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.
In Q3, Hynix DRAM bit supply was down mid-single digit % (previous two quarters were up 10% and declined high single digit %.) DRAM ASPs in Q3 were down around 20% (previous two quarters were down low single digits and down low-to-mid single digits in Q1.) For the last three quarters, DRAM ASPs have declined approximately 25%. The price drop this quarter was historically steep. In NAND in Q3, bit supply declined low teens % (last two quarters this was up high single digits % and up high teens %.) NAND pricing fell more than 20% in Q3 (previous quarters were up low single digit % and up low single digit percent, for Q2 and Q1, respectively.) Excluding Solidigm (the former Intel NAND business,) bit growth was down high single digit % and the ASP change was the same as without. All the talk of NAND supply growth from Samsung and WD-Kioxia has finally caught the NAND market, though the drop in demand for memory overall is likely the more important factor in price declines, as DRAM is down a similar magnitude in Q3. DRAM commentary is that they expanded sales into new mobile products and data centers. For NAND, the comment is higher sales into eSSD to offset consumer products demand weakness.
Overall company revenue was down 20% sequentially (rose 14% in Q2), with gross margin down 1100 bps (was up 200 bps in the prior quarter, to 45%. Operating margin was cut in half, from 30% in Q2 to 15% in Q3. This margin crested at 34% to 35% in Q3 and Q4 of last year. Hynix’s total revenue is 64% from DRAM and 31% from NAND.
For the full year 2022, the company expects DRAM demand to grow low-to-mid single digits % Y-o-Y and they forecast 2023 to see demand growth in the low-teens %. NAND demand bit growth in 2022 will be up single digit % Y-o-Y and in 2023 they are forecasting NAND bit demand to rise mid 20% Y-o-Y. The company has taken their 2022 demand forecast down significantly for both DRAM and NAND. In the Q2 results, they said Y-o-Y demand growth for DRAM would be low-teens % and NAND would be around 20%. This would make 2022 an historically low year for demand growth in both of the major memory forms. It seems to be caused by a collision between the end of Pandemic-related demand pull-ins (work/learn from home) and global macroeconomic weakness. By segment, PC units will drop mid-teens % in 2022 and Hynix believes this will decline further in 2023. Mobile units will drop high-single-digits % in 2022 with no commentary on 2023 from the company. As Micron said in their call three weeks ago, Hynix also sees healthy server demand in 2022 but inventory corrections are affecting demand in the second half.
Here is the most important information for memory investors. Hynix announced substantial cuts to their capital expenditures plan, to bring the market back into balance. They will cut production of relatively low-margin products and reallocate wafer production to improve long-term fab efficiency. This probably means they will eliminate some low-volume devices and/or end some older technology nodes. They said some wafer output loss is possible in the process, a nice way of saying they will reduce wafer outs. They will slow their tech migration plan in 2023 as well as reduction wafer production next year. To quantify the reductions, they said they will cut CapEx in 2023 by more than 50% compared to 2022 levels.
Here are highlights from the earnings conference call
- Pricing fell at a faster pace than expected. Demand for consumer products such as PCs and mobile phones are continuing to deteriorate.
- DRAM and NAND demand is expected to drop to unprecedented levels for the remainder of 2022. PC unit weakness will extend into next year. Demand for low and mid-tier mobile phones has slowed significantly while flagship phone demand remains healthy.
- Hynix will reduce capital expenditures by 50% in 2023 compared to 2022. This magnitude of CapEx cuts has not been seen since 2008-09 during the Great Financial Crisis
- The current CapEx plan for 2023 they are planning for is a total reduction of 50% compared to 2022 levels, proportional between infrastructure and equipment. Between DRAM and NAND, the cuts will be about proportional, though weighted slightly more to NAND. They are considering plans that would cut CapEx in 2023 by more than 50%.
- DDR5 is expected to be more than 30% of server share by the end of 2023. Similar for PC by the end of next year.
- High inventory is expected to peak in the first quarter of next year. Customers are working down their inventory first and this is depressing demand.
- Solidigm’s performance this year is struggling now but management believes in 1-2 years the strategic benefits of this acquisition will be clear. Not surprising that the integration of this company is not going as well as was expected when the deal was announced.
- The current downturn in memory is caused by macroeconomic issues and is severe by historical standards. While making predictions about neither market, management said that predicting when NAND will recover is more difficult than DRAM, because there are more players and a stronger price elasticity factor. Later in the call, they said that their hope is for the memory market to stabilize in the second half of next year, though they hedged that it could be even later. DRAM bit growth next year will be limited in 2023 and may be zero.
- The company did write down the value of some inventory in the third quarter
The severity of the drop in memory prices is the story of Hynix’s call. DRAM and NAND ASPs both dropped by 20% or more from last quarter. Similar to Micron, Hynix announced they will reduce capital expenditures in 2023 by more than 50%. Micron said it would reduce WFE CapEx in 2023 by 50%. Hynix said the severity of the drop has not been seen since the 2008-09 period during the Great Financial Crisis. Consumer spending in the U.S. has not contracted this sharply so the memory market must be feeling the demand drop from customers elsewhere, especially in Asia. The decline in PC unit demand is also a big factor. Management hedged on predicting when the recovery will happen, saying they are hoping for the second half of 2023 but that it may be longer. Just like the rest of us, memory industry executives don’t know when things will improve either. This earnings release and associated commentary was what Micron investors wanted to hear. That is, Hynix is feeling the pain of severe ASP drops and is slashing capital expenditures by more than 50%.