Samsung Electronics Co Ltd

KRX:005930

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and good evening. Thank you all for joining this conference call. And now we will begin the conference of our Fiscal Year 2023 First Quarter Earnings Results by Samsung Electronics. This conference will start with the presentation followed by a divisional Q&A session. [Operator Instructions]

Now, we should commence the presentation on the fiscal year 2023 first quarter earnings results by Samsung Electronics.

[Ben Suh, Head of Investor Relations]

Welcome, everyone. This is Ben Suh, Head of Investor Relations. Thank you for joining Samsung Electronics’ first quarter 2023 earnings call. For additional details regarding our quarterly results, please refer to our earnings presentation, which has a new format and is available on our IR website at www.samsung.com/global/ir.

Joining me on the call today are EVP, Jaejune Kim, representing Memory; VP, Hyeokman Kwon, for System LSI; EVP, Gibong Jeong, for Foundry; EVP, Casey Choi, for Samsung Display Corp, which I will refer to as Display during today’s call; VP, Daniel Araujo, for Mobile eXperience; and VP, KL Rho, for Visual Display; and VP, Sang-Kyun Kim for Digital Appliances.

I want 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 are subject to certain risks and uncertainties that may cause our actual results to be materially different from those expressed in today's discussion.

I will start with the results for the first quarter of 2023. The business environment in the first quarter continued to deteriorate with overall consumer sentiment weakening due to rising concerns over an economic slowdown amid persistent global macro uncertainties and geopolitical issues.

As a result, our consolidated revenue for the quarter declined by 9.5% sequentially to KRW 63.7 trillion. Although, revenue for the Memory business and other component businesses declined considerably, due to the repercussions of decreased demand, the DX division increased revenue on the back of strong sales of new flagship smartphone models.

Our consolidated gross profit decreased by KRW 4.1 trillion sequentially to KRW 17.7 trillion, mainly due to the continued price decline and inventory valuation loss in memory. Gross margin also decreased by 3.2 percentage points to 27.8%.

SG&A expenses declined by KRW 0.4 trillion quarter-on-quarter to KRW 17.1 trillion, primarily due to reduced advertising and promotional spending. However, as a percentage of sales, they increased by 1.9 percentage points to 26.8% due to the decline in sales. R&D expenses exceeded last quarter's record amount and reached a new high as we continue to invest in the future.

Operating profit in the DX division increased, thanks to gains in the MX business, but operating profit declined significantly in our component businesses amid sluggish demand, causing our consolidated operating profit to fall KRW 3.7 trillion sequentially to KRW 0.6 trillion.

Operating margin also fell 5.1 percentage points to 1%. For the following results and outlook section, I will provide brief overviews for DS, Display and DX and includes specific business unit results only for those that are not covered in separate speeches.

The DS division in the first quarter, profits decreased considerably quarter-on-quarter due to an increased inventory valuation loss in memory, which newly included DRAM, a decline in utilization at foundry and continued overall impacts of weak demand and customer inventory adjustments.

For display, the mobile panel business recorded a decline in earnings amid a market contraction, the large panel business slightly narrowed its losses. The DX division delivered improved results, thanks to strong sales of premium S23 models and enhanced sales mix focusing on premium TVs and improved operational efficiency. The network business sites revenue decrease due to weakness in major overseas markets, such as North America and Southwest Asia. The Digital Appliances business reported similar earnings sequentially, amid still sluggish demand and continued cost burdens.

Regarding currency effects in the first quarter, the Korean won strengthened against the US dollar, Euro and most major emerging currencies. The relative weakness of the US dollar had the effect of a company-wide quarter-on-quarter operating profit reduction of approximately KRW 0.7 trillion centering on our component businesses, which are more sensitive to the US dollar.

Next, I would like to share our business outlook. In the second quarter, under expectations of continued weakness in demand, DS will remain committed to boosting our technological competitiveness, including the two-nanometer gate all around process, while meeting the demand for DDR5 and LPDDR5x and other high-end products.

For display in the seasonally weak second quarter, the mobile panel business will focus on preparing for second half demand. The large panel business is expected to increase its sales. DS will maintain solid profitability by expanding sales of A-Series smartphones and new TV models while fully preparing for strong seasonality of digital appliances and improving cost efficiencies.

Network will keep solidifying its business foundation, particularly in North America and Korea, as it explores new business opportunities. Digital appliances will focus on securing profitability by improving its sales structure and cost efficiency, while continuing the global expansion of bespoke products as we enter a seasonal up cycle.

The second half of 2023, there is a general expectation for market conditions to gradually recover amid projections for a rebound in global demand. Yes, we'll stay on top of the demand for high-capacity server and mobile products and continued to reinforce its leadership in differentiated technology, which includes preparing for next-generation flagship mobile SoCs and increasing orders for our leading GAA processes.

Display's mobile panel business will remain -- will maintain its unparalleled position in the high-end market based on its differentiated technology. And the large panel business will push to expand its presence in the premium market and improve profitability. DX will further solidify its leadership in the premium segment, which includes foldables and Neo QLED.

At the same time, it will increase its market share by cooperating with partners and enhance profitability by continuing to improve operational efficiency. Network will pursue revenue growth through its major overseas contracts by promptly addressing customer needs and winning new orders, all while reinforcing our technology leadership in 5G core chips and virtualized radio access networks.

The digital appliances will boost our product competitiveness via SmartThings, while pursuing growth by increasing sales of high-value products and further promoting package sales.

Now, moving on to capital expenditures. CapEx in the first quarter was KRW10.7 trillion with KRW9.8 trillion invested in the DS division and KRW0.3 trillion in Display.

Memory CapEx concentrated on facilities and Pem-Tech, which included completing P3 infrastructure and P4 framework progress for mid to long-term supply and also on equipment to prepare for advanced node demand.

In addition, we continued our R&D and back-end investments to further bolster future competitiveness. Foundry investments continue to focus on Taylor Texas and Pem-Tech to address the demand for advanced nodes, while display investments focused on infrastructure and module production enhancements.

Next, I would like to address the shareholder returns. Today, the Board of Directors approved a quarterly dividend of KRW361 per share for both common and preferred stocks. Based on the annual dividend payout under the current dividend policy, which applies until the end of this year, the total quarterly payout is KRW2.45 trillion and it will be paid in May.

Finally, I would like to share some of our key activities in sustainability management. First, by applying innovative technologies, we have continued our efforts to ensure that using our products and services contributes to a low-carbon and sustainable future.

As prime examples of our everyday sustainability, we increased the adoption of recycled materials in our products, especially in our latest Galaxy S23 phones. We have also enhanced the energy efficiency of the key components used in our large digital plant models, which contributed to 75% of our new models in Korea, achieving top energy efficiency ratings. And we have further enabled energy savings through the AI energy mode and our SmartThings Energy service.

Finally, following a successful release in Europe last year, we introduced the microplastic reduction cycle in the Korean market. The BESPOKE Grande AI model developed in collaboration with Patagonia, can reduce microplastic release by up to 60% compared to a regular cycle.

On another front, we announced Samsung's Global Human Rights Principles policy based on international standards such as the UN Guiding Principles on Business and Human Rights in February. This announcement was part of Samsung's ongoing efforts to respect and promote the labor and human rights of employees, Samsung Electronics and its partners in all aspects of our business.

The principles comprehensively encompass all of Samsung's pre-existing policies related to human rights, such as our child labor prohibition policy, antidiscrimination and harassment policy to name a few.

Meanwhile, Samsung Electronics ranked seventh in the 2023 digital inclusion benchmark as measured by the World Benchmarking Alliance, a global alliance for sustainability management. We achieved the highest ranking among Asian companies, garnering this special recognition for our efforts to support open source, the standardization in the industry and foster an ecosystem for tech start-ups.

Last but not least, the Alliance for Water Stewardship awarded our Hwaseong campus with certified Platinum status, the organization's highest certification level for water resource management. This is the first such recognition in Korea, and the award recognizes the outstanding Water Management System in our semiconductor sites. We will continue our efforts to enhance sustainability in all aspects of our business.

I will now turn the conference call over to the representatives from each business unit. To present first quarter performances and outlooks for their respective business segments in more detail.

We will start with EVP, Jaejune Kim of the Memory business. Thank you.

[Jaejune Kim, Executive Vice President, Memory]

Good morning. This is Jaejune Kim from Memory Global Sales and Marketing at Samsung Electronics. In the memory market over the first quarter, while the macroeconomic continued to slow down, and customer purchasing sentiment was weakened. Overall demand decreased as many customers continued inventory adjustments to improve their financial health.

As a result, our performance fell significantly compared to the previous quarter. If you look at each product in DRAM, while customer inventory is still at a high level for servers, the demand for servers was sluggish with inventory adjustments by customers are mainly hyperscalers affected by shrinking IT spending of many enterprises under economic uncertainties.

Mobile and PC applications, although customer inventories of finished goods in distribution channel are relatively improved. The demand situation was sluggish with purchasing delays and set few deductions as consumer sentiment has not recovered yet. Under this market environment, we preemptively expanded to demand for high-density mobile products, which was boosted by strong sales of new smartphones by major mobile customers.

As for server applications, while customers continue to adjust their component inventories, we focus on capturing DDR5 server demand in line with the adoption of new CPUs. As a result, the price fell less than the market forecast due to our focusing on selling high value-added ease of products, but our big growth couldn't meet the previous guidance.

Next, I will talk about NAND market. The slowdown in demand for server and storage applications has been more clearly observed compared to the other applications. And as I previously mentioned for DRAM, our analysis revealed that the demand sluggishness is linked with reduced enterprise IT spending. Actually, in addition to this, server SSD demand showed a further contraction due to customer inventory adjustment.

For mobile and client SSD, the demand continued to remain sluggish as well. Because the sell-out recovery was not visible, as overall consumer sentiment has not recovered yet despite China’s reopening.

In spite of this weak demand, we actively responded to the trends toward the high-density across overall applications, such as, i.e., storage of 512 gigabyte and above for our major mobile consumers and client SSDs over 1 terabyte and above for PC OEMs. As a result, our bit growth exceeded instead of previous guidance.

Moving on to the outlook for the second quarter. First of all, let me tell you about the market by applications. As major hyperscalers are conservatively investing in servers and customers are continuing to adjust inventories, demand recovery is expected to be continuously limited following the first quarter.

For mobile and PC, consumer inventories for component and finished goods are expect to be healthy, but consumer sentiment trends seems to be important variables for set demand due to macroeconomic conditions. That includes China’s reopening and the follow-up economic stimulus packages. On the other hand, the transition trend to high-density products are based on price elasticity, is expected to continue.

In DRAM case, in order to align with this market situation, we will timely respond to the increasing demand for DDR5 and high-density modules led by the launch of new CPUs for servers and increased demand for AI. And we will also actively respond to LPDDR5x demand for mobile high-end products, such as new competitor smartphones.

For NAND, based on our cost competitiveness, we plan to actively address demand for high-density products across all applications, while responding to customers' need for high-density storages by creating a mobile QLC market and diversifying product portfolios.

Moreover, as we announced in our preliminary first quarter result, we have already started rolling down our productions. Therefore, our inventory levels are expected to start to decline from the second quarter, and such reduction is expected to expand in the second half.

Now, let me tell you about the outlook for the second half of the year. Demand is expected to gradually recover in the second half of this year, as customer inventory levels will have declined due to inventory adjustment that have been occurring since last year. This demand recovery is expected to begin with consumer products such as mobile and PC, for which inventory or the just month by customer began earlier than they need for commercial applications such as software and studies. First of all, for mobile and PC, we finished good inventory level decreasing in completion rate of first half, safety is expected to improve with the launch of new smartphone and PC promotion in the second half of the year.

In addition, the trends toward high density based on overall price electricity is expected to continue. Thus, we are expecting to see our demand pattern over weak in the first half and strong in the second half. For server, the timing of demand recovery may be later than for server and mobile since customers' inventory orders started relatively late.

However, proportion of DDR5 is expected to increase due to the expansion of new CPU reduction and content per box will continue to grow as the transition to high core CPUs will accelerate. Demand will continue to recover in the second half of the year, but it is expected to grow mainly with the new memory products. Due to factors such as CPU platform convergence scheduled for the second half of the year and customer inventory adjustment plan.

Therefore, we are lowering is a production mainly for [indiscernible] products for which demand is expected to be relatively sluggish, while responding to the market with an increased portion of cutting-edge nodes and higher value-added products.

From a product standpoint, for DRAM, we plan to accelerate the conversion of cutting-edge node for DDR5 and LPDDR5x and actively respond to the strong market demand for HBM and enterprise. For NAND, we are going to strengthen supply operations, focusing on products which customers need by creating our mobile creation market and expanding the portion of cutting-edge nodes such as 37 and 38.

Under these trends, we will maintain a similar available CapEx compared to last year and continue to expand the infrastructure and R&D portion of investment to secure mid- to long-term competitiveness.

Thank you.

[Hyeokman Kwon, Vice President, System LSI]

Good morning. This is Hyeokman Kwon from System LSI business. In the first quarter, [indiscernible], the demand for SOC, sensors and DDI dropped sharply due to sluggish demand for the major applications such as wire and cable resulting in a sharp drop in sales. However, from mobile SOC, volume zones sales increased with the launch of a new volume zone product and in order to expand the new application, we launched UWB-based short range wireless communication semiconductor product called U100.

In addition, we have solidified our technological leadership by supplying various 200 million sensors to major global customers at home and abroad. In the second quarter, even though the overall demand continues, customers' inventory reductions are showing further products as sensors and DDIs and inventory accumulation is expected in preparation peak season in Q3. As a result, earnings are expected to improve slightly Q-o-Q.

In addition, to strengthen the GPU competitiveness of mobile resources, we will expand our switch partnership with AMD in the Grid Peak IP period and we are in the final stage of commercializing and communication modem.

For second half, [Indiscernible] related customers inventory is exhausted and starting with the vitalization of the Chinese domestic market, overall mobile demand is expected to recover. As the market is expected to recover in the second half of the year, we will make sure that there is no problem with the supply of parts.

In addition, we are planning to enter partnerships that we wanted to strengthen the product business competitiveness of wireless SoC business. And we also expect to expand our business area and so customize the plan to commercialize the fingerprint authentication based credit card with more enhanced security. Thank you.

[Gibong Jeong, Executive Vice President, Foundry]

Good morning and good evening. This is Gibong Jeong from the Foundry business unit. In the first quarter, demand has contracted due to the global economic downturn caused by macro uncertainties. Impacts included high inventory levels and major fabless companies and set makers, the ensuing drop in orders resulted in revenue decline.

Meanwhile, we are mass producing the first-generation 3-nanometer process using GAA, Gate All Around technology, leading semiconductor device technology currently in production, with yields remaining stable into and throughout the quarter.

And based on our experience with the first generation, we are making solid progress in the development of the second-generation process to secure even greater mass production capabilities.

In addition, we focused on securing new orders from major customers who need high-performance, low-power characteristics in mobile and HPC applications, aiming for mass production in year 2024.

Moreover, by completing the development of the advanced package with 12 stacks of HBM memories, we have secured the foundation to support server products for generative AI segment.

In the segment in the second quarter, we expect revenue to improve quarter-on-quarter basis as set makers' inventories recover to normal levels and customer demand recovers.

In the second half of this year, the market is expected to recover around the HPC sector and the automotive sector, which requires advanced process technologies. We expect our revenue to rebound following our investment strategy, focusing on the advanced nodes.

Based on the stable development of the second generation, 3-nano GAA, we will expand our customer base through active communication with customers and strengthen our technical leadership by smoothly proceeding with the development of the next-generation 2-nanometer technology.

Lastly, we will lay the foundation for sustainable growth by evolving specialty and mature processes, so that we can expand to various applications, such as mobile, HPC, automotive, and IoT. Thank you.

[Casey Choi, Executive Vice President, Samsung Display Corp]

Good morning. I'm Casey Choi from the Cooperative Strategy team at Samsung Display. Even in the face of unfavorable market conditions, we continue to generate stable results in the high-end smartphone business based on our differentiated technology performance and IP superiority.

I will now brief you on our results for the first quarter of 2023. For the mobile display business, even though market demands continue to contract due to persistent inflation and high interest rates, we fortified our market leadership thanks to the robust sales of flagship products with differentiated features and expansion of foldable model.

For the large display business, we solidify our position in the premium market on the back of the full-fledged launch of new QD OLED products by our major customers and diversification of product size and other specifications.

Next, let me share the outlook for the second quarter of 2023. We expect results to contract year-on-year due to the global economic slowdown, excavating seasonal effects, but we will maintain our dominant position in the high-end market based on the stellar technology and the performance of our products.

At the same time, building on our unrivaled product quality, we plan to maximize sales by delivering on our customers' needs and expanding the adoption of OLED panels in their mid-end lineups and by accommodating our mass production of new products in the second half.

For the large display business, we expect to see a slow recovery in demand due to the economic slowdown and effects of the pandemic, but sales should grow as new products for 2023 roll out in earnest.

Finally, I'll share our outlook for the display market and our strategy for the second half. Concerns over market uncertainties and the economic downturn co-exist with the hopes for the potential demand recovery, based on anticipation of improving market condition in China, prompted by its potential stimulus program in the second half. We will maintain our leading market position by leveraging our differentiated technology in our customers' new offerings, and ramp up sales by enhancing the performance of foldable products in the relatively solid market for high-end smart phones.

For large panels, demand is likely to be soft due to prolonged economic uncertainties. However, we will further strengthen our presence in the premium market by offering a wide range of size and supplying rollouts in an increasing number of countries and diversifying our customer base.

Despite uncertainties surrounding future markets, we believe it's an optimal time to prepare for the future and will invest in 8.6-generation OLED. With this investment, starting this year, we'll strive to scale up the OLED market by steadfastly increasing the share of OLED panels in the laptop, tablet, and automotive markets, and eventually recreate the success we have achieved in the smartphone market. Thank you.

[Daniel Araujo, Vice President, Mobile eXperience]

Hi, everyone. This is Daniel Araujo from the Mobile eXperience division. I'd like to share our results for 2023 Q1 and outlook for Q2 and the second half. The macro environment remain uncertain throughout the first quarter of 2023. And in the smartphone market, overall demand weakened, but the premium market grew in terms of both volume and value compared to one year ago.

Despite the market contraction, our sales increased quarter-on-quarter and our profitability recovered reaching double digits. The S23 series launched in Q1 achieved strong sales, led by improved product competitiveness. Overall sales growth was driven by the large S23 Ultra portion of sales and marketing that centered on models with high storage capacity.

Our efforts to enhance operational efficiencies throughout R&D, manufacturing and logistics, led to a major boost in operating profits from flagship devices, Series A and tablets, which contributed to the strong first quarter performance.

Next, let me share the Q2 outlook. For smartphone, we expect demand to recover in the low to mid segment, and the overall market should increase slightly in volume, but declined in value compared to Q1.

In the MX business, we will continue to generate steady sales of the S23 series, which has been well received by the market and re-boost marketing of foldables to continue sales of current models and drive awareness of the upcoming launches of new models in the second half.

As for the A Series, we will actively address recovery mass market demand by propelling the new A54 and A34 into global mega-hit models by delivering a stronger premium experience through upgrades to key specs and the application of the Galaxy design identity.

In Q2, we will drive sales expansion with flagship devices and mid to high A Series models with contributions also expected from our ongoing efforts regarding efficient management of region-specific product lineups, our upselling strategy and a variety of sell-out programs. Moreover, we aim to maintain double-digit profitability, thanks to additional gains in operational efficiency.

Next is the outlook for the second half of 2023. In the second half, we expect to see signs of a global economic recovery, including an easing of inflation. The smartphone market is forecast to witness increases in both volume and value, especially in the premium market, alongside the recovery of purchasing power. We expect the tablet and wearable markets to stay mostly flat due to difficult compares following significant growth during the pandemic.

The MX business will unveil new foldable models that offer even further differentiated and refined user experiences. Our close collaboration with partners is a strength and we will use that strength to boost sales right from launch to further fortify our leadership in the global foldable smartphone market.

For the S23 Series, we will continue sales in the second half by sustaining our marketing campaigns and actively responding to regional seasonality. With the A Series, we will expand our overall share of the smartphone market by collaborating closely with our partners and actively implementing sales programs tailored to our customers by region.

We will strengthen the product competitiveness of our tablets and wearables and highlight our premium ecosystem experience via a joint Unpacked event in order to continue to outpace the market.

In sum, we aim to achieve annual revenue growth in 2023 and secure solid profitability by improving our product mix and enhancing operational efficiencies.

Thank you.

[KL Rho, Vice President, Visual Display]

Good morning. This is KL Rho from the sales and marketing team of Visual Display. First, I would like to review the market conditions and our performance in the first quarter of 2023. TV market demand contracted both quarter-on-quarter and year-on-year as we exited and the peak seasonality and help continued effect of global economic downturn. For Samsung, we improved our profitability quarter-on-quarter and year-on-year by focusing on sales of differentiated high value-added products to enhance our leadership in the premium market and by reducing overall cost.

Now, let us look at the outlook for second quarter and second half of 2020. In the second quarter, we expect negative growth in the TV market to decelerate, while demand for premium products such as QLED and ultra large screen model is expected to keep growing. Samsung will focus on improving profitability by expanding sales strategic products with a differentiated launch of new model over 2023, while also strengthening each area of operation management.

Regarding the TV market in the second half, demand is expected to recover gradually with the LIBOR of peak seasonality, but we expect competition to intensify with the continued uncertainties in the external environment. We will actively capture peak season demand by strengthening our differentiated promotional activities centering on strategic products such as Neo QLED, OLED and also targeting consumer needs, utilizing our differentiated life tire screens.

In addition, we will secure a new growth engine by continuously diversifying sales channels and continue to lease the TV market by expanding the 9 and 8 inches [ph] superlarge screen and micro LED lineups.

Thank you.

[Ben Suh, Head of Investor Relations]

Thank you for the presentations. That sums up the first quarter results presentation. Before we move on to the Q&A session, I would like to share several data points in key business areas. Considering the continuing macro uncertainties, we will not be providing annual guidance at this time. Comparative figures are on a sequential basis for quarterly data.

For DRAM, in the first quarter, our bit growth decreased by a percentage just into the double digits, and ASP decline by a percentage in the low to mid-teens. For the second quarter of this year, we expect market bit growth to increase by a low double-digit percentage, and our EBIT growth should be similar to the market.

For NAND, in the first quarter, our bit growth increased by a low single-digit percentage, while ASP fell by a percentage in the high teens. For the second quarter, we expect market bit growth to be in the mid-single-digit range and our bit growth should be similar. For display in the first quarter, the small panel portion of revenue was a percentage in the high 90% range. And a small panel sales volume decreased by a percentage in the mid-20s.

For MX in the January quarter, sales volumes of smartphones and tablets were approximately 60 million units and 7 million units, respectively, and smartphone ASP was $325. In the second quarter, we expect to see declines in shipments of smartphones and tablets as well as in smartphone ASP.

For TVs in the first quarter, sales volume of TVs decreased by a percentage in the low to mid-teens. And for the current quarter, we expected to contract by a percentage in the high single-digits.

Now, I will move on to the Q&A session. First, we will start taking questions from the conference call.

[Operator]

[Foreign language]

[Operator instructions] The first question will be presented by Sung-kyu Kim from Daiwa Capital Market. Please go ahead with your question.

[Sung-kyu Kim, Daiwa Capital Market]

[Foreign language]

My first question is about the Memory division. In the first quarter, your DS division recorded an overall loss and it appears that the Memory business is accounting for a large share of this loss. In that context, can you give us some more details behind the poor performance of the Memory business this quarter in the first quarter?

Second question is about the Digital Appliance business, still in the first quarter, the Digital Appliance business performance relatively is still disappointing. Can you explain the reason why the poor performance is continuing? And can you give us some outlook on your second quarter bottom-line?

[Jaejune Kim, Executive Vice President, Memory]

[Foreign language]

I'll enter the question about the Memory business first quarter results. In the first quarter, as you mentioned, our results of the Memory business decreased significantly due to demand weakness -- memory demand weakness continuing and that also being coupled with additional fall in prices.

To give you a bit more detail, many companies facing macroeconomic uncertainties have been operating conservative investment stands and this has resulted in a reduction in IT spending overall. So we have seen a slowdown of demand especially around servers and storage. Also, customers have been continuing to adjust their inventory to improve their financial conditions. This has lead to a decrease in purchasing demand and this has driven to an additional price decline versus the previous quarter.

Price changes are an item that has a direct impact on earnings and so during the first quarter, the additional price decline had a direct impact on our profitability as well. Another factor in our first quarter results is the inventory valuation loss. Actually, in Q4, the inventory valuation loss started to kick in from the NAND product, but with the additional price decline recently in DRAM, there was a larger inventory valuation loss recognized this quarter, and that had an additional impact on our performance

The second question was about the details behind the performance of the digital appliance business. During the first quarter, the revenue of the digital appliance business decreased on a year-on-year basis, as we saw a decrease in global digital appliance market demand and also impact of inflation. Also, on the cost side, there was an increase of fixed cost nature costs that were for example, logistics infrastructure that had been executed in response to the supply chain issues we saw in 2022. Also, there was an impact of global inflation on our labor and utility expenses, so overall expenses increased also on a year-over-year basis.

On the material cost side, while material cost did improve versus last year, the raw market – a certain raw material such steel, plates, or resins performing agents have actually been seeing strong demand and so the amount of decreased – the degree of decease in material cost has not been as large as we had expected.

Now looking toward the second quarter, what we expect in terms of our bottom line is that, we expect our revenue to be similar in second quarter to what we saw last year, and that our profitability, our bottom line would also improve in the second quarter. That said, we are still watching some downside factors.

For example, there is still risk of our performance being below what we expect if the market contracts or inflation continues. Also, we think that there's a risk of possible increase of material costs versus the first quarter, given the fact that the raw material market turnaround came faster than expected.

[Operator]

[Foreign language] The next question will be presented by Ricky Seo from HSBC. Please go ahead with your question.

[Ricky Seo, HSBC]

[Foreign language] I'll ask two questions. The first question is about the foundry. During your presentation, you mentioned about plans of the second-generation development of the 3-nano node. Can you give us a bit more detail of your plans of developing the cutting-edge nodes and also the roadmap for mass production? Also, can you give us an update on your customer order situation? Can you give us a bit more update on how new customers are being engaged?

Second question is regarding the US CHIPS Act that was announced. I think there is growing concern in the market of this bringing also increased risk given the detailed requirements such as upside sharing or the requirement to share technology information and the guardrail system. Given this, can you share the company's plans on how to -- how the company plans to respond to the CHIPS Act.

[Gibong Jeong, Executive Vice President, Foundry]

[Foreign language] I would like to answer your first question by starting with a description of the key features of our 3-nano node. Samsung foundry was the first in the world last year to adopt the GAA architecture through the MBC fab.

MBCFET stands for Multi-Bridge-Channel. And we did this because of the tradition of Samsung Foundry of emphasizing customer satisfaction and technology leadership. You've also asked about the customer order updates and engagements. Our orders for the cutting-edge advanced nodes are mainly being consisted of mobile as well as HPC customers. And that is because we are the company that offers the only renal product with GAA. We are currently running the 3 nano promotion and some of the customers have been creating test chips. We're also developing the 2 nano with mass production targeted 2025. And our goal is to stay ahead of the competition and to maintain our technology leadership in 2025. Thank you.

Your second question about the US chips actually cover several business units and, therefore, will be addressed by the IR team. The chipset took effect with the signature of President Biden last August. Since then, there was following announcements of detailed rules in February and also the detailed card rail rules announced in March. And they include several obligation clauses tied to the incentives offered under the Chipset.

You've asked about the market being concerned of these requirements and applications being tied to the incentives offered, the US government regarding that has expressed that it will collect opinions and feedback from the industry and also carry out negotiations with individual companies to iron out the details of such obligation clauses and we, Samsung also plans to participate in such procedures. Also, the company currently is studying various possibilities and scenarios and we'll continue to work on minimizing the geopolitical risk on our business.

[Operator]

[Foreign language] Your next question will be presented by Nicolas Gaudois from UBS. Please go ahead with your question.

[Nicolas Gaudois, UBS]

Good morning and thanks for taking my questions. The first one relates to memory. Could you provide more color and context on the memory production cuts you have announced earlier this month, how sizable is of a production cuts that you ultimately plan to do and for which products?

And secondly, it is well understood that this year, your flagship smartphone models, including the Galaxy S23 are solely using Qualcomm System solutions. Should we expect the Exynos to come back in 2024, starting with Galaxy S24? And also, could you please elaborate more broadly on the overall Exynos strategy going forward? Thank you.

[Foreign language]

[Jaejune Kim, Executive Vice President, Memory]

[Foreign language]

First, to answer your question about the memory production cut. As you know, in terms of operating our memory production, our focus has been on maintaining stable supply capabilities of the products that the customers want from a mid to long-term perspective rather than a near-term perspective. And we have been operating our production in order to secure sufficient inventory availability to respond to future demand.

Now, the rationale behind our production approach has been because while on the demand side, mid to long-term demand is expected to be solid, given the growth of several markets such as automotive applications and also the expected growth of the data-driven computing such as AI or ML.

On the production side, we do see big growth restrictions given the fact that there is a die-sized penalty as part of the switch towards the new interface products. Also, there is growing difficulty with the advanced nodes in terms of technology and also increased production lead-times.

That said, we were looking into our production by product lineup and found -- determined that in certain products, we have already secured sufficient volume to supply and meet customer demand changes and therefore, decided to lower production in these products.

Therefore, the lowering of production that has been announced, what we mean is being carried out mainly around the legacy products that we have already secured sufficient volume to meet mid to long-term demand and this comes on top of the line optimization that already started in Q1, and so we expect the size of the reduction to be far more meaningful.

And we expect our inventory levels to start to decrease from Q2. Also going forward, in the second half, we will continue to monitor the market demand and operate our production flexibly. And so we expect our inventory normalization speed to accelerate in the second half.

Now to be clear, many outside research firms are forecasting that as customers complete their inventory adjustments during the first half, demand will gradually start to recover from the second half and based on such outlook, we will maintain our advanced new production without any adjustments given that the advanced new products will be leading the demand growth.

And going forward, we will continue to flexibly adjust our business strategy based on mid-to long-term demand and also continuous sensing of our -- continuous sensing of mid to long-term demand and also our supply ability.

[Hyeokman Kwon, Vice President, System LSI]

[Foreign language] Your second question was about the System LSI Exynos business. As you know, the MX business is a major customer of the system LSI, and our goal is to develop our business with a full lineup that can be applied in all of the Galaxy series segments, and we are currently pursuing reentry to the flagship segment.

[Foreign language] Now that said, growth rate of the mobile market as a whole is on an decreasing trend, and we do see the need for us to be prepared for that. And so, while in the short term, while we focus on building the SoC competitiveness for mobile SoCs, at the same time, we are focusing on expanding our non-mobile business, including automotive SoC.

And also to enhance our ability to rapidly respond to the market changes from a mid to long-term perspective, we are also continuing to focus our efforts on the market research and business feasibility studies in order to develop new business areas.

[Operator]

[Foreign Language] The next question will be presented by Peter Lee from Citigroup. Please go ahead with your question.

[Peter Lee, Citigroup]

[Foreign Language] My first question is about the Memory business. You have announced plans of reducing your production, but also you've announced that you plan to maintain your CapEx to a similar scale as previous years. Can you give us a bit more detail behind why your CapEx would still remain similar, even though your production would be reduced?

Second question is about the MX division. Actually, you have come in with better profit results than the market expected in the first quarter. Can you give us a bit more detail behind that and also your plans of how to expand your profitability in the second quarter?

[Jaejune Kim, Executive Vice President, Memory]

[Foreign Language] To answer your question, this year, we plan to maintain investments similar to the previous year. The reason why we have decided to maintain CapEx at similar levels as previous years is, because our key goal of the business is to maintain sustainable market leadership by strengthening our future competitiveness rather than operating based on a near-term strategy.

And therefore, based on that business goal, despite our decision to lower our production, we are going to maintain CapEx at level similar to last year, because we believe it is necessary for us to concentrate our investment capabilities preemptively from now in order to secure future competitiveness.

The semiconductor business by nature requires consistent large-scale fab investment. Also, it takes quite a long time for the fab to go into mass production since the start of the investment itself. Therefore, given the fact that mid- to long-term demand is expected to be solid, in the future, in order to have the supply ability, stable supply ability to capture that solid demand in the mid to long term, we need to make the infrastructure investments that have longer lead times ahead of that from a mid to long-term perspective. That's why we plan to continue our infrastructure investments for the Contech [ph] Phase 3 and 4 lines in order to secure the necessary essential clean rooms that will give us the ability to timely respond to the growth of the mid to long-term demand.

Also in addition to that, we are planning to increase the share of R&D investments, as the memory nodes become -- are further scaling, as we approach the cutting edge nodes, the difficulty of development is increasing rapidly. And given the situation, we believe that we need to increase the investments preemptively from the R&D phase in order to strengthen our quality and also develop our cutting-edge products timely. And this will be another way to enhance our competitive edge in responding to mid to long-term supply.

So in sum, while we have lowered our production in the short term, we will continue to thoroughly prepare for mid to long-term demand by continuing to make infrastructure investments to secure the necessary essential clean rooms. And also, we will be increasing the share of R&D investment that will strengthen our technology leadership. Now that said, we do recognize that there will be some impact of geopolitical issues and the macro economy on demand for some time. And therefore, in terms

of equipment investments, we will execute that flexibly by carefully watching the industry situation.

[Daniel Araujo, Vice President, Mobile eXperience]

I'll take a question on MX. So, in Q1, year-on-year declines in market demand, mainly concentrated in the mass market segment were attributable to rising global interest rates and adverse economic indicators. But demand in the premium segment remained solid with slight growth.

Our total smartphone shipments in Q1 decreased Y-o-Y, but grew quarter-on-quarter, and our revenue held up well compared to the market decline, thanks to a higher proportion of premium products and increased ASP, owing to flagship-oriented sales, especially the 23 series.

The S23 series achieved higher sales in Q1 compared to its predecessor series with favorable reviews from the market for the improved Nightography Camera, gaming performance, and sustainability factors, all boosted by our Share the Epic campaign. And within the S23 series, the S23 Ultra portion of sales increased, and we continue to upsell by strengthening communication around our high storage models.

Regarding profitability, we secured a double-digit operating profit margin through continued efforts on increasing operational efficiencies throughout the whole R&D manufacturing and logistics processes. Tablets and wearables also contributed to the improved overall profitability in Q1 with continued solid sales and operations streamlining, even though no new product was launched.

In Q2, we will continue to proactively address the premium and mass market segments with sufficient product lineup operations in each geography and our upselling strategy together with continued optimization and efficiencies, we are aiming to maintain double-digit profitability.

[Foreign language]

[Peter Lee, Citigroup]

[Foreign language]

[Operator]

[Foreign language]

The next question will be presented by JJ Park from JPMorgan. Please go ahead with your question.

[JJ Park, JPMorgan]

[Foreign Language] I have two questions. The first question is about the DDR5 demand. Can you give us a bit more update on the DDR5 especially? Have you seen an uptick on demand since the release of Sapphire Rapids? Second question is about the OLED 8.6-G line, you've mentioned the investment into this during your presentation. When would be mass production from this line? And how much capacity are you planning. Also, I think that, I'm wondering whether there will be some overlap in terms of product coverage by this line and your existing lines for TV. So this new 8.6-G investment that you're planning, would it only be addressing IT applications? Or would it also cover TVs?

[Casey Choi, Executive Vice President, Samsung Display Corp]

[Foreign language] Regarding your question about DDR5 demand, there is a bit of uncertainty still around DDR5 demand given that customers plans of adopting the new CPU platform that supports DDR5 is still fluid. As of now, we are seeing a low 20% growth. We are seeing growth of DDR5 demand. So as of now of the entire demand for deep DRAMs, that's for PCs as well as server DRAM, DDR5 share has come up to around low 20% as of second quarter, which is in line with original expectations.

Now this switch to DDR5 does come with inherent production reduction because of the chip size penalty. But on the demand side, because it's a new product, there is still a low initial market inventory, and we expect there to be an increase – additional increase in demand in the second half.

And in line with this expected growth of DDR5 demand, we are planning to accelerate the node migration for DDR5 products to further enhance our product competitiveness.

Your second question was about the 8.6G OLED investment. I would like to give you a bit more background to why we decided this investment before answering your questions about specific schedule, mass production schedules or how this will work with our existing QD-OLED TV capacity.

In the case of OLED for IT products, as people spend more time consuming content on IT products and also as they do more work that requires higher picture quality, there is a rapid demand growth. And even the OEMs are continuing to adopt OLEDs more on their IT products as a differentiating feature.

Also, it's that users are demanding for similar picture quality as they are used to on their smartphone. They want to see the same picture quality on their IT products. Given this expected demand growth, we have been developing for several years of production -- mass production technology that has cost competitiveness.

We have been working for several years on developing, for example, the large size substrate technology, low-cost technology, eco-friendly technology and oxide technology to do this. And we have decided to make this investment, believing that we have reached a certain level of mature technology.

You've also asked about details of time line. And given that this is the technology is -- we are the first to try this technology first time in the world, rather than setting a fixed milestones in terms of future time line, we are estimating considering the level of technology we have developed that we will be able to operate this line on a full-fledged scale within a two to three-year time line from investment.

In terms of capacity, the product that we will be producing in terms of size is roughly around two times the size of a 6G glass. So in terms of capacity, we are expecting that we will be able to produce volume that would be corresponding to around 10 million notebooks or tablet, PC laptops or tablets, PC OLEDs a year. We also are planning to make our production cost competitive on the 8.6G line versus our existing 6G production line. We have learned from our smartphone experience at such preemptive investments give us the advantage over competitors by allowing us to -- by allowing us to get the head start in terms of completing the core supply chain management and also gaining the know-how of materials and development. And so in addition to the smartphones by making this both investment, we will focus on successfully expanding the OLED to other applications, including IT products.

Operator: [Foreign language] The last question will be presented by Dong-Won Kim from KB Securities. Please go ahead with your question.

[Dong-Won Kim, KB Securities]

[Foreign language] My first question is about the Memory business. In terms of technology competitiveness, what kind of preparations are you making? Where are you focusing on in terms of technology competitiveness? And what are you preparing for the next-generation memory technology? Second question is about the display business. Recently, Samsung announced an MOU with a European OEM, and there is growing interest into the displays automotive business. Can you give us some update and future outlook on your automotive display business?

[Jaejune Kim, Executive Vice President, Memory]

[Foreign language] To answer your question about our technology competitiveness, as you know, we have continued to strengthen our competitiveness around the cutting-edge nodes. And in the case of DRAM, the focus has been on preparing for the mass production of D1b products based on our EUV know-how and that preparation for mass production is almost at the completion phase. And so we are planning this year to go to mass production within the year with the D1b based 32-gigabit DDR5 product to lead the industry.

On the NAND side, we have -- we -- our schedule is to complete preparations for mass production for the 8th generation V8 node for not only 1 terabit, but also the 5, 12 gigabit within the second quarter, and that will give us the condition to -- we will be prepared, therefore, to address not only the performance, but also the value markets within second quarter. Also on the solutions side, we have prepared the full lineup for the enterprise as well as the data center server PCIe Gen 5, and we were the first in the industry to do so.

Now, regarding future markets, we're all continuing to make the necessary technological preparations to capture future markets. As you know, recently, the generative AI has become the very hot topic in the IT industry. And as a part of this, we are seeing an increased demand, especially around the high-performance and high-density DRAM.

And so given this trend in order to provide the best performance and highest-density products on time and in line with the AI market needs and technology trends, we have already supplied the HBM2 and HBM2E products to customers. And we're currently delivering samples for the ultra-low power HBM3 8-layer and 16 gigabytes and the 12-layer 24 gigabytes and have already completed mass production.

And the HBM3 will be followed in the second half with the HBM3P product, which is the next-generation that offers higher performance and density that the market is demanding.

Now there's also -- with the generative AI server, there is a need for the high-density TSV modules. And regarding the TSV modules, by using our high-density product that uses the cutting-edge node technology, we are planning to strengthen our competitiveness of high-density products for servers that 128 gigabytes and above.

Another area that we are looking at with quite a lot of interest is the CXL Memory, with the data processing volume expected to rapidly increase going forward. There is a growing need for CXL memory that has higher density and larger bandwidth as the industry starts to adopt this aggregated computing architectures. In fact, starting from this year, we are seeing increasing sample inquiries from customers for CXL products and overall growing interest in the market.

And as market interest in CXL increased, we have already completed development of the 512 gigabyte CXL DRAM last year, first in the industry. And also are currently preparing a lineup of CXL products based on CXL 2.0 across different densities. We're also currently developing an SSD based on CXL. And so this is an example of how we continue to diversify our memory solutions in – according to customer demand. And we will continue to focus on enhancing our technology competitiveness to respond to future market opportunities.

Your second question was about the automotive OLED, the display business. As you know, recently, with the increase of electric vehicles, EVs, there is a rapidly increasing adoption of OLED panels on the vehicle itself.

Also, with the increased penetration of EVs, the vehicle itself is changing from a means of mobility to a smart space where the passengers can enjoy entertainment. Also, the most recent vehicle designs are adopting end-to-end full size displays and the display itself is becoming a more important part of the vehicle interior.

Regarding our plans of developing the automotive display business, we are planning to pursue that by leveraging the technology we have already secured by our smartphone display business. We're currently in active communication with key global automotive OEMs, including those in Europe, US, China and Japan.

And we are planning to actively promote the technologies that we have already developed and have been proven in the smartphones on auto applications. For example, this will be whole displays or under panel cameras and other technologies that have been adopted in the foldable displays.

The automotive industry, we believe, emphasizes stable supply, given that an auto project is a very long-term business. And in terms of such stable supply capabilities and sustainable business ability, we believe that we have an advantage compared to competitors.

For example, we have the largest OLED capacity in the world and have very stable financial strength, and this is an advantage compared to competitors. And by leveraging the advantages and strengths that we have, that I've just described, we plan on securing firm market leadership in automotive area by increasing the adoption of OLEDs in automobile.

[Ben Suh, Head of Investor Relations]

[Foreign Language] Finally, we will answer questions that were submitted online in advance. We have been accepting questions via our web page in advance of an earnings release as part of our efforts to strengthen communication with individual investors and enhanced understanding of the company. And we have received a wide variety of questions for this quarter. I believe the majority of the submitted questions were sufficiently answered during the Q&A session.

So we will answer one more question on a topic that garnered a high level of interest from our shareholders, but was not addressed during the Q&A session. And that question is the following. What are the major ways to strengthen competitiveness such as raising the company's hardware specifications to cope with the mid to low-priced market? Please explain a major strategy such as price and marketing to boost demand. And this will be answered by VP Daniel Araujo, representing the mobile experience.

[Daniel Araujo, Vice President, Mobile eXperience]

Sure. So we're strengthening our product competitiveness in several ways that consumers will really be able to feel, including raising the hardware specifications of the A Series and expanding our premium software experience and design. We're upgrading the AP and all models, which is core to the smartphone experience. We are also upgrading the camera and display by model, especially for the 5G which has a big pixel camera sensor that's usually deployed in our flagships, which enables a high-quality and low light camera experience. We're strengthening the Galaxy's core software experience which is based on One UI 5 and the Galaxy Design identity is being applied to all models of the 2023 A Series.

In Q2, in particular, we respond to the market and traction by focusing on the new 854 and 834, which can become agents with their improved product experience and in upselling strategy centered on high-capacity storage. We'll also collaborate more closely with local mobile carriers to highlight the fast 5G connectivity of the A Series for our customers, focused scenarios where the 5G conversion rate is high, like Europe, Southeast Asia, Southwest Asia and Latin America.

In terms of marketing, we're running our awesome campaign to communicate in the fund and intuitively to MC consumers about core experiences like our large displays, high-end cameras, high-capacity batteries, waterproofing and dust proofing, security and OS upgrade support. We will continue to reduce the purchase burden on consumers, while also boosting demand by setting competitive retail prices and operating purchase support programs like Samsung trading and student offers tailored to each model and region and considering exchange rate effects and the local situation.

[Foreign Language]

[Ben Suh, Head of Investor Relations]

[Foreign Language]

I would like to thank everyone who share their valuable opinion, and we will be sure to refer to them in our decision-making process. That completes our conference call for this quarter. We wish you and those close to you, stay strong and in good health. Thank you.