2023.07.26
I review the financial reports from the other significant memory manufacturers to learn more about the state of the DRAM and NAND markets, not to analyze the companies as investments. Hynix is Micron’s sister company. It is similar in size and is split 70-30 between DRAM and NAND. The Korean company has typically been more profitable that Micron at a given point in the cycle, but the gap has closed in recent years.
Investor Presentation
In Q2 of 2023, Hynix DRAM bit shipments was up mid-30% sequentially (previous five quarters were down around 20%, flat, down mid-single digits %, up 10% and down high-single digit %.) In NAND in Q2, bit shipments were up around 50% (previous five quarters this was up down mid-teens %, down high single digits %, down low teens %, up high single digits % and up high teens %.) In DRAM ASPs were up high single digits % sequentially (down high teens % in the prior quarter) and NAND declined around 10% (also down around 10% in the prior quarter.) These results indicate a significant positive shift in the markets of both memory types. DRAM prices being up at the same time shipments are up sharply is a strong indication that these ASPs have inflected and are heading up. The NAND market has been weaker in recent quarters, so these results are especially surprising. ASPs still dropped, a similar amount to last quarter, but bit growth was up massively. This means the market was able to absorb much more product that in the prior quarter with the same level of price decline.
Overall company revenue was up 44% sequentially (down 34% in Q1, down 30% in Q4-22, down 20% in Q3, rose 14% in Q2). Gross margin was negative 32.0% in the quarter (was 3.0% in Q4) and operating margin was negative 66.9% (was negative 22.0% in Q4). In three quarters, gross margin plunged from 46% to negative 32% and operating margin dropped from 30% to minus 67%, a staggering 9700 basis point decline.
For 2023, the company is forecasting DRAM demand bit growth to be up mid-to-high single digits %. This is the same forecast they made last quarter. Their view from Q4-22 to Q1-23 shifted lower. For NAND, the company now expects bit demand growth to increase mid teens % in 2023 vs. a prior view of up mid-to-high teens year-over-year. DRAM demand has stabilized and NAND continues to soften. In the PC segment, channel inventories have decreased and unit shipments are up. However, the impact of more PC sales on memory demand has been limited because the units being sold are low-spec. The company anticipates higher demand in the second half of 2023, driven by commercial/gaming PCs. Demand from China reopening has been disappointing. They believe new product launches and higher memory content per phone will lead to more mobile DRAM and NAND sales in the second half, but they always say this. Demand is rising for high-spec memory (high density DDR5 and HBM) from servers being used for AI applications. Hynix is forecasting mid-to-long term AI server market growth at a mid-30% CAGR compared to total sever growth in the high-single digit % CAGR. I think the coming market recovery in DRAM will be led by DDR5 and HBM sales for two reasons. One, inventories of these products didn’t expand over the last eighteen months because they are newly introduced products and two, the recent rise in AI workload demand benefits from these types of memory.
Memory demand started to recover as of the second quarter but is still insufficient to normalize elevated inventory levels. High inventory and low profitability of NAND has led the company to cut back NAND production further. The company is continuing with their plan to reduce capital expenditures in 2023 by more than 50% over 2022, but a higher proportion of this capital will go to DDR5/HBM production, shifting away from DDR4 and other memory types. For the third quarter, they are planning on low-to-mid teens % sequential increase in DRAM bits. In this quarter, NAND bit shipments will be flat from Q2.
Analyst Call
Here are highlights from the earnings conference call:
Prepared Remarks:
· Expanded sales of DDR5, LPDDR5, and HBM premium products in Q2 enabled DRAM bit shipments above guidance and higher ASPs in Q2 compared to Q1.
· Some inventory build demand was seen for DRAM from mobile and PC customers.
· Graphics DRAM sales (including HBM products) were previously a single-digit percentage of DRAM sales. They reached 10% in Q4-22 and were more than 20% of DRAM sales in Q2. In my view, this is a combination of the strength of AI demand and the weakness in other segments.
· NAND bit shipments were up 50% from the previous quarter due to expansion of sales across all applications and the base effect of low shipments in the first quarter.
· The company believes the memory market bottomed in the first quarter, though inventories continue to be absorbed from elevated levels.
· Customer memory inventories continue to decline in the second quarter, with the impacts of production cuts flowing through. This has led to a slowdown in the rate of memory price declines. Demand is expected to improve in the second half of the year and supply will reduce as further production cuts flow through.
· The effects of industrywide production cuts will become more pronounced in the second half of 2023, leading to a tighter supply-demand balance in 2024. I think this is a conservative prediction. Increasing demand for DRAM bits for AI will draw supply into that segment. This, plus production cuts and reduced inventory levels will, in my view, lead to DRAM undersupply by the fourth quarter of 2023.
Analyst Q&A:
· There was some inventory building in Q2 by PC and mobile customers whose inventory level had dwindled in the first quarter.
· Demand for DDR4 continues to soften, thus they are shifting quickly to DDR5 production.
· Overall demand has been soft for two years. The company believes this will lead to a stronger replacement cycle for PCs and smartphones. They see “it is highly likely that there is going to be a recovery next year.”
· Outside of HBM and graphics, end demand continues to be weak. They believe demand will strengthen in the second half of the year. Combined with production cuts, they believe this will lead to reduced inventory levels as the year goes on.
· Hynix did an inventory write-down in the first quarter, and a smaller one in the second quarter. They believe the likelihood of further inventory write-downs are low, given the recovery in the market being seen now.
· The additional production cuts in NAND are between 5% and 10% of total, compared to what was planned a quarter ago.
Summary
The strength from AI demand was a surprise to the upside for Hynix this quarter. It was so good that the favorable pricing and revenue growth from the segment of HBM and graphics brought up the company’s blended ASPs on DRAM to rise from Q1 to Q2. This is faster than almost anyone predicted. With all the focus on AI and the related memory demand, commentary on the other segments was secondary. They did say some inventory restocking among PC and mobile customers was seen in Q2. This is a strong positive signal for the DRAM business. PC and mobile entered the downturn first so those segments will be likely to emerge first. The AI demand is a bonus. It looks to me that the consumer-facing segments (PC and mobile) are reaching the inventory trough. Customers are at normal levels, now the extra inventories at the memory makers need to be worked down. I think we are looking at clear recovery in the DRAM market by the end of the third calendar quarter. Said another way, when I’m looking at Micron’s Q4 results at the end of September, they will be talking about rising DRAM prices in the spot market. On the other had, everyone is feeling the pain in NAND. Hynix even cut NAND output by another 5-10%. NAND is 30% of Micron’s business so it doesn’t matter nearly as much as DRAM, but it matters. I am hesitant to venture a guess on how long NAND will be down. Both Samsung and Hynix were adding capacity with abandon two years ago. It’s going to take some time to work off the inventory and catch up with all that capacity. A good scenario for Micron investors is the DRAM market starts recovering in the third calendar quarter and comes roaring back after that. Then, when the enthusiasm for Micron has started to fade in the middle of summer of 2024, the NAND market has bottomed out and starts contributing positively. Last comment here is to remind everyone that memory prices are down around 60% from their last peak. The memory makers have lost a lot of money and will need to hold back adding supply back onto the market to give them time to recover their losses.
-Smooth Hughes (cyclical long MU)