October 27, 2022
Samsung is the market leader in both DRAM and NAND and their memory divisions are just part of a massive conglomerate. I look through their earnings presentation and conference call transcripts for insight into the state of the memory market. This is not an analysis of their earnings, prospects, etc.
Earnings Presentation
- Bit growth was below guidance, resulting in declining sales. Customer inventory adjustments were higher than expected and consumer product end-demand continued to weaken
- The company saw a slowdown in demand across the industry. They are continuing to focus on maximizing profits in a weak environment by holding inventory rather than further oversupplying the DRAM market.
- Similar to DRAM, overall bit demand was below guidance because of weak end-demand for consumer goods and inventory adjustments at major customers
- In Q4, Samsung expects to ship above the overall market by focusing on the high-density server segment and shifting product mix to the most profitable mix. The mix part is something all memory makers are doing all the time, so no news there.
- In NAND, the company will use lower pricing to stimulate new demand
- They are forecasting demand to improve in the second half of 2023 as DDR5 is adopted, though macro uncertainty hangs over this forecast. Samsung made a similar prediction about 2H of 2022 in their call six months ago, that DDR5 demand would lead to memory market strength. Nobody knows anything.
Earnings Call
These are the highlight quotes regarding DRAM and NAND:
- For the Memory Business, although geopolitical uncertainties are likely to dampen demand in the first half, we expect demand to rebound, centering on server, driven by resumed expansion of data centers. We will align our supply strategy with our mid-term outlook taking into account the limited overall production growth in the industry.* This statement about supply growth is ambiguous. Combined with earlier comments about protecting profitability in DRAM, I read this to say they will also moderate supply growth as Hynix and Micron have said they will.
- Memory capital investment will be focused on infrastructure at their fabs P3 and P4 and on advanced technology. This is similar to what Hynix and Micron have said.
- we aim to deliver Bit Growth that exceeds market for both DRAM and NAND mainly due to base effect, focusing on high-density, high-performance products in line with the needs of our customers. For DRAM, we will maintain our strategy of prioritizing profitability by considering cost competitiveness in determining product mix. Additionally, compared to last year, Capex for the year is likely to increase slightly as we plan to preemptively invest in infrastructure and leading technologies to ensure readiness for to mid- to long-term demand and strengthen our technological competitiveness.* This commentary is mixed for the DRAM industry overall, but I read it to be negative. Samsung is saying they will increase capital expenditures in 2023 from 2022 levels. While the comment includes saying this will be investment in infrastructure and advanced technology, if they are to moderate supply growth they have to cut capex in 2023, because a large portion of total capex is WFE.
- For DRAM, in server, while the shortage of some components is easing gradually, we expect fundamental server demand to remain steady, given key infrastructure investments in AI and 5G etc. However, our customers’ stance on inventory adjustments is likely to remain until the end of this year due to economic uncertainties.*
- For Mobile, we expect memory demand to pick up thanks to the mass production of new Flagship and High-end models by major manufacturers; and if the economy recovers progressively toward the end of the year, we may see a rebound in demand, although we should keep checking on uncertainties such as the potential for additional COVID-19 lockdowns.*
- For PC, while consumer sentiment continues to slow, customers are likely to remain conservative regarding spending as OEM companies are increasingly burdened with inventory adjustments. However, we need to observe how companies’ end-of-year promotions affect consumption.*
- For NAND, We expect our customers to remain disciplined on inventory for Server SSD at lease until the fourth quarter amid worries of a global economic slowdown and geopolitical issues. On the other hand, demand is solid for server OEM SSDs that are linked to the hybrid cloud trend, so we are monitoring demand relative to improvements in market conditions.*
- For mobile, it seems that demand for high-density products of 256GB and above will remain solid, driven by a combination of new smartphone launches in 4Q and a continued preference for high-end models. Also, there is potential for year-end promotions to spark a temporary rebound in demand, considering a recovery of consumer sentiment for IT devices is a key to Set shipments. However, we need to keep track of the scale of the effect.*
- For Client SSDs, as sluggish sell-out weighed on demand from PC, inventory adjustments at customers are likely to continue. As a result, we expect effects of peak seasonality in 4Q to be somewhat limited. However, in terms of storage, high-density demand is projected to keep increasing.*
- There are actually some third-party sources that are saying that they expect the second half market to improve around DRAM next year. And so, given that what we’re looking at is even the strategical level of operation that I was explaining in the previous question answer to the previous question. So even though we agree that the current market demand is contracted, if we think at a strategic level, we do see that there is a need for us to be prepared for demand recovery from a mid to long-term perspective, and that is why, when we say we are not considering any artificial reduction in production, it means that we’re not considering artificial reduction of production for the sake of short term supply and demand balance. That said, we are carefully watching the possibility of any rapid changes in the market situation. To give a bit more color about CapEx, we still stand behind our overall CapEx policy, which is to continue an appropriate level of infrastructure investment for responding to mid to long-term demand but flexibly operate our equipment investments to be in line with industry situation that is how we are able to create a sustainable foundation for profits. And so regarding CapEx this year as well as next year, what we need to keep in mind is that CapEx spending this year or next year does not directly lead to a bit production the following year. And that is why we plan to stand behind our original infrastructure investment plans, which will enable us to respond to mid to long-term demand. Also, to give you some more color on our CapEx spending this year, as you know, we were the first to adopt EUV and DRAM starting from 15-nano and we have been rolling out EUV, going full EUV to advanced nodes. And that is one of the reasons why we have a relatively large equipment CapEx size. And on top of that, we have been going through a large-scale infrastructure investment in P3 and P4 and that explains why our CapEx this year has increased versus the previous year.* This detailed commentary on earlier comments is not encouraging, but not as negative as it could be. They are not taking wafer starts out as Micron and Hynix said they would because they want to be prepared for recovering demand in 2H 2023, but their investment comments are about infrastructure and advanced technology, not about supply growth. If they are consistent with comments in earlier calls, this could be read to mean they will slow down supply growth, with investments focused on capacity that will be realized in the latter half of 2023 and beyond.
- Regarding your question about NAND, yes, we agree that compared to DRAM, the possibility of market conditions improving, recovering next year is relatively low for NAND and that is why we also feel the need to manage our NAND inventory levels to balanced levels.*
- The other factors that impact profitability of the Memory business, the price is a factor that is beyond our control and that is why we have always emphasized cost competitiveness as a way of us ensuring stable profitability regardless of what situation unfolds. And as a result of our focus on cost competitiveness, I can say that in the industry, we have a cost structure that is by far superior than any competitor and this is a huge and powerful strength to have.* The company seems to be saying here that they will focus more on technology advancement and spending rather than on reducing supply growth as their way of dealing with the downturn in memory ASPs. This is negative for Micron and Hynix as it suggests Samsung is willing to risk continued memory oversupply and may take market share rather than slow their bit growth.
Summary
Samsung’s commentary on memory market conditions were similar to those from Micron and Hynix. That is, server end-demand is holding up while consumer segments continue to be weak. All customers are adjusting inventory of memory down. Unlike their memory peers, Samsung didn’t announce large capital expenditure cuts for 2023. Instead, they stated capex next year may increase slightly, though the reasons for this growth are infrastructure and advanced technology. This leaves it open for one to interpret the comments to mean Samsung will moderate bit growth next year but leaves them open to not do so. While not an outright negative report for memory investors, I hoped that Samsung would make conclusive statements about greatly reducing DRAM bit demand next year. Instead, they stated they will outgrow the NAND market and use lower prices to stimulate demand. In DRAM, they intimated the company will use their low-cost position against competitors, though in what way they left open. Samsung is more than 50% larger in memory than either Micron or Hynix so their actions weigh most heavily on supply-demand balance. I hope next quarter Samsung will make stronger statements about action they are taking to reduce supply growth to help bring the market back into balance.
-S. Hughes (long MU)