SK Hynix Inc

KRX:000660

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, afternoon and evening. My sincere gratitude to interview for your presence here today. Let's commence the SK hynix 2023 Q4 Earnings Release Conference Call. Following SK hynix presentation, we will have a Q&A session. [Operator Instructions] Please note that presentations will be interpreted simultaneously and the Q&A session will be interpreted consecutively.

Without further ado, let's proceed with the SK hynix presentation.

[Seong Hwan Park, executive]

Good morning, afternoon and evening. This is Park Seong Hwan, the Head of IR at SK hynix. Welcome to the SK hynix 2023 [Technical Difficulty]. Allow me to introduce the executives present here with me today. We are joined by CFO, Kim Woo-Hyun; Head of DRAM Marketing, [ Kim Jeong ]; and Head of NAND Marketing, [ Kim Seok ]. Let me issue a disclaimer that all outlooks presented by the company are subject to change, depending on the macroeconomic and market circumstances.

With that, we will now begin the SK hynix earnings release conference call for fourth quarter and full year of 2023. Mr. Kim will first present the earnings followed by the company's future plans and market outlook.

[Woo-Hyun Kim, executive]

Good morning, everyone. This is CFO, Kim Woo-Hyun. Allow me to first introduce the company's performance for the fourth quarter of 2023. Amid the ongoing recovery in IT demand, the fourth quarter observed notable growth in demand for HBM and high-density DDR5 for AI servers as well as mobile memory from our customers in the Greater China region. As a result, not only DRAM but NAND prices also turned positive, further improving the memory market environment. Driven by the increased pricing of memory products, our fourth quarter revenue reached KRW 11.31 trillion, up 25% Q-on-Q and 47% year-on-year.

For DRAM, our focus was on enhancing profitability rather than increasing shipment volume by expanding sales of high value-added products such as HBM and high-density DDR5. We saw a low single-digit increase in DRAM shipments compared to the previous year -- sorry, previous quarter, albeit lower than the initial guidance. Meanwhile, the ASP rose by high-teen percent sequentially surpassing the growth rate in the previous quarter. For NAND, we reduced sales of low-margin products, while expanding sales of mobile and eSSD products. As a result, bit shipment decreased by low single-digits sequentially, outperforming our earlier guidance. The ASP rose by over 40%, driven by price increases across all application products and a higher contribution from higher-priced solution products.

With stronger pricing, we saw profitability improve and previously recognized inventory valuation losses were further reversed. As a result, our fourth quarter operating profit was KRW 0.35 trillion with an operating profit margin of 3%, marking a turnaround after a full year of losses. Depreciation and amortization expenses for the fourth quarter was KRW 3.24 trillion, decreasing further due to reduced capital spending. EBITDA recorded KRW 3.58 trillion with an EBITDA margin of 32%.

Nonoperating loss net of gain in the fourth quarter was KRW 2.22 trillion. This includes net interest expense of KRW 0.33 trillion, net foreign currency related gain of KRW 2.26 trillion, Kioxia investment valuation loss of KRW 1.43 trillion and valuation loss of conversion rights for the convertible bonds that we issued last year, which occurred due to a rise in our share price. As a result, our net pretax loss was KRW 1.87 trillion, the net loss was KRW 1.38 trillion, and the net profit margin was negative 12%.

I will now present our financial performance for 2023. The memory market faced challenges in 2023 due to concerns of high interest rates and economic recession, resulting in a severe downturn. Despite significantly expanding sales of our industry-leading AI memory products, our consolidated revenue recorded KRW 32.8 trillion, a decrease of KRW 11.9 trillion compared to the sales of 2022. In DRAM, we responded swiftly to the surging demand from AI customers with premium products like high-density DDR5 and high-performance HBM3, leveraging our technological competitiveness.

DDR5 sales increased by more than 4x and HBM3 sales increased more than 5x compared to the previous year. We solidified our position as a leading company in the HBM market, a core product of AI memory. In light of the challenging demand landscape, particularly for NAND, unlike DRAM that experienced benefits from AI, we maintained conservative production stance, placing emphasis on improving investment and cost efficiency. Despite our efforts in investment and cost reduction, sales decreased significantly due to price declines, resulting in an operating loss of KRW 7.7 trillion in 2023.

Consolidated cash balance including short-term investments at the end of the year was KRW 8.9 trillion, up by KRW 2.5 trillion from the prior year-end. Interest-bearing debt was KRW 29.5 trillion with an increase of KRW 6.5 trillion from the end of 2022. Our debt-to-equity ratio and net debt-to-equity ratio at the end of 2023 were 55% and 38%, respectively. Due to a large operating loss in 2023, free cash flow, which is cash flow from operating activities plus the acquisition of PP&E was negative KRW 4 trillion. Accordingly, the dividend for the fourth quarter will be KRW 300 per share and the accumulative dividend for 2023 will be KRW 1,200 per share.

Next, I will discuss market outlook and the company plans. While uncertainties perceived in the memory market, we have seen a positive shift in the supply-demand landscape since the second half of last year, moving away from a severe downturn toward recovery. Positive growth in PC and mobile phones shipments is anticipated after 2 consecutive years of negative growth. Moreover, the demand for general purpose servers is expected to rebound aligning with the recovery in AI servers driven by increased customer spending. PC units are projected to grow by mid-single-digit percent, driven by delayed PC replacements and Windows upgrade demand. Looking ahead, the AI PC market requiring more than double the DRAM content of current PC is expected to drive both PC shipments and content growth in the long term.

Smartphone market, which is now a mature market, a mid-single-digit growth in units is anticipated compared to the previous year, driven by replacement demand and the recovery of consumer purchasing power. Furthermore, the demand for high-density and high-spec mobile memory is set to rise with an increase in flagship product demand. Moreover, if the introduction of AI phones and the proliferation of AI applications lead to substantial enhancements in features and user convenience beyond what conventional smart brands offer, the smartphone market could experience another leap forward.

The server market is anticipated to undergo a gradual recovery this year as the commercialization of generated AI begins and increased investment from major server customers are expected. As the demand for the component configuration for AI servers become more fragmented, allowing diverse hardware configurations and thus, using price burdens, a recovery in investment for general purpose servers is also likely to be seen. The growth trend of AI server shipments is also expected to persist with the inclusion of inferencing demand alongside training demand.

In summary, this year's demand growth for DRAM and NAND is expected to be in the mid- to high-teen percent, respectively. And we plan to respond flexibly to grow in line with market growth level. Despite seasonality in demand, we anticipate continued price improvement in the first quarter and intend to maintain a focus on profitability in our operations. Consequently, we expect a mid-teen percent decrease in DRAM shipments Q-o-Q with the potential for further profit expansion driven by favorable pricing. For NAND, we anticipate a mid-single-digit increase in bit Q-o-Q, as NAND pricing improvement is also expected to continue.

Anticipating a recovery in demand this year, we expect gradual adjustments to production cuts, aligning with the normalization of industry inventory levels. However, overall production growth will be constrained as focus moves toward high-demand premium products, requiring advanced processes, while production of legacy products continues to decline Therefore, despite the recovery in utilization, we estimate industry production growth to be within the single-digit range, mainly caused by the die-size penalty impact in shifting production to value-added products. Therefore, we expect industry inventory levels to continue to decline throughout the year. We will accelerate the development of our industry-leading AI memory products and proactively respond to customer demand.

Furthermore, we are committed to profitability focused operations and cost optimization, strengthening our foundation for sustained success. First, for DRAM, we are on track to supply HBM3E, which is anticipated to grow significantly in demand. We have initiated the development of the next-generation product, HBM4. And we aim to broaden our product lineup in order to meet diverse customer demand. We plan to expand our high-density solution offerings, including not only a 128-gigabyte DDR5, but also up to 256-gigabyte modules for which demand has recently been rising. Our high-performance mobile DRAM product, LPDDR5T will range from 16-gigabytes to 24-gigabytes.

In addition, we will strengthen our technological leadership in the evolving memory market by preparing mobile modules such as LPCAMM2 for on-device AI and high-performance server modules like MCRDIMM. For NAND, where recovery is more gradual, we focused on improving efficiency through production cuts of low-margin products and inventory reduction. This year, we plan to maximize investment efficiency, utilizing existing capacity for demand and enhance our product lineup with premium products, such as eSSD, aiming for higher sales of solution products. We will continue to find ways to optimize the use of our existing assets, thereby transforming our NAND operations to be more stable even under the fluctuated demand environment.

Meanwhile, CapEx is expected to grow from the reduced levels of last year following an unprecedented downturn. However, we plan to minimize the incremental growth as we try to execute based on profitability and customer demand as well as focus on investment efficiency. Following the era of PC, mobile and data centers, the memory market is entering a new stage of advancement with the emergence of AI. The AI era is expected to drive fundamental changes and growth of the memory industry with rising importance of memory as a key player in data processing and diverse specification needs from customers. These transformations require long-term collaboration among memory suppliers, customers and partners, enhancing visibility of the memory industry and reducing volatility in the memory cycle.

We are gearing up to go beyond traditional methods, introducing new value in line with the changes in the memory industry. We are preparing optimal memory solutions tailored to each customer's needs. Furthermore, by ensuring the smooth preparation of the new Yongin Cluster production site, we aim to evolve into a total AI memory provider, not only in technology, but also in customer service and production capabilities.

Next, let me share our ESG management activities and performance. We completed the human rights assessment process initiated in 2021, covering domestic and overseas sites of our company and 5 other subsidiaries. This evaluation focused on examining the overall governance system for human rights management, identifying potential human rights infringements and areas for improvement through employee surveys and interviews. Based on the results, we will formulate action plans for future improvement to elevate our human rights management. Recently, we unveiled a more specific human rights and neighbor policy, aligning with global human rights initiatives such as the International Labor Organization.

In addition, our Human Rights and Neighbor Council involving key departments within the company ensures more systematic human rights management activities. In 2022, we announced specific targets for our ESG strategy framework PRISM, covering environmental, social and governance. In 2023, notable achievements include reducing level of greenhouse gas emissions and enhancing supply chain management. Our commitment continues in 2024 to obtain lead to long-term prism goals with transparent disclosure of related achievements as we strive for sustainable management.

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

[Operator]

[Operator Instructions] The first question will be provided by Sung Kyu Kim from Daiwa Securities.

[S. K. Kim, analyst]

First of all, congratulations on the good business results. And now looking at the Q4 results, we see that the memory prices have gone up quite rapidly and also quite intensely more so than we had expected. But then at the same time, real demand recovery appears to be yet to follow. Perhaps that also has to do with some active production cuts. So, then what is the company's outlook for the memory demand and supply as well as the prices in 2024? And the second part of my question is on HBM, where the company has enjoyed truly a unique position last year. And does the company foresee any changes in the HBM landscape this year, perhaps a stronger competition or any other changes? And also, what is the plan for the expected capacity?

[Woo-Hyun Kim, executive]

Now, I would like to respond to your question about the memory supply and demand outlook as well as the prices. Now, memory suppliers have responded to the downturn with aggressive capacity cuts and investment reductions over the past year against 2 years of unprecedentedly low demand growth and a near record level inventory. The aggressive production cuts caused negative growth in industry production in 2023, and prices began to improve in the second half of the year as inventories were reduced by meaningful levels. But of course, how fast and how much demand will improve is subject to a number of factors like the macro environment. But this year, demand growth is expected to significantly outpace production growth, with demand for both DRAM and NAND likely to grow by mid- to high-teen percentage, while production growth remains in the low single-digits.

For PC and mobile, which traditionally see stronger seasonality in the second half, they are expected to see content growth expected at over 10%, which is the usual level. For servers, content growth is expected to continue. Company's IT investment will increase with strong shipment of AI servers and recovery in general servers, which will turn overall shipment to growth. There will be demand for inference in addition to demand for training and new CPUs and GPUs will be released. Suppliers will gradually restore utilization rates to ramp up production, beginning with high demand products like DDR5 and HBM, but industry-wide production increase will be limited due to the die-size penalty specific to premium products as well as lower productivity. Thus, the memory market is likely to keep improving in 2024. Inventory will steadily decrease, bringing the industry-wide inventory to a low level by the end of the year. And depending on supply and demand conditions, the recovery momentum could be sustained into the next year as well.

Now, let me move on to the second part of your question, which was about the company's position in the HBM market. Now first off, HBM is a quite challenging market. You need not only a combination of product-specific features like speed, thermal control and power, but also the ability to ensure timely delivery in close cooperation with customers and also the ability to respond to new technologies such as advanced packaging. Now, on top of product development and mass production experience we have accumulated over the past decade, we have also incorporated customer feedback into our HBM business, which helped establish our leadership in HBM that we see today who can fulfill the whole set of customer needs, not just individual features.

And HBM3E, for which there will be real demand this year, is on track for mass production this year to meet customer time line. Supply will begin in the first half of the year and we will respond to customer needs with a wide range of HBM products. And we also plan to expand our customer base to potential customers as well, including not only the leading AI players but also CSPs and AI chipset providers who will be a big part of the AI market. Now with more demand visibility, we also plan to roughly double the TSV capacity this year over last. Any additional investment will be carefully considered against mid- to long-term demand, market environment and the supply chain.

[Operator]

The following question will be presented by Subin Lee from CGS-CIMB.

[Subin Lee, analyst]

I also have 2. First is about the inventory level. So, what is the expected customer inventory level by application? And also, what is the company's inventory level in both DRAM and NAND? And the second question is about the differences in the DRAM and HBM products. So, with the increase in the DRAM prices overall, it seems as if the premium effect on the HBM has shrunk. And could the company elaborate on the differences between DRAM and HBM features?

[Woo-Hyun Kim, executive]

Allow me to first answer the first part of your question about the inventory. Now we see that the customer inventories across all applications continue to improve, but purchase demand has been rising from Q4 last year from customers, especially anticipating higher memory prices. And PC and mobile appear to be building up inventory from the current relatively low level. And customer demand recently has been rebounding starting with legacy products where suppliers have built up inventory from the sharp drop in demand last year. Given that most of this year's production ramp-up is for next-generation products that require advanced processes, some inventory build-up appears to be necessary to facilitate sales of low- and mid-end products.

Now on the supply side, as we move into the second half of the year, production migration to the higher end, HBM and DDR5 will pick up speed, which will further reduce the supply of legacy products as well as customer inventories. By the end of the year, inventory will be lean not only for customers but also suppliers. And for the company, despite the limited bit growth in Q4, our end of quarter inventory continued to decrease meaningfully Q-o-Q. And we maintained conservative production throughout 2023, resulting in clear improvement in inventory in the second half as sales outpaced production since Q3. And we plan to remain conservative into this year until inventory normalization, which we expect to reach in the first half of DRAM and in the second half for NAND.

And allow me to explain the differences between the general DRAM market and the HBM market. Now AI memory is a product with high performance and quality requirements as well as reliable quality, which means that close collaboration with customers is essential. And HBM indeed is the leading AI product with standardized specifications. But at the same time, unlike general DRAM, it is a much more complex and demanding product that requires additional processes like TSV process and also stacking of multiple chips to be packaged.

And even when the product is finished, there is the additional step of combining it with a GPU to be packaged, which requires collaboration not only between customers and memory makers, but also with downstream companies and we must ensure that there are no supply chain bottlenecks throughout the process. And given the high cost of production and the relatively long production lead time, close consultation with customers is required to ensure timely response to demand. And the company negotiates prices on a minimum annual basis, taking into consideration the R&D invested in HBM capacity investment, life cycle and the price of general DRAM products.

Due to this decision-making process, HBM enjoys relatively higher price stability. And as the HBM market expands into the future, the DRAM business on the whole can see better price stability as well. Now the price premium for HBM may be less this year than last year due to the sharp ASP increase in general DRAM. But at the same time, HBM3E, which is newly released this year and is expanding sales is expected to reflect a price premium in light of the higher development complexity and input costs compared to HBM3 and we expect to maintain the premium level, thanks to the change in the HBM product mix.

[Operator]

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

[Dong Hee Han, analyst]

I also have 2. The first is in terms of the company's investment scale this year for 2024, then what would be the main areas of investment as well as the overall direction for investment? And second, we see that in terms of the shipment price, we see that the company has far outperformed the market last year. So, then if the company believes that this can be maintained this year, then what would be the drivers for such possibility?

[Woo-Hyun Kim, executive]

Thank you very much for your questions. I would like to respond to your first part of the question about investment CapEx. Now the company to proactively respond to the rapid slowdown in 2023, we reduced our CapEx by more than 50% Y-o-Y as we had communicated to the market earlier. So, compared to our historic investment levels and annual depreciation, last year's CapEx was a significant reduction in all areas, except for essential investment needed to respond to demand for AI products. Now while we expect higher prices and also higher growth in memory demand this year, we plan to maintain conservative investment this year as well.

We will invest in ramping up production strictly based on customer demand and when there is clear visibility. By limiting our investments to areas where we are confident of growth and profitability, we will avoid the cycle of more investment leading to oversupply that we have repeatedly seen in the past. So, we plan to minimize incremental investment in 2024 by considering priorities such as expanding mass production of advanced process products to meet the growing demand for AI, expanding TSVs and investing in essential infrastructure. And the direction of investment beyond '24 will also be determined by finding the right balance. So, we will be getting ready for the investment to be made so that we will be able to preemptively prepare for the future growing infrastructure. And so we will need to find the right balance between growth and financial improvement as we try to set the course of investment in the future.

Now, I would like to respond to your question about the company's performance in 2024. Like other suppliers in 2023, the company also struggled with deteriorating profitability and high inventory. But with the advent of AI, we were able to quickly return to profitability by launching high-value products that fulfill customer needs and we are able to close relatively high ASP growth than industry average. And as the demand for AI memory takes off, we believe the competition will be less about volume-based market share and more about delivering the value customers need at the right time and at the right price to continue to grow revenue and profitability. And going forward, we will prioritize revenue and profitability centered on value-added rather than volume and strengthen our position as the total AI memory provider by rapidly establishing ourselves in the HBM market and new AI memory products such as MCRDIMM and LPCAMM2.

[Operator]

The following question will be presented by from Chung Taeyoung from Korea Investment & Securities.

[Chung Taeyoung, analyst]

Now, I also have 2 questions. Now, including Hynix and the other suppliers, it appears that they are gradually increasing the utilization rate. And as a result, there are some concerns in the market that the market recovery might end earlier than expected. And of course, the presenter earlier explained quite well about why supply is going to be limited, but then can the company also elaborate on this possibility? And also what is the company's position on the production cut stance?

And the second question is, the company also mentioned earlier that any increment in the CapEx is going to be limited. But then doesn't that mean that as the -- in the course of the memory upturn, then the fab operations could become tighter. So, what does the company think about this concern as well?

[Woo-Hyun Kim, executive]

Thank you very much for your questions. I will answer your question about the memory market recovery. Now, what the questioner has mentioned, the concern in the market, that is something that the company is also quite aware of. But having said that, the production cuts we have been seeing in the industry since late 2022 have been mostly in low-margin legacy products with high inventories and we believe the production cuts here will continue until inventories are sufficiently depleted and prices reach levels that ensure profitability. And I'm sure that we are all fully aware that where the suppliers are looking to expand production this year are in high value-add products such as high-performance, high content DDR5, LPDDR5 and HBM, where customer demand is growing.

Now, unlike the legacy products that are subject to cut, these products are characterized by large die sizes. In particular, HBM has a die size that is approximately twice as large as DDR of the same capacity. This means that even if we put in more wafer for HBM, we will not get equal increase in the finished products. The company has maintained the principle of increasing supply of high-demand products but not increasing production of low demand products. Now, this also has to do with our trust with our customers. So, we will respond to customer demand by increasing production of high-value ad products such as high-performance and high-capacity DDR5 and LPDDR5 as well as HBM, which are currently in short supply, but we will maintain a production reduction stance in areas where demand is low and inventory needs to be lowered. And as was mentioned during the briefing, given these industry trends and our plan, we expect production growth in 2024 to be limited and thus, the memory market improvement will continue.

Now, moving on to the second part of your question about the mid- to long-term fab plan. With production cuts still ongoing, I must say it is a happy problem to have, how to prepare for the time when fab operations become tight. However, after expecting steady growth in the memory industry after consolidation only to experience an extreme downturn like we did in 2023, I believe it now warrants a different perspective in thinking about future investment. On one hand, we need to focus on providing differentiated value to our customers by ensuring the readiness and timely delivery of the various products that meet their various needs to bear the rapidly rising investment costs.

But also at the same time, we need to focus our investment decisions in areas with adequate profitability and visibility in demand. And that is why we plan to focus our investment on products where we have a clear competitive advantage and plan to utilize the remaining space in the current M15 and M16 fabs for the next few years. Unlike in the past, we will focus on migration investments to deliver value rather than to increase capacity and try to make the most efficient use of our clean room space. And so under this principle, the OC fab will also eventually enable mass production of products such as DDR5 and LPDDR5 by migrating to 18-nanometer to extend the utilization period as much as possible.

[Operator]

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

[H. Kwon, analyst]

I also have 2 questions. First is about the HBM demand. So, what is the company's projection for the demand growth rate for HBM this year? Then also, it seems as if the HBM capacity has been rising from last year and also will continue so into this year and next. Then what about the non-HBM, in other words, the general DRAM applications. So, what does the company expect the demand and supply dynamics to be for the non-HBM DRAM applications? And the second part of your question is about the on-device AI. We have seen the demand moving a lot from the AI server also to the on-device AI. And does the company expect this to be in terms of the impact on the memory semiconductor demand?

[Woo-Hyun Kim, executive]

Thank you. Now, I will first respond to the first part of your question about the HBM. Now, HBM is memory optimized for high-speed processing of massive data in AI and deep learning. Demand is gradually expanding for ultra-large-scale AI chatbots for CSP companies trying to combine it into their existing platforms and also for on-device use. And we see that there is clear demand growth for HBM recently with increasing adoption of AI by companies and also increasing acceptance among individuals of AI. And based on demand visibility, the demand growth is expected at 60% per annum for mid- to long-term. And there is even some upside potential, such as the extent of AI commercialization and expansion into new applications, which, if they do happen, will accelerate growth further.

Now, it was also mentioned earlier, but for HBM, the required capacity is at least twice as high to produce the same volume as conventional DRAM, which means that if there is no capacity increase, the availability of wafers for conventional DRAM would shrink significantly with HBM production ramp-up, potentially leading to very tight supply and demand for conventional DRAM, depending on the level of HBM volume expansion.

And let me now move on to the second part of your question, which was on the demand for on-device AI. AI PCs and AI phones with on-device AI capabilities are expected to become the new catalyst or a new driver for memory demand in the future because to support AI services on the device requires high performance and high capacity hardware. Of course, there would be some differences by application, but basically, we expect to see an increase in content per device, thanks to demand for on-device AI. AI PCs are expected to have more than double the DRAM capacity than traditional PCs. And similarly, AI phones will need at least 4-gigabytes of additional DRAM. Now the market will begin to bloom in 2024, as customers actively launch products with on-device AI capabilities, but it will not be until 2025 that we will see real increase in shipments. And what is noteworthy is that should there be killer applications that actively use on-device AI capabilities, they can drive additional mid- to long-term demand growth in the already mature PC and smartphone markets.

[Operator]

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

[Giuni Lee, analyst]

Congratulations on the good performance. And my first question, I also have 2 questions, one on NAND and another on HBM. Now, with the recent recovery in the NAND prices, we see that the non-NAND suppliers' profitability has also improved quite a lot. Then in relation to this, when does the -- when does Hynix believe that its NAND business can turn around to profit? And also in relation to this, what are for the short term, the specific ways that the company plans to improve NAND profitability.

And the second question is on HBM. Now the memory makers are increasing the HBM capacity quite rapidly in order to meet the growing demand coming from AI, which also is now leading to some concerns about possible oversupply after 2024. And what is the company's position regarding this scenario?

[Woo-Hyun Kim, executive]

Thank you very much for your questions. Now in NAND, we are indeed starting to see the impact of supply reduction following intense production cuts with profitability starting to improve, thanks to higher ASPs from Q4 last year. And we expect the price rise to continue in 2024 with gradual recovery in demand and the industry staying in conservative production. And for the company, we will keep working to reduce costs by maintaining conservative investment and minimizing expenses this year. And for NAND, in particular, we see that it is fast becoming more capital-intensive due to the higher 3D stacking required, while demand growth coming from price elasticity is slowing, which means efficient investment is more important than ever before. And that's why for the company, optimizing investment and security profitability are our top priorities for NAND, and we will try to develop a structure that can ensure profitability even under market fluctuations. To that end, we will try to improve investment efficiency and boost ASP by strengthening our premium product lineup over the long term.

Let me now respond to your question about the HBM capacity. The AI market that we see now is in the early stage of building AI infrastructure to deploy AI devices and services. Now in this process, memory is critical in AI infrastructure as both the pain point and also the selling point in terms of optimizing system performance. And for AI models, continued server upgrades are expected for training purposes, followed by fine-tuning for each company and service as well as multimodal evolution. And some customers are utilizing high-performance servers for inference as well to ensure high-quality service latency. And given this, expansion of inference servers will also have a positive impact on HBM demand.

Now in 2024, the HBM market is still going to be driven by demand growth from large customers. But at the same time, we expect to see diversification in the sources of demand as the big tech companies compete for AI leadership and also CSPs develop their own projects that also require the adoption of HBM. Now on the supply side, unlike conventional memory, HBM has a nature that is similar to order-based business with capacity being determined in consultation and contract with customers at least 1 year in advance. And that means that we can remain cautious in investment and respond to supply in line with expected demand levels this year and beyond. Now with this continued growth in demand for HBM and the growth momentum for AI likely to continue, I must say that we don't see much cause of concern for oversupply.

[Operator]

The last question will be presented by Sei Cheol Lee from Citigroup.

[Sei Cheol Lee, analyst]

Now, this is also a 2-part question. First is on NAND. Now, we see that NAND profitability has improved quite a lot in Q4. So, what are the factors that enable this? And also, it was meant in the briefing, it was mentioned about the reversal in the inventory valuation loss. Could you also specify the size of the reversal? And the second question is more on the long-term strategic direction. Now, in the CES that was held in November this year, the company's President, Kwak, he has mentioned that the company will introduce a customized memory platform to provide customer-specific AI memory solutions in response to diversifying customer needs. Then why does the company believe that such diversification of memory products is occurring and also the need for customized memory. Why does the company believe that there is a need for this? And also what is the strategy for providing customized memory platform?

[Woo-Hyun Kim, executive]

Thank you for your questions. I would like to first respond to your question about the reasons behind the improved NAND profitability. Now first of all, NAND in the fourth quarter was driven by strong ASP growth Q-o-Q, thanks to price recovery driven by industry production cuts and improved customer demand as well as a shift away from lower-margin products and more towards premium products. And as NAND prices began to increase in Q4, there was a reversal in part of the inventory valuation loss based on LCM valuation, which was approximately KRW 400 billion, KRW 500 billion in Q4. With the prices expected to keep rising in the foreseeable future, the reversal of the inventory valuation loss is expected to have a positive impact on our business results this year.

Now, I would like to respond to your question about the customized memory platform. Now, I would first point to the advent of the AI era as the major driver of memory diversification and the proliferation of customized memory. Just as we couldn't have predicted how fast the HBM market would grow a few years ago, advancements in AI technology that we are seeing today are moving faster than anyone could have imagined and we expect to see memory products of all shapes and sizes emerge and grow in the coming years. And as AI systems continue to develop, their performance is increasingly dependent on memory performance and customers are actively requiring customized memory that is optimized for individual products and services.

The company is now focusing on HBM and high-capacity DDR5 modules for AI-oriented solutions. And we are preparing a diverse product lineup, including MCRDIMM, which is a high-performance server module and LPCAMM2, a low-power mobile module to meet the diversifying needs of our customers into the future. And for the mid- to long-term, development and preparation are already underway for next-generation products such as PIM and CXL, and we will keep active collaboration with our customers to secure the optimum memory solutions for their needs.

[Operator]

Thank you very much. With that, we conclude the earnings release conference call for SK hynix 2023, Q4. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]