Samsung Electronics Co Ltd

KRX:005930

Earnings Call Transcript 2022-Q2

[Operator]

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2022 Second Quarter Earnings Results by Samsung Electronics. [Operator Instructions].

Now we shall commence the presentation on the fiscal year 2022 second quarter earnings results by Samsung Electronics.

[Ben Suh, SVP, IR]

Welcome, everyone. This is Ben Suh from Investor Relations. Thank you for joining our second quarter 2022 earnings call. For additional details regarding our quarterly results, please refer to our earnings presentation, which is available on our IR website at www.samsung.com/global/ir.

On the call today, I am joined by the following representatives from each business unit. EVP, Han JinMan, representing Memory; EVP Pyee Jae Geol for System LSI; EVP Kang Moonsoo for Foundry; EVP Choi KwonYoung for Samsung Display, which I will call Display in the presentation; VP Kim SungKoo for Mobile eXperience; and VP Kim Young Moo for Visual Display.

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

Before reviewing our quarterly results, I want to confirm the second quarter dividend. Today, the Board of Directors approved a quarterly dividend of KRW361 per share for both common and preferred stock. Based on the annual dividend payout under the current dividend policy, the total quarterly payout is KRW2.45 trillion and will be paid in mid-August.

Now I will move on to the results for the second quarter. Despite a highly challenging business environment marked by inflationary and supply chain issues, we recorded the company's second highest quarterly revenue and a new all-time high for a second quarter at KRW77.2 trillion. The DS division led such performance was a new quarterly revenue record for a second quarter in a row by actively adjusting the product mix to meet solid server demand and increasing the supply of system semiconductors. In addition, the DX division posted significant year-on-year growth on solid sales of premium smartphones along with strong sales of seasonal digital appliances such as air conditioners.

Gross profit increased by KRW0.2 trillion sequentially to KRW30.9 trillion mainly due to profit-focused memory sales and yield improvement in foundry. Gross margin also increased slightly to 40.1%. SG&A expenses increased KRW0.2 trillion quarter-to-quarter to KRW16.8 trillion as our continued investments in R&D outpaced reductions in advertising and promotional spending. As a percentage of sales, they were also up slightly. Although profits in the DX division declined due to macro issues, such as increased material and logistics costs and currency effects, we delivered a similar operating profit quarter-on-quarter at KRW14.1 trillion. Operating margin improved moderately, thanks to across-the-board improvements in the DS division. On a year-on-year basis, operating profit increased by 12% or KRW1.5 trillion, also led by the DS division.

I will now briefly review the results of each business unit. In memory, although bit growth came in below guidance due to weaker-than-expected mobile and PC demand, results improved both quarter-on-quarter and year-on-year as we maintained ASP by preemptively shifting our focus to meet solid server demand and by maintaining our disciplined sales strategy. The positive effects of a strong dollar also contributed.

In system semiconductors, operating profits were up 61% quarter-on-quarter, achieving a record high as System LSI expanded sales of DDIs in volumes on SoCs and foundry yields entered our targeted trajectory also for advanced nodes as we increase supply to global customers. In addition, we further improved our technology competitiveness through the world's first mass production of the GAA process and supply of 200 megapixel image sensors.

For Display, the mobile panel business delivered its highest ever second quarter revenue and operating profit, thanks to continued solid demand by our major customers for their flagship models despite weak seasonality for smartphones. The large panel business surpassed its yield target for QD display, but its results still weakened due to initial ramp-up costs of QD display and a decline in LCD ASP.

For the MX business, earnings decreased sequentially due to elevated operating costs, mainly in material and logistics and adverse currency effects. But revenue rose year-on-year as an improved component supply enabled increased sales of new premium models such as the Galaxy S22 and Tab S8 Series.

The network business saw its revenue grew slightly compared to the previous quarter with consistent sales as it also continued to pursue new opportunities, highlighted by the addition of DISH Network as our newest U.S. customer.

In VD, earnings decreased due to a decline in revenue caused by sluggish global TV demand and a rise in sales costs, but we reinforced our market leadership by focusing on the premium segment including QLED and Super Big TVs.

Digital appliances saw its profits decline due to lingering cost burden issues, but it achieved record high quarterly revenue for a second consecutive quarter, thanks to the increasing global expansion of Bespoke products and a strong start of seasonal air conditioner sales.

Regarding currency effects relative to the Korean won, the component business benefited from the strong dollar, resulting in an approximately KRW1.3 trillion company-wide gain in operating profit compared to the previous quarter. The DX division, however, experienced some adverse currency impacts.

Next, I would like to share our business outlook for the second half of the year. Under expectations that macro uncertainties are unlikely to dissipate, we will actively monitor demand trends to respond swiftly and flexibly. DS will focus on operating a high value-added portfolio, expanding advanced nodes and adopting new applications. DX will continually reinforce our leadership and lineups in premium segments. And we have started full-fledged expansion of multi-device experiences based on SmartThings, which has a global user base of KRW230 million.

Now for each business unit's outlook, in Memory, we expect fundamental server demand to remain solid, the macro issues are likely to cause continued weakness in PC and mobile demand. While closely monitoring impacts on the demand side, such as releases of new mobile products by our major customers, we will continue to focus on our high value-added and high-density portfolios.

For System LSI, we plan to further increase our volume-zone SoC business and strengthen our leadership position in image sensors by expanding our customer base for 200 megapixel products. For Foundry, we aim to exceed market growth by adding new global clients, while we continue to reinforce our technological competitiveness, including through the development of the second-generation GAA process and by evolving derivative processes of existing nodes.

For Display, in the mobile panel business, we anticipate that earnings will grow driven by new smartphone launches and increased entry into new application areas such as automotive and gaming. In the large panel business, we expect earnings to improve with the shutdown of LCD production and increasing demand for QD display.

The MX business will work to secure solid profitability on multiple fronts. We will target sales of foldable products to surpass those of the Galaxy Note series as we fully mainstream the segment by delivering a differentiated consumer experience enabled with global partnerships. We will also expand the Galaxy ecosystem through successful launches of wearable products and boost overall operational efficiency.

For Network, we plan to maintain revenue growth momentum by actively expanding our overseas businesses and by meeting domestic needs for 5G installations in a timely manner. We will also continue to reinforce our technology leadership in 5G core chips and virtualized radio access networks. For VD, we aim to capture demand in the premium market during strong seasonality by expanding sales of strategic products such as Neo QLED, Super Big and Lifestyle Lines. For digital appliances, we will focus on improving profitability by increasing sales of premium products, strengthening the B2B and online sales and working to further enhance cost efficiencies.

Now turning to capital expenditures. CapEx in the second quarter was KRW12.3 trillion, with KRW10.9 trillion invested in the DS division and KRW0.8 trillion in Display. CapEx in the first half of the year totaled KRW20.3 trillion with KRW17.6 trillion invested in DS and KRW1.5 trillion in Display.

Similar to last quarter, memory investments concentrated on infrastructure at P3 and on capacity expansions and process migrations at fabs in Hwaseong, Pyeongtaek and Xi'an to address future demand. Foundry investments focused on increasing production capacity of advanced processes of 5-nanometer and below.

Next, I would like to share some of our key activities in sustainability management. To start, in June, we published our 2022 sustainability report, which includes our key activities and achievements for the past year, such as the reinforcement of the Board's oversight function of sustainability management, expansion of sustainability management activities by businesses and our joining of the UN Global Compact, or UNGC. For more details, please refer to the sustainability report, which is available via our website.

Meanwhile, in recognition of our efforts to enhance the energy efficiency of our products and work sites, we were honored at the beginning of May, with our ninth Sustained Excellence Award for product brand owner, the highest level of recognition in the manufacturing sector in the U.S. Environmental Protection Agency's ENERGY STAR awards. And we also received the Partner of the Year Award for Energy Management, the highest level of EPA recognition.

In addition, 11 models of our new TV products for 2022, including our Neo QLED 8K earned reducing CO2 certification as part of the Carbon Trust Carbon Footprint labeling. The DS division achieved a waste recycling rate of 97.5% through its multipronged approach towards recycling. It received global recycling standard certification by developing eco-friendly clean room garments using waste plastic bottles. And it brought two more of its work sites to the platinum level for zero waste to landfill. Additionally, to reduce GHG emissions, we developed and then installed process gas treatment equipment at our domestic work sites. We expect to reduce greenhouse gas emissions by approximately 190,000 tons monthly through this in-house technology.

Along with such activities, we are currently establishing a comprehensive mid- to long-term environmental strategy that includes a climate change response and we expect to be able to share detailed plans in the near future. We will continue to systematically promote sustainability management and are committed to transparently communicating our ESG direction and achievements with our stakeholders.

I will now turn the conference call over to the representatives from each business unit to present second quarter performances and outlooks for their corresponding business segment. We will start with the Memory business. Thank you.

[Han JinMan, SVP, Semiconductor Business Memory]

Good morning. This is Han JinMan from the Memory Global Sales and Marketing Office. For the Memory market in the second quarter, server demand remains solid but demand for consumer products such as mobile weakened due to widening impacts of macro issues. As a result, DRAM and NAND shipments were below the guidance. However, our performance improved both year-on-year and quarter-on-quarter as ASP stayed at a better-than-expected level. Thanks to our disciplined sales strategy to meet the market demand and also the benefits of a strong dollar.

In DRAM, for server, there were some disruptions in set builds due to supply issues for certain components, with continued expansion of the proportion of high core CPUs kept fundamental end demand on a solid trend and memory demand on an upswing. Inventories increased at major PC OEM companies due to low sellout amid intensifying macro issues such as inflation and demand weakened accordingly. Mobile experienced weak demand trend as well as consumer sentiment worsened due to lockdowns in China and price instability caused by the prolonged Russian-Ukraine war. We achieved the high sales of server products in the industry for any quarter by optimizing our portfolio and actively responding to solid demand centering on servers. However, we missed guidance for total bit growth due to weak demand for consumer products such as PCs and mobile devices.

Next, I'll talk about the NAND market. For server SSD, along with continuously rising demand for high-density products, thanks to investment by data center customers, demand extended to low-density products as customers be to minimize set build disruptions caused by a shortage of active passive components. For client SSD, such shipments were flat due to weak purchase demand for PCs attributable to macro issues such as inflation, but SSD content per box and attach rate kept growing, thanks to the rising proportion of high-end products.

For Mobile, despite the continued trend towards high density, demand weakened as overall consumer sentiment deteriorated due to the persisting Russian-Ukraine war and lockdowns of major cities in China. We continue to expand the proportion of high-density products of 512 gigabit and higher for server SSD and actively responded to the high-density trend in client SSD mobile, helping us maintain a decent ASP. However, overall big growth came in below guidance as mobile demand was much weaker than expected.

Now let's move on to the outlook for the second half. For server, even though server demand and macro issues show a relatively weak correlation, there is a possibility of customers' temporal inventory adjustment amid some IC component supply problems as well as a concern of a widespread economic recession and geopolitical issues. However, centering on major data center companies investment in core infrastructure and new growth areas such as AI and 5G are expected to keep expanding the fundamental demand to stay solid.

On the other hand, consumer products like PC and Mobile are more sensitive to macro factors than servers are, and current forecast indicates that related demand is likely to weaken in the second half of the year. And for PC, it is possible that the risk may spread to enterprise segments. They are expected to remain relatively solid. But we cannot rule out chances of positive effects on consumer demand during the year-end promotional season.

For Mobile, changes of a recovery in consumer sentiment toward the end of the year are likely to depend on various factors such as economic policies of major countries and the stabilization of commodity prices. In addition, high-density adoption is expected to continue given launches of new mobile products by major customers. Amid highly volatile market situation, we are planning to maintain our stance of operating an optimized portfolio that centers on high-density, high value-added solutions based on supply flexibility in accordance with market conditions and customer needs. For product-specific strategies, as always DRAM improve the quality of its business by staying disciplined against excessive expansion of sales and flexibly managing supply in line with demand.

NAND will focus on creating demand mainly for high-density products while considering characteristics of high price elasticity, and we will continue to strengthen our market leadership by actively responding to demand based on our excellent cost competitiveness.

Finally, as an industry leader, we are sustaining our efforts to reinforce ESG management. For example, based on our accumulated product technology as a leading memory company, we are working to establish a recycling business model that will produce a virtuous cycle and streamline resource use. Moreover, as our customers' business patent shift from ownership to usage based will make great efforts to develop business models that reinforce our customers' agility and flexibility and also improve the future investment efficiency of our memory business. Thank you.

[Pyee Jae Geol, System LSI]

Good morning, this is Pyee Jae Geol from Systems LSI business. In second quarter, demand for products in major applications was sluggish due to unfavorable economic conditions such as the geopolitical issues and inflation. However, System LSI second quarter earnings has improved quarter-on-quarter, owing to exchange-rate movement and growing supply of major components such as volume-zone SoCs and TDI.

We further also solidified our leadership in mobile image sensor technology by supplying the world first 200 megapixel sensors. Furthermore, we have also established a foothold to extend our automotive SoC business by securing these customers in addition to our ones in Europe. Also in the second quarter, our DDI reclaimed the top market share position in revenue. In the second half of this year, despite high uncertainties such as weak demand for consumer electronics and manufacturers inventory adjustments, we aim to exceed revenue and profitability growth year-over-year by expanding our 5G SoC lineup and increasing customer base to maximize the supply of our technology-leading 200 megapixel image sensors. Thank you.

[Kang Moonsoo, EVP, Foundry]

This is Kang Moonsoo from the Foundry business. In the second quarter this year, we achieved our highest ever second quarter revenue, thanks to solid demand for advanced processes, especially from HPC applications, sustained demand in matured processes and overall yield improvement. In addition, we also achieved our highest ever second quarter profit through price realization and cost reduction, taking one step closer to securing future self-investment capacity.

We have strengthened our technological competitiveness through the world's first mass production of the 3-nano GAA process accomplished in June. Although we have expanded application areas through continuous evolution of both advanced and matured processes, such as preparing advanced automotive process, developing processes for RF or radio frequency applications and optimizing performance, power and area of our technologies.

In the second half of the year, we expect that HPC and 5G-related demand will continue to be solid, but uncertainties related to geopolitical issues and inflation exists. We are aiming to exceed market growth this year through yield improvement of advanced processes alongside a proper pricing strategy while responding flexibly to demand predictions we are close cooperation with our customers.

Additionally, we will strive to improve the maturity of second gen GAA process, which will be our base for future growth, and to expand our customer base for large scale orders. Lastly, in October, we will host off-line forums for the first time in 3 years. We aim to strengthen networking with our customers through our Samsung Foundry Forum in the U.S., Europe, Japan and Korea, and our Samsung Advanced Foundry Ecosystem, in short, SAFE Forum in the U.S. Thank you.

[Choi Kwon Young, VP, Samsung Display]

Good morning. I'm KwonYoung Choi from the Business Planning department, Samsung Display. In the second quarter, for the mobile display business, overall demand for the smartphone market declined due to deteriorating consumer sentiment attributable to inflation and rising inflation rate -- interest rate, sorry. However, we achieved solid earnings growth, thanks to strong sales for flagship smartphone models based on our proprietary technologies and product performance. Our profit increased year-on-year backed by positive effects of foreign exchange movements with the continued increase of OLED adoption by laptops and portable gaming devices also contributing to the growth.

For the large display business, losses persisted due to a decrease in LCD ASP and initial cost of QD display development. However, we expect an increase in sales and profit margin from the second half of 2022, driven by rapid improvement in QD display yield and a rising number of brands adopting QD display products.

Next, let me share the market outlook and Samsung display's core strategies for the second half of 2022. In the second half for the smartphone market, we expect earnings to improve half on half as a number of major customers plan to release new products. However, we expect earnings to be more volatile than they were last year due to a number of difficult to predict external factors. We expect our OLED panels to continue to record sales growth, given the higher demand for their use in premium products, which are relatively unaffected by economic fluctuations.

Laptops, although we forecast that the market will contract due to an overall downturn in consumer markets. We expect our OLED display sales volume to keep growing, driven by rising consumer equipments for displays featuring high resolution and a fast response time. Meanwhile, for the large display market, our QD display we feature in TV and monitor market makers, new products, which are scheduled to roll out in earliest around the globe. Samsung Display will channel all of its efforts to promote the excellence of QD displays to consumers by launching joint promotion with our customers, aiming to lead the premium market. Thank you.

[Sung Koo Kim]

Good morning and good afternoon. This is Sung Koo Kim from the MX business. I would like to share our Q2 results for 2022 and the outlook for the MX business for the second half of the year. In Q2, geopolitical issues and concerns of our inflation on top of continued seasonally weak demand, smartphone market to decrease compared to the previous quarter. For MX, revenue and operating profit decreased Q-o-Q due to the market situation, but revenue was up compared to Q2 last year. Even though total revenue of smartphones and tablets decreased Q-o-Q, smartphone surge of flagship models remained solid.

The supply disruption in Q1 was mostly reserved in Q2 and that contributed to the sequential increase in the Galaxy S22 series, which were driven by the Galaxy S22 Ultra, the tab model in the series. Also, the flagship Galaxy Tab S Series, which embraced growing demand for big screen premium tablets continued strong sales. However, profitability decreased Q-o-Q due to increased material costs caused by recent price increases for components and logistics as well as headwinds from exchange rates.

Let me now share the outlook for the second half of this year. Given the persistent geopolitical volatility and economic uncertainties, we expect market demand for smartphones in the second half to stay similar Y-o-Y or grow by a low single-digit percentage. Despite the challenging market conditions, MX plans to expand sales with a focus on flagship products. In particular, through our successful launch of new foldable models, we will strive to solidify foldable products as a key category in the flagship market. To that end, we are committed to preparing thoroughly in all areas, including product completeness and supply.

The new foldable models feature upgrades in design and durability and in addition, close collaboration with global leading partners has helped us provide richer experiences tailored to the form factor. We will secure sufficient supply in advance to ensure we can meet the demand of every customer who wants to experience our products right after release. By doing so, we are striving to make our foldable domain stream that our customers love even more than they did the Note series and achieved continued high growth to drive flagship centered revenue growth.

Meanwhile, also the Smart Watch market in the second half of 2022 is forecasted to fair effects of economic uncertainties in the short term. We will try to maintain high growth momentum with the release of new watch models. The new watch models will be impacted alongside the new foldable models in the second half and there are more intuitive and convenient Galaxy connected experience will help us expand sales of Galaxy Ecosystem devices.

Going beyond providing customers with convenient technology and devices, Samsung will add value over experiences and in which customers everyday life through services such as Samsung Wallet, which was introduced in Q2. Moreover, in collaboration with the overall DX businesses, we are making broad efforts to provide a richer, multi-device experiences based on SmartThings, including through the introduction of various life scenarios customized to individual life patterns.

Finally, given the expectations that the market will remain uncertain for some time, we will endeavor to maintain profitability in the double digits in the second half by improving our product mix centering on flagship products through fully mainstream foldable and by continually enhancing operational efficiency to respond to challenges such as adverse currency effects. Thank you.

[Young Moo Kim, SVP, Sales & Marketing of the Network Division]

Good morning. I'm Young Moo-Kim from Sales and Marketing team on Visual Display. First, I'd like to review the market conditions and our performance in the second quarter of 2022. Market demand for TV contracted both quarter-on-quarter and year-on-year, former caused by entering weak seasonality and the latter due to the base effect of the last year's pent-up demand as well as decreasing consumer confidence resulting from high interest rates, inflation and other factors.

For Samsung, our performance declined due to a decrease in revenue amid declining market demand and cost increases related to the intense market competition but we improved the quality of our sales mix and are maintaining our leadership by focusing on expanding series of premium products such as New QLED and Lifestyle.

Next, I'd like to talk about our outlook for the second half of 2022. For TV market, although there are opportunities to expand sales such as fixed seasonality and global sporting events, several macroeconomic risks are likely to continue to test uncertainties on overall TV demand. Samsung will closely observe the rapidly changing market, and we will capture peak season demand and secure profitability by focusing on strategic products such as Neo QLED Lifestyle and through strategic partnerships with major channel partners. At the same time, we will proactively target signage market, where B2B demand has been more active recently, while also further solidifying our status as a market leader with innovative products such as Micro LED and Odyssey Ark. Thank you.

[Ben Suh, SVP, IR]

Thank you. That sums up the second quarter results presentations. Before we move on to the Q&A session, I would like to share several data points in key business areas. However, once again, we will not be providing annual guidance considering the persistently high macro and geopolitical uncertainties.

First, for DRAM, in the second quarter, our bit growth increased by a mid-single-digit percentage, and ASP was flat quarter-on-quarter. For the third quarter, we expect market bit growth and our bit growth to stay flat compared to the second quarter. For NAND, our bit growth compared to the first quarter decreased by a percentage in the high single digits, while ASP increased by a low single-digit percentage. In the third quarter, we expect market bit growth and our bit growth to both rise by around 10% quarter-on-quarter.

For Display in the second quarter, the mobile portion of revenue as a percentage in the high 90s and sales volume declined sequentially by a percentage in the high single digits. In Mobile, in the second quarter, shipments were approximately 62 million units for smartphones and 7 million units for tablets. Smartphone ASP was USD 281. For the third quarter, we expect smartphone shipments at ASP to both rise quarter-on-quarter and tablet shipments to stay similar. For TVs, sales volume in the second quarter declined sequentially by a percentage in the mid-20s. For the third quarter, we expect sales volume to increase by a high single-digit percentage.

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

[Operator]

[Operator Instructions]. The first question will be presented by Ricky Seo from HSBC.

[Ricky Seo, HSBC]

I have two questions. The first question is about the inventory. It seems that the company's inventory has increased by about 9% Q-o-Q. With that in mind, can you give us some details about the reasons for the inventory increase? The company's position regarding the higher inventory and also your expectations going forward about your inventory levels? Second question is towards the MX business. The company has been emphasizing connectivity, for example, that connects the mobile device with other devices such as tablets, wearables or PCs. The company I've been told is expecting this to be a source of additional synergy and has been focusing on actively developing new products. With that in mind, can you give us some more details about what kind of solutions the company is developing its strategy and some updates on new products?

[Unidentified Company Representative]

To answer your first question about inventory, as you will recall, there was the sort of a serious global supply chain issue last year and watching that, the company has since been continuously looking for ways, first of all, minimizing the impact on our business and also allowing us to supply products without disruption to our customers. And strategically, since end of last year, we have been securing inventory around the key components through close cooperation with the key suppliers.

Now the supply chain situation actually worsened as we passed through this year with the Russia-Ukraine war and also some lockdowns in parts of China. And so watching that, we have been increasing our inventory levels this year. And this was actually one of the key factors of why we were able to continue stable supply of products throughout the first half.

Regarding our outlook on inventory, we do expect that our inventory would be adjusted to fair balanced levels during the second half, especially around the DX business. But that said, given the fact that these macro uncertainties are continuing to exist, we will, at the same time, maintain a flexible approach while closely monitoring the situation. We will also be implementing a fair or a balanced inventory policy at the DS business in connection with market situations.

To answer your second question about the connectivity, we see that the competitive paradigm in the market is shifting from the smartphone, the mobile device stand-alone to an ecosystem experience that is centered around the smartphone. And that is why we have been continuing to strengthen the connectivity experience between ecosystem devices such as tablets, laptops and wearables. This effort to strengthen the connectivity experience is not just within the MX business, but also, it is at a corporate level, including the VD and our domestic or digital appliances business. For example, now customers are able to control and manage various home appliances such as TVs using the SmartThings from their smartphone. They are, for example, able to continue to watch a video from their smartphone seamlessly onto their TV opening the buzz case would trigger a window on either a TV or smart monitor or the freestyle projector so that the user can connect the buzz to these devices with just one click. These are some of the very examples of how we are providing a very convenient user experience that covers multiple devices in the home.

Actually, our concept of this SmartThings connectivity goes beyond connectivity between our own devices. We have been carrying out do the SmartThings, the SmartThings daily lives campaign, where we show our customers the various scenarios that they can actually experience themselves by connecting not only our products and services, but also third-party devices such as light or power curtains in the home to provide a customized experience that fit for everyone. And so based on the SmartThings, our aim is to go beyond just providing convenient technologies or devices, but to become recognized as a premium brand with stronger position and value that actually makes life richer through a multi-device experience.

[Operator]

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

[Peter Lee, Citigroup]

I have two questions. The first question is about the Memory side. You did miss your second quarter bit growth guidance by a significant margin. Can you give us some background to why it came in so low? Second question is to the VD side. I think the market is concerned quite a lot about TV demand going forward. Can you share your second half outlook for TV demand, your plans about the premium segment lineup, and also how you plan to defend your profitability?

[Unidentified Company Representative]

To answer your first question about the Memory, actually, in second quarter, our performance, our business results in terms of both revenue and profit grew on a quarter-on-quarter and year-on-year basis, thanks to healthy pricing and also positive impact from FX.

But that said, second quarter Memory market conditions were not easy. They were very challenging. It was not so in the case of server where server demand continued to remain solid, but it was on the consumer products that were hit due to various macro issues, including the rising commodity prices due to the extended war going on. Within the consumer products the demand for mobile was lower, particularly more than expected. And so that was the main reason why our shipments for DRAM and NAND came in lower than what we had originally expected. And between DRAM and NAND, NAND, which has a higher exposure towards consumer products had a more prominent decrease in shipments.

Now looking towards the second half, we think that the second half, there will be a mix of upside and also risk factors. So given this uncertainty, we think that the best approach would be to continue to carefully watch the market and respond flexibly. In the case of NAND, I think the outlook is that demand for consumer products would be somewhat weak consumer products such as PCs or mobile. But then when we sense the market, at least at the end user level, there is definitely a very clear demand for more storage capacity at the device level. So we are currently discussing ways of tapping that together with our customers.

To answer your question about the VD. You've asked, first of all, about our outlook for the TV market. Currently looking towards the second half, it would be seasonality positive. There will be positive seasonality and also there are some sports events, which would be an upside factor. But then there are various other macro variables that are difficult to predict. And so overall, the visibility about demand in the second half is limited.

And so given this uncertainty of market demand, our focus is to gain a stronger edge in the premium segment and also to secure profitability by continuing to expand our high-value high-end products and also optimizing our internal operations.

And so our strategy towards the premium segment is, #1, to continue focus on premium sales around the Neo QLED products, but also same time, VD Ultra super large size 90-inch plus market by increasing the sales of our 98-inch offering. And also to introduce new sizes using Micro LEDs, which currently is offered in 110-inch, we'll be adding new sizes, such as 89 inches in order to open up new territory within the premium market.

[Operator]

The next question will be presented by J.J. Park from JPMorgan.

[J.J. Park, JPMorgan Chase & Co.]

My first question is on the System LSI, the Exynos business. There are, I think, concerns about the competitiveness of that business in the market. We've been hearing some rumors that the company may fold up that business. Can you confirm whether those rumors are true? And if not, how does the company plan to increase the competitiveness of its Exynos business? Second question is towards the foundry. The foundry has been making significant investments over the past several years, and that has resulted in growth of its top line above market growth rates. But I guess the profitability-wise, it's not at a satisfactory level from the market perspective. And so can you give us how -- what you expect in terms of the foundry business profitability in the future?

[Unidentified Company Representative]

To answer your question about the Exynos business, the rumor that we may fold the business is completely not true. We're currently in the process of reviewing, revising our SoC business model with the focus on gaining mid- to long-term competitiveness by efficiently delegating or dedicating our resources appropriately. Within this new resource plan, the focus is on strengthening the competitiveness of the next-generation mobile Exynos. And currently, we are focusing on expanding the market share of our key customers by increasing the level of cooperation with the leading IP holders for each area and also starting the development cycle early on so that we have the core competitiveness.

Also to further strengthen the competitiveness of the SoC, we are looking into improving the business model, which is currently more relying on the -- dependent on the mobile side. So we're trying to expand that to other applications such as wearables, laptops and WiFi products. Also at the same time, we are focusing on expanding the ecosystem partnership around the SoC by building stronger partnerships and new cooperation models with various companies within that value chain, such as OEMs, ODMs, the module companies and software vendors.

To answer your question about the Foundry profitability, at least we think that the demand will remain solid, especially around the advanced nodes. And so our plan is to continue our investments by analyzing multiple factors, including mid- to long-term market, global customers demand, economic outlook, profitability so that we're able to continue a stable supply.

In terms of timeline, our plan is to start operation of our Pyeongtaek new line in 2023 and in Taylor in 2024, we also think that we will be able to continue to improve our profitability by introducing healthier prices and also improving our cost side so that we're able to fund our investments from our operation. So if we are able to continue our growth momentum that we see, we expect that we will be able to reach a level of profitability where we will be able to source the funding of investments from our own operations.

[Operator]

The next question will be presented by Dongwon Kim from KB Securities.

[Dongwon Kim, KB Securities Co.]

My first question is about the Memory, the server demand visibility. I think there are some concerns in the market that in the second half, even server demand be slowed down. Can you give us your views of the server demand in the second half? Second question is about the Display. While the overall Display market globally is going through a difficult period, SDC relative was able to deliver positive results. Can you give us some more detail on how that was possible?

[Unidentified Company Representative]

You've asked about server demand. I think one thing we've noticed about server demand is that it's relatively less sensitive to geopolitical issues or macro issues and that's because servers have sort of an nature in infrastructure that enables a lot of the things we do in daily lives and at work that we take for granted. And so there is that nature as an infrastructure essential. And then there are some new growth areas such as AI, where investments into core infrastructure is continuing to expand.

Another thing we've been noticing in the market is that many enterprises are now adopting what's referred to as a hybrid server that combines their on-prem servers together with the data center, public cloud servers in parallel. And so that is also adding to a solid support for our fundamental server demand.

And so despite the resilience in server demand, I think it's difficult for us to say that everything would be optimistic because as you mentioned, there are some reasons to be concerned, such as that there are some still IC parts that are going through a supply disruption. And also, if the global economic recession occurs, as some are concerned, I think at that point, even the server customers will have to go through an inventory adjustments, which may impact the memory demand at our end.

And so our assessment of the server market is that uncertainty is at high levels and that is why actually we are updating our forecast and outlook at any time in order to improve the fidelity of our forecast. And an example of how that works is what we did in the second quarter where we were able to optimize our product portfolio earlier on so that we are able to fully capture the demand on the server side and report the highest quarterly server sales in the industry.

Looking towards the second half, there are some upside factors. For example, the mass production of DDR5 at full scale, market is expected to, therefore, expand and therefore, server markets are expected to record meaningful increase in share. And so our approach to that is to continue to maintain and optimize product portfolio around the high-end and high-density solution products but maintain a supply that's flexible and fit to the demand.

To answer your question about the display and the relatively better performance compared to competitors. Well, first of all, if you just look back on the market, as you mentioned, overall, the economic environment is challenging. The display market this year has been going through a decrease in demand and also a decline in ASP. So it's a challenging market. We are concerned about these market volatilities as well as the possibility of an economic recession. And so we are carefully monitoring market demand and also the supply chain. Despite these challenging environments, as you mentioned, there seems to be a divergence of company results. And the reason why we are pulling away from the other competitors and staying healthy, I think it's mainly explained by the fact that we were able to preemptively start to readjust our business strategy.

Well, as you recall, based on our market analysis and analysis of consumer needs, we had decided to fold our LCD business several years ago and have been going through that process. We completely closed down the LCD business as of the first half of this year. And we were able to actually focus our resources and are building a full lineup of OLED offerings that covers not only the mobile but also IT and also the QD display. And that has actually given us the fundamentals to weather through various disruptions that we've been going through the past several years, including the pandemic and the rapid decline in market demand. And despite that maintain a stable performance. Going forward, we will continue to focus on building our competitiveness on these different applications such as mobile, IT, auto and QD displays and focus on providing -- focus on developing our technologies and providing greater customer satisfaction.

[Operator]

The next question will be presented by Nicolas Gaudois from UBS.

[Nicolas Gaudois, UBS]

The first one is on Memory. In light of on demand uncertainty in the market, we believe that Memory makers are reconsidering and reducing the initial capital spending budget into 2023. Does this actually apply to Samsung as well? And could this imply a reduction in overall CapEx and with a public spending in relatively to next year? And secondly regarding the Foundry Business, for the 3-nanometer get around second generation, i.e., 3GAP what is the development status now and mass production time? And how are you executing in winning large-scale customers for 3GAP?

[Unidentified Company Representative]

I'll first start your -- to answer your question about Memory, I guess a good place to start with is about our Memory market outlook. As we've been talking, we do agree that there is a possibility that memory markets may be somewhat weak in the second half. But we are, as we mentioned, updating our demand forecast weekly and even daily basis. So I think at this point, the best approach we can take is to not be too optimistic or too pessimistic about the memory market, but to just continue to check all of the factors we can both internally and externally and respond flexibly to what we see.

Now despite all of that uncertainty and changing forecast, our overall investment principles still stands. As we have mentioned several times, our basic principle and approach towards investments is to continue to meet the appropriate level of inventory and advanced node investments in order for us to capture mid- to long-term demand, but at the same time, manage our facility equipment investments more flexibly, closely tied to the actual industry situation. So that principle still stands valid. Now that said, with the huge amount of uncertainty in the market, driven by a wide variety of macro issues, we will place priority on using inventory to continue our supply. And also regarding our short-term equipment-related investments, wouldn't you agree that at this point, the best to just flexibly respond by revisiting the situation.

You've asked about the update of our 3GAP, the 3-nano second generation GAA development process. As you know, compared to first generation, the second generation further improved the size, performance and power efficiency. Also, we have adopted an improved development process so that we're able to do checks from stage to stage during the development phase. And also, we have designed the development process so that resources are intensively invested in the upside of the first part of the development process so that we're able to ramp up the initial yield. And so our overall development is on track with mass production aiming for 2024.

Regarding the orders, we have already secured several mobile application customers, and we're currently under discussion, negotiation with a large number of mobile customers, and we expect that the size will continue to grow.

[Operator]

The last question will be presented by Sung Kyu Kim from Daiwa Capital Markets.

[Sung Kyu Kim, Daiwa Securities]

The first question is about memory supply outlook for second half and next year. I do agree that currently, at least the second half demand, there's a lot of uncertainty around that. Another factor regarding supply side is that there are some disruptions in the equipment supply, the lead time. And that, according to us is slowing down the process migration of especially the DRAM nodes. Given all of those factors, what is your outlook on DRAM supply, memory supply for this year and next year? Second question is about the Display side. As you mentioned, Samsung Display has taken the preemptive initiative to restructure its businesses and preparing for future. With that in mind, can you give us more details of which specific business areas Samsung Display is preparing for?

[Unidentified Company Representative]

To answer your question about DRAM supply, yes, given the high level of uncertainty that we see going forward, our basic approach is to continue to maintain an optimized product mix so that we're able to stably supply products that the customers actually need.

Now looking towards next year, as you mentioned, there are possibilities of equipment lead times being delayed due to continued issues in the component parts supply. If there are delays in the equipment deliveries, this would cause delays in migration to the advanced nodes. And also considering the difficulty at the advanced nodes in terms of production, this is causing already some restrictions in bit growth throughout the industry.

So with that structural constraint in production, we expect there may be actually a quite low level of bit growth in the DRAM at an industry level. What's happening at the same time is that the new product markets are opening up, especially around the new interfaces, such as DDR5 and LPDDR5X. And so with the variety of products being introduced, it's going to be critical for the Memory companies to start with the right product mix in place, and so that is why we have been focusing on sensing the market demand and closely cooperating with the customers.

Now with that outlook, our basic policy towards supply next year would be to maintain a flexible inventory policy based on close collaboration with our customers and also to carefully monitor the market with a very wide product lineup prepared so that we are able to emphasize profitability in terms of our supply.

To answer your second question, which was about the Samsung Display's future growth and business strategy. As you mentioned, we have been sensing market changes in the mid- to long-term perspective and have taken the preemptive initiative to change our business structure. Now going forward, we will continue to take this mid- to long-term strategic approach that tries to look at, for example, market and technology changes, at least with a 5-year horizon. Some of the key areas that I can emphasize within that strategy would be: #1, trying to find new applications for OLED. Currently, smartphone OLED penetration is already around 40% levels, and that's why we are trying to find other applications where OLED can replace LCDs. This will be, for example, in IT, automotive or gaming, could be new OLED applications, so we're focusing on emphasizing the advantages of OLED versus LCD and also preparing the technologies to actually implement OLEDs in these application areas.

The second area that we're focusing on is areas that would grow significantly as a part of this fourth industrial revolution that's basically metaverse or, in other words, AR and VR applications. These applications actually demand extreme level display performance. And so we are preparing the technology, including micro displays.

Well, especially in the case of metaverse, it's not a market that's already existing where we will be entering, but actually, it's going to be a new market that's created from ground up. And so it's important to not only have the display right but also both have the upstream and downstream infrastructure well prepared. And that's why we are actually getting ready to play a leading role in creating this infrastructure, this supply chain ecosystem around the metaverse by developing the technology and also contributing the display business know-how that we have accumulated as a leader in that space.

[Unidentified Company Representative]

Finally, we will answer questions that were submitted online in advance. We have been accepting questions via our web page in advance of our earnings release as a part of our efforts to strengthen communication with individual investors an 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. And so we will answer one more question on the topic that garnered a high level of interest from many of our shareholders but were not addressed during the Q&A session. And so that question is, amid the heightened concerns over an economic slowdown in the second half of this year, what is the company's outlook for smartphone demand? And against this backdrop, what are the company's sales strategies and measures to secure profitability in the Mobile side? And so that will be answered by VP Sung Koo Kim, on behalf of the Mobile eXperience, the MX.

[SungKoo Kim]

Yes, to answer your question, I think I can start from the outlook of the smartphone demand. Actually, at the start of this year, the smartphone market in the second half was expected to record a mid- to high single-digit growth in terms of both revenue and volume. But recently, our outlook has been revised. And as we stand today, we believe that in the second half due to various market uncertainties, the smartphone market would either be flat or record only a small amount of growth. However, we think that still in the mid- to long term, growth will continue, especially around the flagships. And the reason we believe that is, number one, because there is a greater need from consumers for premium experiences and also in the emerging market countries, disposable income is increasing. And also, there is a greater penetration of new technologies such as foldable.

And so overall, we think that on a full year basis, smartphone shipments, we think that at our level would slightly decrease given the shrinking market. But then actually we will focus on increasing our revenue as well as ASP on a year-on-year basis, on a full year basis by increasing the sales of our flagship. To translate into specific details in the second half, we will continue to maintain the sales momentum of our S Series and also use the new foldable series that will be launched in order to deliver sales volumes that are above the sales volumes we used to record using the Note series.

Also, the shift towards the premium segment will continue on our EKO devices as well as we increase sales around the large screen size premium tablets and wearable new models. So with all of that, we're expecting that our overall product mix will be further enhanced. So while we meet those advances on our sales side internally, we will continue to work on optimizing and raising the efficiency of our overall process across development, manufacturing and logistics to deliver double-digit revenue growth on a full year basis year-over-year Korean Won and also focus on maintaining a double-digit operating profit.

[Unidentified Company Representative]

I would like to thank everyone who can share their valuable opinions, and we will be sure to refer to them in our business making process. And that completes our conference call for this quarter. We wish all of you and those close to you stay strong and in good health. Thank you.