SK Hynix Inc

KRX:000660

Earnings Call Analysis

SK Hynix Sees Record Revenue and Robust Demand for AI Memory Products

In the second quarter of 2024, SK Hynix achieved record revenue of KRW 16.4 trillion, a remarkable 32% increase sequentially and 125% year-on-year, driven by strong AI memory product demand and rising memory prices. DRAM sales surged, particularly in server products, exceeding guidance with low 20% sequential bit growth and mid-teen price increases. Meanwhile, NAND bit shipments slightly declined but ASP rose by mid- to high-teen percent. Guidance points to continued revenue growth propelled by expanding HBM3E product sales and a strategic focus on high-density enterprise SSDs, which have seen a 50% quarter-over-quarter sales increase. The operating profit margin improved to 33%, highlighting operational strength amid rising AI-driven demand.

Robust Revenue Growth Signals Market Strength

In the second quarter of 2024, SK Hynix reported remarkable revenue growth, reaching KRW 16.4 trillion. This figure represents a staggering 32% sequential increase and a whopping 125% year-on-year rise, marking an all-time high for the company. The growth was primarily driven by the strong demand for AI memory products and a recovery in conventional memory products as customers stock up ahead of expected supply constraints.

Significant Demand for DRAM and NAND Products

The increase in revenue was largely attributed to DRAM sales, which saw a bit growth of low 20% sequentially, exceeding guidance expectations of mid-teen percent. The average selling price (ASP) for DRAM rose by mid-teen percentages, bolstered by a higher mix of premium products like HBM2E, which saw sales surge by over 80% from the previous quarter and over 250% year-on-year. However, NAND sales saw a slight decline in total bit shipments due to lower demand for discrete products, despite an increase in ASPs by mid- to high-teen percentages.

Improved Profitability Through Strategic Product Focus

SK Hynix's operating profit for the second quarter rose remarkably from KRW 2.58 trillion to KRW 5.47 trillion, reflecting a robust operating profit margin increase of 10 percentage points to 33%. This improvement was primarily due to rising conventional DRAM prices and a substantial increase in sales of HBM products, ensuring stronger margins across the board.

Investment in High-Density Storage Products

As demand for enterprise SSDs grows, especially those catering to AI applications, SK Hynix plans to significantly ramp up investment in general-purpose servers. The company aims to expand their high-density eSSD offerings, already leading the industry with QLC-based products exceeding 60 terabytes, to eventually include models with capacities of 128 terabytes and 256 terabytes later this year. This strategy positions SK Hynix to capture a growing market as customers increasingly seek high-density, low-power storage solutions.

Outlook and Future Growth Opportunities

Looking ahead, SK Hynix anticipates continued strong demand in the AI sector and plans to quadruple sales volumes in the eSSD market, potentially increasing the proportion of eSDD sales to 50% of their NAND sales this year. The ongoing expansion in AI applications across the storage sector highlights SK Hynix's prospective growth avenues, leveraging their competitive product quality and evolving market needs to sustain future revenue momentum.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, afternoon and evening. Thank you for joining the SK Hynix 2024 Q2 Earnings Conference Call. For today's call, we'll have SK Hynix presentation followed by a Q&A session. [Operator Instructions] Please note that the presentation will be translated simultaneously and the Q&A session will be translated consecutively. With that, we are now ready to begin.

[Seong Hwan Park, executive]

[Interpreted] Good morning, afternoon, evening. This is Park Seong Hwan, Head of IR at SK Hynix. Welcome to the SK Hynix 2024 second quarter earnings release conference call. Allow me to introduce the executives present here today. We are joined by CFO, Kim Woo-Hyun; Head of DRAM Marketing, Kim Kyu Hyun; and Head of NAND Marketing, [ Kim Seok ].

Let me issue a disclaimer, all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we will now begin the SK Hynix earnings release conference call for second quarter 2024.

Mr. Kim, CFO, will first present the earnings, followed by the company's future plans and market outlook and a Q&A session with the attendee executives.

[Woo-Hyun Kim, executive]

[Interpreted] Good morning, everyone. Allow me to first introduce the company's performance for the second quarter of 2024. In the second quarter, AI memory product demand continued to hold very strong, while demand for conventional memory products also grew as customers try to build inventory ahead of potential tightness in the future, which led to another quarter of meaningful price increase for both DRAM and NAND. As a result, our second quarter revenue reached KRW 16.4 trillion, an increase of 32% sequentially and 125% year-on-year, marking the highest quarterly revenue in our company's history.

DRAM saw a significant increase in sales of general server products along with the expansion of HBM3E sales, leading to bit growth of low 20% sequentially, above guidance of mid-teen percent.

ASP rose mid-teen percent sequentially due to higher mix of premium products such as HBM and server DRAM, while prices rose across all products for 3 consecutive quarters. Particularly notable was HBM sales, which drove overall revenue growth by growing over 80% from the previous quarter and over 250% year-on-year.

For NAND, although sales of enterprise SSD and mobile products increased, total bit shipments decreased by low single digits sequentially due to a reduction in sales of discrete products and client SSDs, where demand recovery remains relatively muted. Meanwhile, ASP increased by mid- to high-teen percent as prices rose across all products.

Due to revenue expansion from rising memory prices, higher mix of value-added products and favorable FX impact, operating profit for the second quarter increased by KRW 2.58 trillion from the previous quarter to KRW 5.47 trillion, with an operating profit margin of 33%, up 10 percentage points from the previous quarter.

Amidst rapid improvement of conventional DRAM profitability due to rising prices, the significant increase in sales of HBM3E products contributed to the growth in DRAM profit. NAND margins also improved as a result of continuing ASP increases since fourth quarter of last year, expanded sales of enterprise SSDs and ongoing focus on profit-oriented management.

Depreciation and amortization expenses for the second quarter amounted to KRW 3.12 trillion, with sequential decline continuing due to reduced capital spending last year.

EBITDA reached KRW 8.59 trillion, with an EBITDA margin of 52%.

Non-operating loss net of gain for the second quarter was KRW 0.42 trillion, including net interest expense of KRW 0.28 trillion and net foreign currency-related loss of KRW 0.16 trillion. As a result, net pre-tax income was KRW 5.05 trillion, and net profit for the quarter was KRW 4.12 trillion and net profit margin was 25%.

Consolidated cash and cash equivalents, including short-term investments at the end of second quarter was KRW 9.7 trillion, down KRW 0.6 trillion from the end of previous quarter. Meanwhile, interest-bearing debt was KRW 25.2 trillion, down KRW 4.3 trillion from a quarter ago. As a result, debt-to-equity and net debt-to-equity ratio recorded 42% and 26% respectively, meaningfully improving compared to a quarter ago.

Next, I'll discuss market outlook. Continuing from last years, demand for AI memory products is seeing another year of growth. Along with HBM, demand for high-density server DRAM and enterprise SSD are also rising, and increase in contents for PC and smartphone and is also expected in order to support AI features on the device.

Although memory suppliers are increasing production utilization this year, they are prioritizing to support HBM and enterprise SSD, which are showing faster demand growth than conventional memory products. In particular, the memory suppliers allocate more wafer capacity for HBM, production capabilities for other DRAM products can be constrained as HBM consumes more wafer capacity due to larger die size. As a result, DRAM prices are increasing continuously when demand for traditional end markets has not yet fully recovered.

In the second half of this year, strong demand from AI servers are expected to continue as well as gradual recovery in conventional markets with the launch of AI-enabled PC and mobile devices.

Looking at demand by application, the demand recovery in the PC market is trending relatively weaker than initial expectations. High inflation and cost burden due to rising memory prices are impacting not only downstream demand, but also product lineups. Customers are preparing for the launch of high-spec products with AI features to create new demand while also responding to the divergent demand trends by offering more affordable low-spec products.

As a result, high-spec devices are expected to drive memory demand in the second half, and in the longer term, increased memory content and wider adoption of low-power memory are expected to support optimal operation of AI PCs.

Similarly, the smartphone market also showed more moderate demand recovery in the first half, but the release of new AI-enabled flagship and foldable phones are expected to help improve that demand in the back half of the year.

Smartphones adopting AI functions require higher content than existing high-end models. The further releases of these products that are scheduled in the second half to next year are expected to drive demand.

In the server market, AI servers are driving demand growth with exponential increase in the workload needs as generative AI evolve to multimodal models and also with the ever-increasing AI-related spending from big tech companies. Requests from customers for additional HBM supply this year and efforts to expand [indiscernible] capacity in the supply chain also indicates strong demand for AI servers.

In addition, general purpose server demand is also expected to gradually improve along with the impending replacement cycle for data center servers. They were invested 6 to 7 years ago, especially with growing needs to adopt new energy-efficient platforms.

Now I'll discuss our plans. Third quarter DRAM bit shipment is expected to grow by low-single-digit percent sequentially, driven by further expansion of our HBM sales volume, where strong demand is evident. NAND bit shipment is expected to decrease by mid-single-digit percent sequentially despite increase in eSSD sales volume given yet soft end demand in conventional applications and relatively high customers' inventory.

Net revenue growth, however, is expected to continue with rising prices and optimized product mix. HBM3E sales increased significantly in the second quarter as demand gained momentum. In the third quarter, HBM3E bit shipments are expected to be greater than that of HBM3, resulting in HBM3E accounting for more than half of total HBM sales volume this year. HBM3 12-Hi product samples have already been shipped to major customers and is on track to start mass production in this quarter and volume shipment to customers by fourth quarter.

With a full product portfolio ranging from HBM2E to HBM3E 12-Hi products, we plan to maintain our competitive advantage in the HBM market.

Our DDR5 products have been successful in securing early market leadership with stable technology and quality since first generation products. Currently, we are the sole supplier in the industry, offering 256 gigabyte products, maintaining our leadership of DDR5 products.

In the second half of the year, we are planning to release 32-gigabit DDR5 based high-density server DRAM as well as MCRDIMM, which offers superior bandwidth compared to existing RDIMM, the target high-performance computing market. We're closely collaborating with major server companies to successfully launch products that satisfy customers' requirements.

For NAND, we achieved notable results in terms of revenue and profitability in the second quarter. We are planning to focus more on strengthening product mix and availability of product lineups for future improvement. We are currently expanding sales of high-density enterprise SSDs, where demand is increasing, and we are also raising production utilization for some of our NAND fabs to support growing demand.

With the demand increase for enterprise SSDs this year, we have increased our enterprise SSD sales by 50% in the second quarter compared to previous quarter, and we expect our annual eSSD sales to grow by nearly 4x compared to that of last year.

We plan to lead the market in the second half of the year with 60 terabyte eSSD, the only available ultra high-density product in the industry. We also plan to release 128 terabyte enterprise SSDs in the beginning of next year to maintain our continued edge in the ultra-high density eSSD market. In addition, we plan to support upcoming AI PC demand by offering high performance and low power PCIe Gen5 client SSD that was developed in June.

Construction for M15X, which was recently decided to support the growing demand for AI memory as well as Yong-in Cluster, which will be our next-generation production site is progressing as planned. Amid increasing infrastructure investment compared to past years, investment needs are also rising to meet demand of conventional DRAM as well as HBM, which requires more wafer capacity than regular DRAM. Therefore, this year's CapEx level is expected to be higher than what we expected in the beginning of the year. Nonetheless, our investment plans will be prudently decided based on end demand and profitability and will be executed within the generated operating cash flow.

We will continue to pursue financial soundness by executing investments efficiently, and this quarter's meaningful reduction in debt levels was in line with these efforts.

Next, let me share our ESG management activities and performance. We issued Sustainability Report 2024, highlighting our ESG management activities and achievements during the year of 2023 as well as future commitments.

In 2023, we achieved company-wide renewable electricity adoption rate of 30% level for the second consecutive year. Also, we received international standard certifications from the British Standards Institution for our compliance and anti-bribery management system based on our compliance framework. This certifications recognize our achievements in complying with domestic and international standards and proactive prevention of related risks.

This quarter, we announced the joint declaration for greenhouse gas reduction with 28 members of the ECO Alliance composed of material component equipment suppliers. The greenhouse gas emissions of the participating companies account for approximately 50% of our scope 3 emissions from purchased raw materials last year. We plan to implement various collaboration programs such as operating ESG funds and participating in government supported renewable energy products to support our partners in achieving their greenhouse gas reduction targets. Thank you.

With that, we are now ready to take your questions.

[Operator]

[Operator Instructions] The first question will be presented by Nicolas Gaudois from UBS.

[Nicolas Gaudois, analyst]

You commented earlier on seeing -- having seen some upside for conventional server DRAM demand. And I think we've seen the same in terms of [indiscernible] server downstream. How did you see this translating into server DRAM demand upside on your side? Could you effectively quantify it versus what you expected earlier? And if we look at non-HBM server DRAM bit demand growth, could you quantify this as well for your expectations for 2024 and your initial view for 2025?

[Woo-Hyun Kim, executive]

[Interpreted] Thank you very much. While the run for those investments in AI servers that again last year continues, we're also seeing an improvement in demand for general purpose servers from some customers.

This is not only because of the impending replacement cycle for cloud data center servers, which were heavily invested in 2017 and 2018, but also because of AI data center deployments that are driving demand for general-purpose servers.

In particular, the rapid growth of AI servers with high power consumption has led to a move to upgrade existing conventional servers to new server platforms with significantly improved power efficiency to reduce operating cost and free up power across the data center.

Server DRAM, excluding HBM, is expected to see mid-20% level demand growth this year and next year as AI technology expands from training to inference, driving robust AI server demand, along with replacement demand for general purpose servers.

[Operator]

The next question will be presented by Peter Li from Citigroup.

[Sei Cheol Lee, analyst]

[Interpreted] I am Lee Sei Cheol from Citigroup. I have a question about investment. With the recent announcements of increased investment and capacity utilization by memory companies. concerns have been raised about supply growth beyond 2025. So what is your company's view and direction regarding this matter?

[Unknown Executive]

[Interpreted] Thank you very much for that question. So based on past experience, you may be concerned that increased investment by suppliers may lead to oversupply, but the current investment and ramp-up of production is centered on HBM, which has a much different market structure and production characteristics than conventional DRAM. So it's not really reasonable to assume that increased investment will automatically lead to oversupply.

As we know, given the die-size penalty of HBM and the level of clean room required, bit growth is limited even as investment increases and the limited production growth is expected to be exacerbated as HBM generations are upgraded.

Furthermore, HBM is facing its investment decisions on at least a year's worth of customer contract volumes. So increased investment in HBM means increased product orders.

Demand for HBM is growing rapidly due to increased competition in the AI industry resulting in a supply shortage even as suppliers expand their capacities.

Currently, demand is concentrated on AI servers due to the nascent AI market. But as AI technology begins to be applied to various different applications, new types of memory products such as processor in memory PIM and wide I/O and mobile are expected to emerge and generate new demand.

We expect the memory industry to evolve from a structure of mass production of a small number of products to a low volume production of a wide variety of different products and to become an on-demand industry that provides long-term supply of the products that the customers want.

We will work closely with our customers to increase the visibility of demand and focus our investments on products with strong customer demand so that we can contribute to the stable growth of the market.

[Operator]

The next question will be presented by Jay Hyun from JPMorgan.

[H. Kwon, analyst]

[Interpreted] I am Jay Hyun from JPMorgan. I have a question about specific investment directions. You said in your presentation that you will be investing largely within the operating cash flow that is generated. So can you elaborate more on what SK Hynix's investment direction for this year and next year is?

[Unknown Executive]

[Interpreted] So let me answer your question. Thank you very much for that question. So our investment this year is higher than planned at the beginning of the year due to higher-than-expected demand for HBM products and our decision to invest in fabs to secure clean rooms for the mid- to long term.

In addition, in 2025, demand for not only HBM, but also general memory is expected to increase further requiring significant investment into infrastructure such as N15X and Yong-in Cluster to prepare for this. Therefore, we expect the scale of investment to increase compared to the historical average.

Given our position as a leader in the AI market and the expected growth in demand, infrastructure investments are essential to secure future growth. Our long-term investment plans reflect this. But we have the flexibility to execute our annual investment plan according to the market demand at the time.

Even excluding this year's increased investment, our operating cash flow is improving rapidly, and we will continue to ensure that our financial strength is supported.

[Operator]

The next question will be presented by Dong Hee Han from SK Securities.

[Dong Hee Han, analyst]

[Interpreted] I'm Han Dong Hee from SK Securities. My question has to do with your strategy on managing the capacity for HBM and general DRAM. So there are many views that DRAM supply will be tight until next year as demand for HBM continues to be strong, and demand for on-device AI to start earnest from next year. So compared to HBM, whose price is set on an annual basis, the price of general DRAM is adjusted quarterly according to supply and demand and profitability is improving rapidly. How does the company plan to manage the capacity between HBM and general DRAM to maximize DRAM profitability?

[Unknown Executive]

[Interpreted] Let me answer your question. As you have mentioned, the available capacity for general DRAM production has remained at a reduced level since the production cutbacks even though suppliers are increasing their utilization rates due to the rapidly growing demand for HBM.

While overall capacity is expected to increase next year due to the increased industry investment, a significant portion of it will be utilized to ramp up production of HBMs so the tight supply situation for conventional DRAM is likely to continue.

Furthermore, if the demand recovery for conventional DRAMs accelerates, it is possible that the profitability of conventional DRAMs, which are priced on a quarterly basis, may be higher than that of HBM, which is priced on an annual contract basis.

As HBM has many new aspects that make it different from conventional DRAM, we will seek to maximize DRAM profitability over the long term rather than the short term, taking into account the growth and stability of HBM's revenue, our position in the market and our relationship with the customers.

[Operator]

Next question will be Presented by Sung Kyu Kim from Daiwa Securities.

[S. K. Kim, analyst]

[Interpreted] First of all, let me congratulate you on your excellent performance. I have a question on HBM. So you just said that the packaging technology of the 12-Hi product is said to be more difficult than the 8-Hi product.

So when do you expect to reach the mature yield stage? And when do you think the HBM3E 8-Hi and the 12-Hi products will cross over each other? Those are my questions.

[Unknown Executive]

[Interpreted] Thank you for the question. As I have noted previously, the HBM3E 12-Hi samples were provided to customers in May, and we are currently preparing for mass production. And we plan to start mass production this quarter and start supplying customers in Q4.

Demand for the 12-Hi product is expected to increase in earnest from next year, and we expect the supply of HBM3E 12-Hi to exceed that of 8-Hi in the first half of next year.

Although it is true that technical difficulty involved for the 12-Hi product is higher than the 8-Hi product, we believe that our experience in mass producing the HBM3 12-Hi and the successful development and production ramp-up of the 8-Hi product will shorten the time required to ensure stable quality and yield.

[Operator]

The next question will be presented by Giuni Lee from Goldman Sachs.

[Giuni Lee, analyst]

[Interpreted] I also have a question related to the HBM. So the HBM's product development period seems to be shortening as major GPU customers have shortened their product release intervals from 2 years to 1 year. Do you think these industry changes are favorable or unfavorable for SK Hynix as HBM market leader? And does this change the mid- to long-term HBM TAM outlook?

[Unknown Executive]

[Interpreted] Thank you for the question. As the AI market is expanding faster than expected and related industries are growing faster, some customers are responding to the market growth by accelerating their new product release cycles.

Faster GPU release cycles require shorter development cycles for the HBMs employed in those GPUs, and this can be a burden for the DRAM companies.

However, the environment is likely to be favorable for industry leaders who can respond to these customer demands, especially as time to market is of the essence, and it is important to minimize risk by partnering with industry leaders who have the right combination of technology competitiveness, mass production experience and the scale.

We also believe that shorter time to market for new products will help to stimulate market demand, and this is expected to expand the size of the AI market and positively impact the generation of demand for HBM.

[Operator]

The next question will be presented by Ricky Seo from HSBC.

[Ricky Seo, analyst]

[Interpreted] I also have a question about the HBM4. So in the HBM4 product range, there is the 12-Hi product and the 16-Hi product. And there is a lot of -- so my first question is, when will the HBM4 12-Hi and the 16-Hi product will release?

And my second question is, there's currently a lot of discussion about when to apply the hybrid bonding technology. So when do you intend to apply the hybrid blending technology in the HBM4 16-Hi?

And my third question is, what are the considerations made when deciding to use the technology?

[Unknown Executive]

[Interpreted] HBM4 is expected to be shipped from the second half of next year, starting with the 12 high products. And we plan to apply the advanced MR MUF technology for mass production.

The hybrid bonding technology that you have referred to is a technology that we are researching to reduce the height of the packaging by joining the pads of the copper wiring directly to each other without micro bumps between the chips so that we can prepare for the ever-increasing number of stacks.

The effectiveness of applying the hybrid bonding technology may vary from company to company due to the different packaging technologies currently used by the HBM suppliers and their different capabilities and resources.

Furthermore, the mass production application of hybrid bonding requires further technological advancement and thorough characterization and quality verification at the system level in collaboration with customers and partners.

The HBM4 16-Hi product is expected to be in demand in 2026, and we plan to develop in preparation for that demand. And we are reviewing both the advanced MR MUF and the hybrid bonding method to select the most optimal method to meet customer demands.

[Operator]

The next question will be presented by from Sun Woo Kim with Meritz Securities.

[Sunwoo Kim, analyst]

[Interpreted] I am Kim Sun Woo from Meritz Securities. I have a question related to the bit growth of NAND. So you have very strong performance for the first quarter and the second quarter. However, in comparison to that performance, your shipment level seems to be rather weak. The second quarter shipments have been below guidance. And for Q3 as well, it is expected to be down Q-o-Q. So how long do you think this trend will continue going forward?

[Unknown Executive]

[Interpreted] So with the exception of enterprise SSDs where demand for NAND is clearly growing, general applications such as PC and mobile demand is still showing a modest recovery and we are responding to market conditions by maintaining our strategy of optimizing investments and improving profitability.

For instance, we are ramping up production on a limited base this year, which was reduced last year due to NAND investment minimization and production capacity cuts. We're focusing this year on select applications where demand is growing.

While our quarterly NAND shipment growth may appear limited this year, we are committed to maintaining our market share by revenue through our profitability-focused product mix and sales strategy based on actual demand.

In the third quarter, while expanding sales for enterprise SSD products, we plan for a mid-single-digit shipment decrease in some applications due to low demand and customer inventory conditions.

But in the fourth quarter, we expect shipments to return to growth as more bits are produced internally and the external demand environment improves.

Looking ahead to next year, we will continue to optimize investments and improve profitability, positioning the business to be profitable even in the face of future market fluctuations.

[Operator]

The next question will be presented by [indiscernible] from Daishin Securities.

[Unknown Analyst]

[Interpreted] I'm [indiscernible] from Daishin Securities. My question has to do with the reversal of inventory valuation allowance. So what was the size of the reversal of the inventory valuation allowance in the second quarter? And if prices continue to rise in the second half of the year, is there a possibility of further reversals?

[Unknown Executive]

[Interpreted] Let me take the question on inventory valuation allowance reversal. So our DRAM sales volume in the second quarter exceeded our guidance and our finished goods inventory level at the end of the second quarter decreased from the end of the previous quarter as sales of DRAM and NAND continue to exceed production volumes.

The DRAM and NAND prices continue to increase, resulting in a reversal of inventory valuation allowance of approximately KRW 300 billion in the second quarter.

As the pricing environment for DRAM and NAND is expected to remain favorable going into the second half as well, there is the possibility of further reversals taking place. But as the majority of the inventory valuation allowance has been recognized during the downturn has been reversed, further reversals are expected to be minimal.

[Operator]

The next question will be presented by Minsook Chae from Korea Investments & Securities.

[Dana Chae, analyst]

[Interpreted] I'm Chae Minsook from Korea Investment & Securities. I have a question related to HBM. Given that HBM demand is growing rapidly and SK Hynix's leadership in the market is wildly recognized, you seem to be taking a conservative stance when it comes to the capacity increase. So why are you not increasing HBM capacity more aggressively? And what are your plans for HBM capacity to meet demand next year?

[Unknown Executive]

[Interpreted] Thank you very much for that question. Now contrary to some concerns, AI-driven demand has continued to exceed expectations and is growing this year.

We have previously announced that we will more than double our TSV capacities from last year's level to meet the growing demand this year, and we expect to rapidly expand the supply of HBM3E based on the increased TSV capacities and 1B-nanometer conversion investment this year, resulting in HBM revenue growth of over 300% compared to last year. That is our expectation.

We are very carefully crafting our investment plans and capacity-related plans by reflecting the demand in the downstream and also the supply chain situation.

Most of next year's [ capacity ] has already been largely agreed with the customers, and we expect shipment for it to more than double compared to this year.

Next year, the HBM3E 12-Hi product will be our flagship product, and we will also finalize preparations for the HBM4 to ensure a stable response to customer demand.

[Operator]

The last question will be presented by Young Ho Ryu from NH Investment & Securities.

[Young Ho Ryu, analyst]

[Interpreted] I am Ryu Young Ho from NH Investment & Securities. I have a question about NAND performance. So as you have already noted, the eSSDs are experiencing strong demand in growth this year and so how is the demand for eSSD presently compare it to your expectations at the beginning of the year? And what is your outlook and strategy for eSSD going forward?

[Unknown Executive]

[Interpreted] Last year, the demand for general purpose servers slowed down significantly due to a focus on AI-oriented servers within limited IT investment budget. And so as a result, enterprise SSD demand was weak.

This year, however, our investment in general purpose servers is increasing compared to last year, and AI-related demand, which was previously limited to DRAM, is spreading to NAND storage. And so eSSD demand is growing at a level that is significantly exceeding expectations at the beginning of the year, mainly for high-density products.

Due to the high power consumption of AI servers, the preference for low power storage products is expected to grow, and we plan to respond to this growth with a diverse lineup of enterprise SSD products to meet customer demand.

We are currently the only company in the industry to offer QLC-based enterprise SSD products over 60 terabytes, and the quality of our products is highly competitive. We plan to maintain our high-density product leadership by introducing 128 terabyte and later on, 256 terabyte products later this year.

Our eSSD products also have very strong QOS advantage based on our deep understanding of data center workloads. QOS stands for Quality of Service, which means that the response time to read and write data is short and reliable, which in turn means less time waiting for the SSD to respond, and this can increase the efficiency of the GPU.

In the future, power efficiency will be a critical factor for AI servers and high density eSSD products with a strong performance and reliability will be very attractive to customers in terms of TCO. So we're looking forward to further growth in the high-density storage market for data centers.

Based on these competitive advantages, we're going to increase our sales volume to fourfold that of the previous level, and we will expand the proportion of eSSD sales to half that of NAND this year and strengthen our position as the top 2 player in the high-growth eSSD market.

[Seong Hwan Park, executive]

[Interpreted] With this, we would like to conclude the SK Hynix 2024 Q2 Earnings Release Conference Call. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]