung Choi from the planning department of
Samsung Display.
In the 1st Quarter, overall Display business units posted an operating loss due
to worsened profitability in both the Mobile display and the Large display
business.
Specifically, earnings in the Mobile display business fell into the red due to a
slowdown in demand from major customers alongside a continued slide in
panel ASP caused by heightened competition with LTPS LCD.
In addition, under weak seasonality the Large display business recorded a
deficit due to a continued ASPs decline of LCD panels caused by capacity
expansions for 10.5th-generation large panels in China.
Looking ahead to the 2nd quarter, in the Mobile display business, we expect
any improvements in profitability to be limited, due to a soft demand for
flexible displays.
Under these circumstances, we will strive to improve profitability by increasing
sales of Rigid OLED products as well as reinforcing our products and customer
portfolio leveraging our cutting edge technology such as fingerprint on display
and infinity display.
In the Large display business, although we are concerned about imbalance
between supply and demand, we also expect demand to keep growing for high-
value-added products such as ones used in High-Resolution and Ultra-large TVs.
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In preparation for such conditions, we will work to improve profitability by
actively addressing demand for core products, as well as enhancing our cost
structure and reinforcing technical differentiation.
Now I would like to present our display market outlook and core strategies for
the 2nd half 2019.
For the Mobile display business, we expect OLED panels for smartphone to see
a rebound in demand bolstered by a launching new products of our major
customers.
However, at the same time, we are concerned about continuous ASP pressure
on OLED panels caused by fierce competition with LTPS LCD.
Against this backdrop, we will work to enlarge the OLED panel market through
actively addressing demand for new products of our major customers as well as
launching new applications such as IT and Foldable.
For the Large display business, we are concerned about growing uncertainties
caused by capacity expansions in the LCD industry.
However, since we expect to see continued growth in demand for Premium TV
panels, such as UHD, 8K and Ultra-large ones, we will strive to improve
profitability by focusing on high-value-added products.
Thank you.
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Good morning. I am Jongmin Lee from the Mobile Communications Business.
I would like to share our 1st quarter results and the outlook for the IM Division.
For the Mobile Business, overall market demand for smartphones decreased
QoQ as we moved into a seasonally weak period.
Demand also decreased YoY due to a stagnant market trend.
We released the new Galaxy S10 series which celebrates the 10th Anniversary
of Galaxy innovations.
The S10 series is designed to deliver a practical and perfect mobile experience,
leveraging our accumulated innovations in technology, including Infinity-O
Display with ultrasonic fingerprint scanner, a camera that captures
professional-grade looking images, and wireless PowerShare.
Revenue in the 1st quarter increased considerably QoQ thanks to the sales
performance of the S10, which outperformed its predecessor, S9 backed by
high interest and a positive market response from its launch.
However, our shipments increased modestly QoQ due to a decrease in sales of
legacy models as a result of our lineup reorganization of mid-to-low end
models.
Moreover, profitability improvement was limited due to the trend of offering
higher-specs for new models, brand marketing for new flagship models and
expenses related to changing the mass-market lineup.
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Now, let me address the outlook for the 2nd quarter of this year.
Under continuing weak seasonality, market demand for smartphones is
expected to increase slightly QoQ but is likely to continue its declining trend on
a YoY basis.
For our Mobile Business, with a healthy sales trend of the S10 series, we expect
our smartphones shipments to grow slightly QoQ as the newly launched A
series is getting a positive feedback in the market.
To quickly respond to diverse customer needs in a rapidly changing market, we
refreshed the lineup by integrating the J series into the A series and introduced
a number of new A series which adopted innovative technology.
For the A series, in particular, along with its stylish design, we upgraded
essential features that are frequently used by our customers, offering an
enhanced camera experience, a powerful battery with Super-Fast charging, and
on-screen fingerprint scanner.
Now, new models boast stronger initial sales than its predecessors did.
In the 2nd Quarter, we will not only strive to drive solid sales of both the S10
and the new A series but also to enhance competitiveness of our overall
portfolio by expanding adoption of cutting-edge technology, as demonstrated
by the S10 5G and A80.
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For our Network Business, we will do our best to maintain our strong
performance through 5G commercialization and LTE expansion.
Finally, I will share our outlook for the second half of this year.
We forecast that market demand for smartphones in the 2nd Half will be flat
YoY. As we enter the period of strong seasonality, each competitor will expand
launches of new smartphones.
Market competition is expected to intensify.
Amid such conditions, we will strongly pursue sales growth by launching
competitive new models in all segments from the A series to the Galaxy Note.
First, we aim to strengthen our premium leadership and gain growth
momentum. For the new Galaxy Note, we will build on its own strengths which
include its large display and S Pen, while also increasing sales of innovative
products such as 5G models and foldable devices.
For the A series, we will actively respond to market competition and drive sales
growth by introducing cutting-edge technologies that meet customer needs.
Furthermore, we will strive to secure profitability through improving efficiency
of our operations as well as expenses.
For the Network business, we will maintain our leadership role by
strengthening our business foundation through continuing to expand LTE
networks into the overseas market and 5G equipment for initial markets such
as South Korea and the U.S. as well.
Thank you.
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Good Morning. I am Louis Kim, Vice President of Visual Display Sales and
Marketing Team at Samsung Electronics.
Let me start with current market conditions and our results for 2019 Q1.
The overall TV market in Q1 declined quarter-on-quarter as it entered a slow
season after end-year peak seasonality; and year-on-year due to weak demand
mainly in emerging markets.
For Samsung, sales of premium products increased, expanding our strategic-
product portion of sales. In addition, early adoption of new models led profits
to improve year-on-year.
In particular, boosted by an increase in the sales of premium models like QLED
and ultra-large products, Samsung expanded its market share year-on-year and
maintained the No.1 position in the ultra-large screen and 2,500 US dollar and
above segments, solidifying leadership in premium markets.
In addition, Samsung released its full QLED 8K TV lineup globally, offering models
ranging in size from 65 to 98 inches to pioneer the market for ultra-high picture quality.
QLED 8K TVs have been well received by the market thanks to our proprietary
picture quality processing engine and upscaling technologies.
For the Digital Appliances market in Q1, market demand decreased slightly
year-on-year due to the spread of conservative consumer sentiment caused by
a sluggish US housing market and Brexit effects in Europe.
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We improved our sales and profitability through adoption of new models with
strengthened product competitiveness.
In particular, growth in the domestic market is trending up solidly, centering on
new-lifestyle home appliances such as a clothes refreshers, dryers, and air
purifiers.
Now I will share market prospects for 2019 Q2 and the second half.
For the TV market in Q2, market demand is projected to weaken slightly both
quarter-on-quarter and year-on-year due to an ongoing decrease of
consumption caused by unfavorable exchange rates in emerging markets.
While sales are projected to decrease year-on-year because of a lack of global
sporting events this year, Samsung will seek to improve results through
expanding its high-value-added portion of products, including QLED and ultra-
large screen TVs and increasing sales of new models such as QLED 8K TVs.
In particular, we plan to shorten the schedule for new model releases this year
by more than one month compared to last year’s schedule.
Through this, we will focus on further strengthening our leadership in the
premium market as well as securing profitability.
For Digital Appliances in Q2, we will seek improvements by strengthening sales
of air conditioners, which are entering peak seasonality, and continuously
increasing sales of new premium products.
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In the second half of 2019, the TV market for 2H is projected to grow slightly
year-on-year, despite negatives such as economic slowdowns and unfavorable
exchange rates in some emerging markets.
Under these market conditions, Samsung will keep increasing sales of its high-
value-added product line-up, which includes QLED and ultra-large screen TVs,
further enhancing our leadership in premium products and generating
continuous growth and profits.
In addition, through modular Micro LED products—which have no bezels or
limits in size, resolution, or shape—as well as lifestyle products that add value
to our consumer's lives like the Frame/Serif TV, Samsung will continue to show
leadership and spearhead product innovation.
For the Digital Appliances market in the second half of 2019, demand for
appliances is projected to recover half-on-half amid easing of the trade conflict
between the US and China and despite concerns over Brexit.
While improving profitability through an increase in the sales of new-lifestyle
appliances and premium products, Samsung will further strengthen its B2B
business, which includes built-in appliances and system air conditioners, as well
as its online channels to secure future growth engines.
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Robert M. Yi
Thank you. This completes the management's presentation. Now we'll turn the
call over to the Q&A.
Q&A
Operator
Now Q&A session will begin.
The first question will be presented by Mr. Yoo Jong Woo from Korea
Investment & Securities. Please go ahead, sir.
<Q – Yoo Jong Woo>:
I have 2 questions about the semiconductor.
The first question is about the 1x-nano defect that was talked about in the
market quite a lot. Can you share us -- share with us some details about the
cause as well as the current status of that defect? And if there was, what was
the impact -- how much was the impact to your first quarter results due to this
1x-nano defect? Also, would there be any implications or changes to your
DRAM ramp-up schedule as a result of this defect?
Second question is about the bit growth. Actually, you were above guidance for
both DRAM and NAND in first quarter. Can you give us some background to
why you were able to be above guidance? On the other hand, we noticed that
you've actually you sort of decreased the full year guidance for bit growth. Can
you also share some background on that?
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<A>:
To answer your first question about the 1x-nano issue, the cause and current
update, we would like to also then explain the impact that would have on the
company as well as how we plan to respond. The issue itself is actually quality
issue that we found in some of the 1x-nano DRAM products that were
delivered to some of our server customers. It was a temporary quality issue
that occurred in the process of ramping up our 1x-nano product. We've already
found the technical solution. It's been adopted to our mass production. And
currently, our 1x-nano is in normal operation.
The provisioning for this quality was -- quality issue was taken in the first
quarter results. We cannot share with you the specific size, but it was not large.
And therefore, the -- any impact to our profit and loss for the second quarter as
a part of handling this quality issue would be minimized. Also, regardless of this
quality issue, our 1y ramp-up is going ahead as scheduled.
As we move up with the process migration, the technical difficulties are
becoming more sophisticated. Actually, we've learned valuable lessons from
this experience. We are focused even more on quality control, and we will be
able to therefore deliver even more a perfect quality as we ramp up to 1y-nano
and the other processes. And we will maintain a very strong position as the
technology leader in the industry.
About your second question on the bit growth, first about the reason why we
were able to overachieve the guidance in terms of the first quarter shipments.
Even though the overall market demand remained weak, we were fortunate to
have a high share, especially of the high-density mobile products, the new --
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for the new smartphones. And that has helped us overachieve on the guidance
as well as the market growth.
In terms of the reason why we are downward adjusting our full year guidance is
explained by several factors such as the fact that actually, the market demand
for first quarter was weaker than what we had expected. Also actually, the
timing when major customers are expected to complete their inventory
adjustments and come back to buying, that timing is actually being pushed
back closer to the end of the second quarter. Also, we're noticing that as prices
decline, the customers are actually operating on a leaner inventory than what
they used to. So considering all of these factors, we have decided to downward
adjust the full year bit guidance to mid-teens.
Now about how we expect our bit growth to be slightly above market for the
full year, to give you some background, our basic strategical direction of
focusing more on a profit-based growth, mid- to long-term sustainable growth
has not changed. We will focus on sustainable profitable growth rather than
focusing on, for example, short-term growth in scale.
However, the reason why we're expecting to be slightly above market is,
number one, because we have grown above market in terms of first quarter
shipments. So that has been counted in. Also, we believe that of the
application markets, the mobile, where we have a large share, is going to be
relatively the more stronger application market. And that's why we are
expecting our full year bit growth to be slightly above market.
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Operator
The next questions will be presented by Mr. Ricky Seo from HSBC. Please go
ahead, sir.
<Q - Ricky Seo>:
I have 2 questions about the DRAM inventory. It seems the DRAM suppliers,
their inventory is rapidly increasing. Can you give us some color in terms of
your inventory, how high it is right now? And is it high enough to call for
flexible adjustment of your production? For example, have you been
considering ways of adjusting your production by, for example, reducing the
wafer, feed or input?
A second question is that we're also noticing that the data center customers,
data centers are not just buying anymore. Do you notice from your customer
and -- whether the inventory is just -- inventory has been run through?
Do you see signs of your customers' demands improving? And if you see that,
can you compare that to the amount of demand improvement you saw this
time last year?
<A>:
To answer your question, even though we can't share you with the details of
our inventory levels, we can say that our inventory has definitely increased
quarter-on-quarter mainly due to the fact that we're in the weak season of the
year and also the fact that we went through the expansion of the capacity
second half of last year.
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But as we mentioned always during our calls, we have continued to maintain
flexible capacity considering the market demand.
And because we've downward adjusted our overall market demand for this
year, we are currently in the process of undergoing line optimization to
respond to the decrease in demand and also to stabilize our future inventory.
About the line optimization, as you know, because there was such a rapid
increase in market demand over the several past years, we've been increasing
our production through not only facility expansions but also by converting
some of our production capacity. And in this process, there were actually many
areas that needed to have some optimization work done.
And this time, we have decided to optimize and raise the efficiency of our
overall semiconductor line through, for example, relocating some of the
equipment. Of course, line optimization is something that goes on routinely in
a fab. But this time, we will be able to take on a more aggressive scope, and
this may have some impact on the production volume. However, the actual and
detailed scale of the production that will be affected by our line optimization
has not been determined, and we plan to review and adjust this level
depending on market demand in the future.
About your second question of the customer demand and their inventory, even
though it's difficult for us to share the details of customers' inventory levels, we
do presume that their inventory levels would have decreased at least
compared to the end of last year given the fact that they've been going through
inventory adjustments since fourth quarter of last year. Even -- however, it
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seems that the timing when the server customers will start back purchases
have been pushed back to closer to the end of the second quarter. But we think
that from the second half of this year, as inventory levels stabilize and also the
seasonality kicks in, there would be an increase in demand.
Operator
The next questions will be presented by Mr. Nicolas Gaudois from UBS. Please
go ahead, sir.
<Q – Nicolas Gaudois>:
The first one relates to memory. So several of your peers have implemented
production cut, so idling for NAND Flash and to a lesser extent DRAM. Beyond
what you described today in terms of probably more -- another impact of line
optimization, do you consider potentially implementing similar measures or
not going forward? And why? And what would be the cost duration in doing so
including profitability, pricing and also risk for DRAM of potential price
collusion?
And number two, related to mobile. Last week, you issued a press release
indicating you are delaying the launch of the Galaxy Fold. Could you summarize
for us the key issues, how you intend to address them and whether and how
this is changing your outlook for foldable devices into mid- to long term?
<A>:
To answer your first question, as we've always done when it comes to our
decisions about investment, supply or price strategy, we've always done our
decisions based on our own market analysis and our own market outlook
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regardless of what peers or other suppliers have been doing. And in terms of
the line optimization, it's being done for 2 main purposes. One is, of course, the
fact that this will help us optimize the lines in mid- to long-term perspective
but also because we adjusted down the full year demand growth. And based
on this adjustment, the inventory would have gone above the appropriate level
that we believe, and therefore, the line optimization will also achieve that
purpose.
<A>:
To answer your second question about the Galaxy Fold, we have received the
review sample. And according to what we've analyzed, there were some
display damages in the review sample due to force applied to the part of the
display that's exposed on the top and bottom part of the hinge. And also, there
were some foreign substances that were discovered in the display.
The reason why we announced to delay the launch was because we wanted to
thoroughly analyze these issues to find the fundamental solution and to supply
and deliver a product that meets our very high standard of completeness. The
updated launch schedule will be announced within the next few weeks.
Also, we have realized that we need to provide and prepare even better
communications with the customers in terms of how to use the Galaxy Fold.
Regarding the Galaxy Fold itself, as you know, we have invested quite a long
time and effort in order to develop the Galaxy Fold. We believe that it is going
to be the product that provides a differentiated premium experience to
customers who want to have the latest technology and innovative experiences
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and that the Galaxy Fold will create a new category in smartphones. And our
conviction and commitment behind that has not changed. We will continue to
exert our efforts to innovate new form factors and also actively respond and
reflect the voices of our customers and the market.
Operator
The next questions will be presented by Mr. SK Kim from Daiwa Capital Markets.
Please go ahead, sir.
<Q - SK Kim>:
I have 2 questions about memory.
First of all, it seems that listening to the message, you're expecting the recovery
of DRAM demand to be delayed than what we originally thought. And under
that assumption, do you still think that you'll be able to meet the bit growth
guidance that you provided for second quarter? Also, it seems that the price
pressure is going to continue into the second half. Given that, can you give us
an outlook for the overall market as well as how you plan to respond to it in
terms of strategy?
The second question is about the NAND industry. Inventory seems to be
running quite high. But if the SSD demand doesn't recover as people are
expecting, probably this oversupply may even continue until the end of this
year. If this happens, if oversupply continues in the second half, how will you
respond? Are you, for example, considering ways of responding by using this as
an opportunity to gain market share by actually increasing your investments?
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<A>:
To answer your first question, first of all, in terms of the bit shipment for
second quarter DRAM, we expect to actually meet the guidance for second
quarter by increasing shipments for not only the mobile but also for server
DRAM in the second quarter.
Regarding recovery of the data center demand, even though there will be
differences in inventory levels from server customer to customer, we think that
overall, as inventory stabilizes for servers, there will be recovery gradually of
demand starting from second quarter.
Regarding price outlook, fundamentally price, of course, is determined by the
demand-and-supply situation of the market. But more recently, I think visibility
has even become lower, so it's very difficult to predict where the price will go.
But just looking at the market situation, even though there are external
variables in terms of environment, we think that in the second half, with the
seasonality kicking in and also the server customer inventory stabilizing, there
will be solid demand in the second half. And that's why we would leverage our
technology leadership, especially strengthening our cost competitiveness
around our cutting -- our advanced nodes and also actively respond to the
high-density and differentiated demand in order to gain a stable profitability.
Regarding your second question of NAND, NAND prices, there are many
complex dynamics in play. For example, in some customers, actually, they were
hesitant in increasing the memory content because they saw that if they
started to buy again, this may actually rebound the prices. On the other hand,
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from the suppliers' perspective because of the impact of the inventory that
they're carrying, even though demand was growing, supply also grew. And this
also resulted in continued weak prices. That was the past.
However, we think that there is actually a recovery in demand in all the
applications including e-storage and SSD driven by the lower prices. And as an
example, for example, in mobile, the adoption of e-storage, of high density, of
256-gigabyte and more is expanding. And actually, the demand from HDD to
SSD, that conversion demand is also accelerating. That's why from the second
half, we expect both the market situation and also prices to stabilize.
Regarding our investment plans, as we've always mentioned, we do not pursue
just a short-term growth in size and scale, but we've always emphasized the
stable profitability as the priority of our strategy. And that remains valid. So in
the short term, we will very closely sense changes in the market to flexibly
manage both our investments and supply but at the same time focus on the
mid- to long-term perspective so that we're able to analyze and better
understand the overall mid- to long-term trends of the IT industry so that we
are well prepared to maintain our position as the industry leader.
Operator
The next questions will be presented by Mr. JJ Park from JPMorgan. Please go
ahead, sir.
<Q - JJ Park>:
I have 2 questions.
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The first is about the semiconductor. Can you give us the current status of the
second floor of Pyeongtaek Phase 1 and plans of using the remaining space?
And also, can you give us when you expect to operate the second phase of
Pyeongtaek?
Second question is about the IM. It seems that the S10 has actually done even
better than expected. But compared to that, the improvement in your
profitability for first quarter seems to be limited. Assuming that S10 would sell
even more in the second quarter, accounting for that, can you give us your
overall outlook for mobile results in the second quarter?
<A>:
To answer your first question, as we mentioned in the last call, this year we'll
be focusing more on migration rather than new expansions.
That's why the remaining capacity on the second level of Pyeongtaek Phase 1,
that will be operated flexibly according to market demand, and we have not
reached any specific decisions regarding operation of a new fab.
<A>:
Regarding your second question about the S10 and the IM performance
outlook, as we mentioned during the speech, in the first quarter, the
improvement in profitability was limited.
For example, there was the new model unpacked for both the S10 and Fold
brand marketing. And also, there were some costs associated with the revamp
of our mass lines.
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But the S10 margin itself is maintaining healthy second -- or 2-digit level similar
to its predecessor. And looking forward, even though the BOM cost burden
continues as products become more high spec and market competition is
expected to become more fierce, and so overall, it's not an easy competitive
situation, we will try to improve our profitability incrementally by gaining
stronger economies of scale, by increasing our sales and also by cost efficiency
and more effective marketing efforts.
Operator
The next questions will be presented by Mr. Mehddi Hosseini from SIG. Please
go ahead, sir.
<Q - Mehddi Hosseini>:
On the smartphone guide for the second half, you said that you should be able
to show year-over-year growth.
Can you share with me some of the factors that give you the confidence that
the unit shipment in the second half of '19 would actually grow on a year-over-
year basis? And I have a follow-up.
<A>:
The reason why we're projecting that we'll be able to grow in terms of
shipments year-on-year, number one, is the A Series which actually was
announced at very competitive prices compared to the product itself. The
shipment -- the sales volume we're expecting will increase throughout the year.
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The A Series that was launched last quarter has had very positive responses
from the market. Also on top of that, there is the S10, which has shown very
strong performance in the first quarter. That will continue in the second
quarter and thereafter.
And also, towards the second half, there's always the launch of the Note, which
will also help increase our overall shipments.
<Q - Mehddi Hosseini>:
And as you -- on the foundry side as your 7- and 6-nanometer ramps, how
should we think about the margin profile for that specific subsegment relative
to the operating profit for the entire semiconductor business unit?
<A>:
Regarding the profitability, the margins of our advanced nodes, having done
advanced nodes before, we do know that 6-nano and 7-nano, these advanced
nodes, do require initial investment. But once we have the volume ramp-up,
the margins actually quite improved to cover, for example, the depreciation.
And on top of the 7-nano and 6-nano, we have the road map for 5 and 4
following. And so we are confident that in the long term, margins will be
secured.
Operator
The next questions will be presented by Ms. Kim Kyung Min from Hana
Financial Investment. Please go ahead, ma'am.
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<Q - Kim Kyung Min>:
I have 2 questions.
The first question is about the Foundry business. You've announced plans of
investing KRW 133 trillion in system semiconductors by year 2030. Also, you're
planning expansions for both 8-inch and 12-inch. Can you share with us the
insight that you have in terms of your downstream demand to justify the sort
of expansions and investments?
Second question is about the System LSI business. Mobile still accounts for a
large share, which may have actually dragged down the business in the second
half of 2018. But especially with the rollout of 5G, this may actually become an
opportunity for you. And so in terms of that context, what kind of product
portfolio are you preparing?
<A>:
Regarding the 12-inch, actually, it is the demand from applications such as
mobile network, 5G, HPC and auto that's driving and justifying the investments
and expansions that we're doing, including the EUV exclusive line for 5 and
below -- excuse me, 7-nano and below. Also, for the legacy 65-nano, we have
demand coming, for example, from the high pixel and multiple camera image
sensors, and that is why we're planning to expand the S4 line.
We will -- regarding the 8-inch, that is focused, for example, for the power or
DDI or sensors, fingerprint recognition and the sensors, even the discrete
products. Also, that's the current demand. In the future, we're expecting more
39
demand to grow, for example, in the automotive and IoT. And that's why even
for the 8-inch, we are making investments to expand the production.
<A>:
Regarding your second question, yes, even though the smartphone handset
market itself decreased, contracted between '18 and '19 and expected to only
grow about 1%, actually from the Semiconductor business side with the
adoption of 5G, this is actually an opportunity to see increase in both market
revenue as well as market size. Given the fact that we were the first to
commercialize the 5G, we think that this is a great opportunity for us to
strengthen our position as a mobile SoC company.
So we were the first to develop and supply the chipset solution for 5G for the
flagship handset. On top of that, we are currently working on creating a one-
chip solution that combines the AP and the modem. In addition to the mobile
demand, there will be 5G solution demand from the auto as well as IoT, which
we are preparing, and we will continue to expand our business in the 5G area
by signing on new customers.
Robert M. Yi
We'll take one last question before ending the call.
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Operator
The last questions will be presented by Mr. Marcus Shin from Mizuho Securities.
Please go ahead, sir.
<Q - Marcus Shin>:
I have 2 questions.
First question is about the Display business. We're noticing that the first half is
always weak. First half last year was a weak period. And also, you're recording
an operating loss first half of this year. Do you know why, the reason why this is
repeating? Would you think that the same pattern would repeat next year? Or
do you have strategies and plans of countering this repeated seasonality in the
business?
Second question is about the network, the 5G network equipment business,
which many people are expecting to be the next driver for the company overall.
Compared to the expectations that the market has about the 5G equipment
business, I think there's relatively less known about specifically what Samsung
is targeting in terms of 5G equipment. What's the size? What kind of market
are you targeting? And so can you share with us to your target market size and
the description of the 5G equipment market that your -- will be focusing on?
And can you give us some guidance in terms of the 2019 and 2020 revenue
that you're expecting for the equipment 5G?
<A>:
Regarding your first question about the low utilization of capacity in the first
half, that is actually caused by our high dependency on a specific customer and
a specific part of the smartphone industry. So it will be difficult to
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fundamentally remove that effect in the short term, but we are countering this,
for example, by developing new solutions such as FOD fingerprint sensors or
SoD, speaker on display. And also, we're increasing our supply of flexible OLED
to Chinese handset makers.
Even though we can't disclose the exact scale, we do expect there for the
supply volume to increase in the second half, and this will continue to have a
positive effect until the first half of next year. In the mid- to long term, the way
of us countering the seasonality of the business will be to diversify our
applications to -- beyond the mobile to look at, for example, laptop computers
in IT, automotive or foldable.
<A>:
Regarding your second question, actually when it comes to our 5G network
equipment business, there is the equipment business itself consisting of the
radio access network or core. But also, there is -- we are also focusing on the
service business, for example, on equipment deployment and optimization.
We are working with the major carriers in markets such as Korea, U.S., Japan
and India. We were able to complete 5G commercialization first in the world
successfully early April in Korea. We will leverage this to maintain a strong
leadership in 5G in countries such as Korea and the U.S. and also continue to
roll out our base to new areas.
Even though it's difficult to give you details of the results, the business results
we're expecting, we are expecting to have solid results on -- because not only
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the 5G network business but also that we will continue to supply the 4G LTE
equipment.
Robert M. Yi
Thank you very much. That completes this quarter's conference call.