▲SK Hynix 4Q23 Business Results (Source: SK Hynix)

Q4 2023 sales reached KRW 11 trillion, and operating profit turned to a profit of KRW 346 billion.
The trend of expanding production of high-value-added memory such as HBM and DDR5
Demand for PCs, mobile devices, and servers expected to increase...AI to drive the market

SK Hynix, aiming for a performance rebound, announced its fourth-quarter earnings. Driven by increased production of high-value-added products, particularly AI-focused memory, and reduced production of low-margin legacy memory, the company saw its losses narrow and profits improve.

Total sales last year reached 32.8 trillion won... Memory performance recovering.

SK Hynix announced its fourth quarter 2023 earnings during a conference call on the 25th.

In the fourth quarter of last year, SK Hynix recorded sales of KRW 11.306 trillion, operating profit of KRW 346 billion, and net profit of KRW -1.379 trillion.

SK Hynix announced that it achieved a turnaround in operating profit due to improved profitability stemming from rising memory prices and a partial recovery of inventory valuation loss reserves. It is reported that the loss reserve was recovered in the amount of approximately 400 to 500 billion won due to the increase in NAND flash ASP.

Despite the significant expansion of sales of high-capacity, high-performance AI-focused memory products, such as HBM3 and DDR5, overall DRAM and NAND flash inventory backlogs led to a consolidated total revenue of KRW 32.8 trillion in 2023, a KRW 11.9 trillion decrease year-on-year. Operating profit also decreased by approximately KRW 7.7 trillion year-on-year.

■ AI-oriented memory production increases, while general DRAM and NAND production decreases.

SK Hynix Market Outlook

SK Hynix stated that NAND flash has faced more difficult market demand conditions compared to other business divisions, and that it has maintained a conservative production strategy and focused on investment and cost efficiency.

On the other hand, the company has strengthened its portfolio of high-capacity DDR5 and high-performance HBM3 premium products in DRAM, setting a growth trend toward responding to rapidly growing customer demand for AI. DDR5 sales increased more than fourfold year-over-year, and HBM3 sales also increased more than fivefold year-over-year, it said.

SK Hynix forecasts a mid-single-digit percentage growth in shipments for 2024, driven by the recovery of delayed PC replacement demand and the blooming of the AI PC market; a mid-single-digit percentage growth in shipments driven by the recovery of replacement demand and consumer purchasing power in mobile, growth in demand centered on high-end products, and the emergence of AI phones; and a gradual recovery driven by the expected increase in investment by large CSPs, including the full-scale commercialization of generative AI on servers and the increase in AI inference servers.

In its shipment plan, the company said it plans a mid-teens percent decline in DRAM shipments in the first quarter of this year compared to the previous quarter, while NAND shipments are expected to increase in the mid-single digits in the first quarter.

While facility investment is expected to increase compared to last year, it is reported that the increase will be minimized through profitability-based investment execution and enhanced investment efficiency.

Going forward, SK Hynix is expected to focus on supplying HBM, which is experiencing a mid- to long-term average annual demand growth of 60%. While focusing on the supply and development of HBM3E and HBM4, the company is expected to respond to the market by providing 256GB of high-capacity DDR5, which has recently seen increasing demand, and expanding LPDDR5T 16~24GB solutions.

Competition is expected with Micron, which recently announced the launch of its high-performance server module MCR DIMM, which was released late last year, and its mobile module LPCAMM2, which targets the on-device AI market.

SK Hynix said in a conference call, “Although the memory industry is expected to recover by the second half of this year, we are planning a conservative investment stance,” and “We will expand production centered on premium product groups such as HBM3 and DDR5, and maintain a production reduction trend for legacy products, so the inventory of legacy products will be reduced by the end of the year.”

"There's no oversupply for HBM; on-device AI is the killer app."

It has been reported that recent customer purchase demand is reviving, centering on legacy products, but SK Hynix responded, “This year, supply increase will be toward advanced processes, so from the customer’s perspective, it is judged that it will be necessary to accumulate legacy memory inventory to sell mid- to low-priced products.”

Accordingly, the company added that the production cutbacks in low-margin legacy product lines are expected to continue until ASPs reach appropriate levels. In particular, NAND flash memory is expected to become more capital-intensive as 3D stacking increases, making efficient production adjustments more critical than in the past.

As SK Hynix focuses on high value-added products such as HBM, its production of general DRAM and legacy products will inevitably decrease. This is because HBM takes up more than twice the capacity assuming the same production, so the capacity available for general DRAM production is reduced.

In particular, HBM is a pre-order product, so supply prices and capacity are determined through collaboration with customers at least a year in advance. Therefore, there are no concerns about oversupply. Furthermore, lead times are extremely long, ranging from stacking to advanced packaging and post-processing required for GPU integration. With limited room for flexibility in reserved capacity, a reduction in supply for general DRAM and legacy products this year is inevitable.

In 2024, as competition among big tech companies to secure AI leadership intensifies, demand for HBM is expected to diversify as cloud service providers expand their adoption of in-house AI servers. Furthermore, the on-device AI market is expected to experience significant expansion starting in 2025, and the emergence of killer applications will signal market expansion.