Hynix Q1 2024 Earnings

4.25.24

Investor Presentation

In Q1 of 2024, Hynix’s DRAM bit shipments were down mid-teens % sequentially (previous eight quarters were up low single digits %, up around 20%, up mid-30%, down around 20%, flat, down mid-single digits %, up 10% and down high-single digit %.) Following seven quarters where DRAM bit shipments grew a total of 25%, this is a large decline. Hynix shipped only 7% to 8% more DRAM bits in Q1-24 than they did in Q1-22. In NAND, bit growth was flat quarter-over-quarter. This follows the previous eight quarters (most recent to oldest) down low-single digits percent, up mid-single digits percent, up around 50%, down mid-teens %, down high single digits %, down low teens %, up high single digits % and up high teens %.) For the last three quarters, NAND bit shipments out of Hynix have stayed about the same. Bit shipments tell the supply story of the downturn. Low investment has flowed through and has flattened out bit growth for the last year plus. As inventories have mostly cleared and demand is healthy, pricing is responding. In the quarter, DRAM ASPs rose 20%+ sequentially for Hynix. This follows the prior four quarters (newest to oldest) of up high teens %, up around 10%, up high single digits and down high teens %. For Hynix, because of their leadership position in high bandwidth memory (HBM), their DRAM pricing began to recover in Q2-23. Since bottoming about a year ago, Hynix’s DRAM ASPs are up around 70%. In NAND, ASPs rose 30%+ sequentially. This follows a rise of 40%+ the prior quarter and slightly down and down around 10% the two quarters before. That is two quarters in a row of large increases in NAND pricing. Gross margin in the first quarter of 2024 was 39%. That is a stunning rise of 1900 basis points in a single quarter. Hynix’s gross margin the last five quarters, from oldest to most recent, has been (32%), (16%), 1%, 20%, 39%. Operating margin in the quarter was a healthy 23%. A year ago, operating margin was negative 67%. For Hynix, the DRAM upturn started a year ago and margins are reaching levels typical of that point in the cycle. Micron’s gross margin is trailing that of Hynix by ~2500 bps. This is a measure of how different the market for DRAM AI memory is from the rest of the DRAM segments as the cost structures of the two companies are similar.

Hynix’s plan for 2024 sees “limited DRAM/NAND production growth in ’24, as a result of conservative investments in ’23, and more capital allocated to produce HBM which has a larger die size.” For the second quarter, the company will increase DRAM bit shipments mid-teens % sequentially and NAND bit shipment growth will be flat. The company said they will hold inventory for most of their NAND products until “clear end-demand recovery is seen.” This commentary is what Micron investors wanted to see. Hynix is not rushing to add production capacity now, and they are holding back NAND inventory to prevent customers from buying ahead, thus supporting ASPs.

Hynix’s market outlook led with “Memory market is entering into full recovery cycle with ongoing strength of AI demand.” They see demand improvement from conventional applications in the second half of 2024. This implies demand from the PC, mobile, and non-AI server markets are weak today. Indeed, the company calls the first half of 2024 PC demand “relatively weak” and expects a recovery in 2H. They made similar comments regarding mobile memory demand. The company cites replacement of server hardware investment made during the 2017 – 18 super-cycle as a source of coming demand increase from the server segment. My view is AI demand is soaking up so much supply that it has brought the DRAM market back into shortage. If the other segments see increased demand in the second half of 2024, it will be a bonus (causing a more undersupplied market) rather than a necessary development to get to better pricing. Hynix did leave themselves some freedom to increase capital expenditures, depending on how the market unfolds during 2024. They announced a new DRAM fab (M15X), which will open by the end of 2025. They also announced an advanced packaging facility in Indiana, to start production in 2028. Neither of these announcements affect the current up-cycle, but the company did also say that “Due to rising needs to meet the rapidly growing demand for HBM & new investment decision for M15X, the company’s capex this year is expected to be somewhat higher than initially planned.” I read this to mean some of the higher CapEx they will spend in 2024 will be for the M15X shell, and it also frees them up to add more WFE to support HBM production.

Analyst Call

Here are highlights from the earnings conference call:

Prepared Remarks:

· The company believes this quarter marks the turnaround point in the NAND market.

· Q4 profitability was boosted by selling of inventory that was previously written down.

· Memory pricing is expected to continue to improve throughout 2024, supporting revenue to reach levels comparable to prior cycle peaks this year. This either means the company believes the DRAM market will peak this year, or this cycle will be the highest ever seen.

· Their NAND business turned to profitability in the first quarter. The company is now focused on optimizing mix of NAND products. That means they have enough demand now that there is some freedom for them to pick where NAND bits go, rather than just finding ways to sell them.

· DRAM and NAND capacity is expected to be constrained in 2024, the result of conservative investment in 2023.

· Last quarter, the company said the memory market was moving “toward” recovery. Three months later, things have improved enough that Hynix is calling the upturn to be underway and for prices to rise at least through the end of calendar 2024.

· Also last quarter (Q4 2023), the company said NAND pricing recovery had been weaker than DRAM. In Q1 2024, the opposite is true.

Analyst Q&A:

· Customer inventory at the end of the first quarter is believed to be similar to where it was at the beginning of Q1.

· Finished products inventory at Hynix shrunk during the quarter as demand was higher than supply, even in the seasonally weak first quarter.

· Inventory for legacy memory products, which make up the bulk of inventory today, will continue to fall throughout 2024 as capacity expansion is focused on the leading edge. This will likely lead to legacy supply being constrained by the end of 2024.

· If construction begins now on M15X, it could open by the end of 2025. That means the lag between beginning fab building construction and first wafer starts is seven quarters, so eight quarters from start to first silicon.

· Hynix is sold out of this year’s supply of HBM3E supply.

· One analyst, in their question, said they expect further sharp increases in NAND prices in the current quarter. The company didn’t comment on this during their answer to the question.

· As ASPs rise and supply declines, the company expects further inventory write-down reversals to come, but at smaller amounts.

· The company made similar comments to those from Micron, that the larger die size of DDR5 and HBM products means migration to higher technology nodes making these products will keep wafer output levels from reaching the prior peak in 2024, regardless of increased fab utilizations.

· Additional capacity being added this year is for high-margin products with clear demand and for more cleanroom space, to enable future capacity to be added more quickly.

Summary

The most surprising fact I learned in this call is how large the price premium is for HBM, as judged by the difference between Hynix’s and Micron’s gross margins. The difference is 2500 bps, for companies of similar size with similar cost structures. That indicates a massive premium for HBM, since Hynix has most of the market today for that product and Micron has almost none. As Micron ramps up production of HBM this year, their ASPs will grow even faster than what is normally seen at this point in the turning of the cycle. Also, HBM supply will come on fast, closing the ASP gap to other kinds of DRAM. Another surprise in this call is how strongly the NAND market has turned. This is now two consecutive quarters of 30% sequential ASP increases. Neither Micron nor Hynix made any indication they will add NAND capacity in response to this. There is too much scarring. Hynix made mostly the right comments with respect to adding capacity. They have revised their investment plans for 2024 up somewhat, for HBM and for more cleanroom space. These comments support my view that 2024 is going to see a rate of DRAM and NAND ASP increases that will shock the market. There is a confluence of low capacity investment from an historically brutal downturn combined with a large new source of demand. I don’t think the Market has fully realized how sharply prices for memory are going to rise the rest of the year, with demand growing mid-teens percent and supply to be up low single digits. We’ll hear from Samsung tomorrow.

-Smooth Hughes (cyclical long MU)

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