Samsung Electronics Co., Ltd. (OTCPK:SSNLF) Q3 2022 Results Earnings Conference Call October 26, 2022 9:00 PM ET
Company Participants
Ben Suh – Executive Vice President, Investor Relations
JinMan Han – Executive Vice President, Semiconductor Business (Memory)
Kenny Han – Vice President, Semiconductor Business (System LSI)
Moonsoo Kang – Executive Vice President, Semiconductor Business (Foundry)
KwonYoung Choi – Executive Vice President, Samsung Display
SungKoo Kim – Vice President, Mobile eXperience
Young Moo Kim – Vice President, Visual Display
Conference Call Participants
Peter Lee – Citigroup
Nicolas Gaudois – UBS
Ricky Seo – HSBC
Sung Kyu Kim – Daiwa Securities
Dongwon Kim – KB Securities Co.
Ben Suh
Welcome, everyone. This is Ben Suh from Investor Relations. Thank you for joining our Third Quarter 2022 Earnings Call. For additional details regarding our quarterly results, please refer to our earnings presentation which is available on our IR website at www.samsung.com/global/ir.
On the call today, I’m joined by the following representatives from each business unit: EVP, Han JinMan, representing Memory; VP, [indiscernible], for System LSI; EVP, Kang Moonsoo, for Foundry; EVP, Choi KwonYoung, for Samsung Display Corp, which I will call Display in the presentation; VP, Kim SungKoo, for Mobile eXperience; and VP, Kim Young Moo, for Visual Display.
I want to remind you that some of the statements we will be making today are forward looking based on the environment as we currently see it. All such statements are subject to certain risks and uncertainties that may cause our actual results to be materially different from those expressed in today’s discussion.
Before reviewing our quarterly results, first, I want to confirm the third quarter dividend. Today, the Board of Directors approved a quarterly dividend of KRW 361 per share for both common and preferred stock. Based on the annual dividend payout under the current dividend policy, the total quarterly payout is KRW 2.45 trillion and it will be paid in mid-November.
Now I will move on to the results for the third quarter. Despite a challenging business environment, marked by global inflation and sluggish demand, we still delivered our highest ever third quarter revenue of KRW 76.8 trillion. We have set new records for total revenue in a respective quarter in each quarter so far this year, and we expect annual revenue to surpass the all-time high mark that we set last year.
While Memory business revenue declined as customer inventory adjustments caused our bit growth to fall short of guidance, each of the foundry and mobile panel businesses delivered a new quarterly record for revenue.
Sales of flagship smartphones were solid, helping drive our overall revenue performance.
Gross profit decreased by KRW 2.2 trillion sequentially to KRW 28.7 trillion, mainly due to the impacts of a significant price decline in memory. Gross margin decreased by 2.7 percentage points.
SG&A expenses increased KRW 1 trillion quarter-on-quarter to KRW 17.9 trillion as we continue to actively invest in R&D and increased advertising and promotional spending. As a percentage of sales, they increased by 1.4 percentage points.
Operating profit declined KRW 3.2 trillion sequentially to KRW 10.9 trillion. Display set a new record for quarterly profit led by increased demand for major customers’ new products and MX improved its profit thanks to solid flagship sales. However, the gains were overshadowed by weak results in the Memory business. Operating margin also decreased, falling 4.1 percentage points to 14.1%.
I will now briefly review the results for each business unit. For the DS division in Memory, results declined quarter-on-quarter as customers’ inventory adjustments exceeded market expectations and demand for consumer products remained sluggish, including for mobile products in China.
In System Semiconductors, profits decreased amid weak demand for mobile and TV, but foundry delivered a record result with ongoing yield improvements in advanced nodes and increased revenue contributions from derivative processes of mature nodes.
For Display, results in the mobile and panel business significantly improved both quarter-on-quarter and year-on-year, with the release of major customers new products, including foldables. Also, our differentiated technology drove increased share in a major customers’ new flagship smartphones. Losses in the large panel business continued amid weak TV and monitor markets.
The MX business recorded solid profitability, driven mainly by strong sales of flagship smartphones including foldables as well as new wearable products. MX also benefited from effective resource management in the face of continued foreign exchange headwinds.
The Network business delivered improved results led by its overseas businesses, and it secured a deal with Comcast in the United States, a testament to our continued pursuit of new opportunities.
In VD, profits declined amid a combination of decreased demand and increased costs. But still, we reinforced our leadership position by expanding sales of premium products. In digital appliances, despite an enhanced product mix, persistent materials and logistics challenges, along with sluggish consumer demand, affected our performance.
Harman delivered a record high quarterly profit, driven by strong demand for connected car technologies and solutions, and also by strong sales of consumer audio products.
Regarding currency effects against the Korean won for this quarter, the positive impacts of a strong US dollar on component businesses surpassed the adverse impacts of the DX division, resulting in an approximately KRW 1 trillion companywide gain in operating profit compared to the previous quarter.
Next, I would like to share our business outlooks. In the fourth quarter, while global IT demand and the memory market looked to remain weak, we plan to keep improving earnings in foundry and display and continue our efforts to secure profitability in the DX division.
Now for each business unit’s outlook. In Memory, even though we expect fundamental server demand to remain, backed by continued investments in core infrastructure, impacts of inventory adjustments are likely to persist. We will actively address the demand for high density products and, at the same time, continue to place a priority on DRAM profitability by transitioning our product mix towards a more cost competitive lineup.
For System LSI, we expect our SOC revenue to grow following the launches of new products from our mobile customers, and we will work to expand sales of 200 megapixel sensor products.
For foundry, we anticipate that demand from our global customers will remain solid, and that additional yield enhancements will help maintain earnings momentum.
For display, the mobile panel business is expected to continue to grow on the back of strong smartphone demand for premium OLED panels, in which we have a clear competitive advantage. The large panel business will expand the presence of QD-OLED by capitalizing on year-end seasonality and growing our customer base.
For the MX business, we will continue to focus on sales of premium smartphones and expand the sales of tablets and wearables. And we expect the sales volume to grow after releasing new mass model smartphones. Even though macro uncertainties are likely to persist, we will continue to focus on profitability.
Network will continue to expand overseas businesses, including in the North America and Japan regions.
For VD, our priorities are capturing demand in the premium market during strong seasonality and enhancing profitability through improving cost efficiency. Digital appliances aims to expand revenue by increasing sales in the premium segment and online channels during the year-end seasonality, focusing on our bespoke lineup.
Now let’s move on to our outlook for 2023. We expect demand to recover partially, but macro uncertainties are unlikely to dissipate. The DS division will actively address the demand for high value-added products, expand the advanced node portion of production, and increase adoption into new application areas. The DX division will continue to reinforce our leadership and expand lineups in premium segments, while enhancing user experiences by expanding multi-device connectivity for mobile, TVs, home appliances and others based on smart things.
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.
In addition, we will reinforce market leadership by actively addressing the demand for new interfaces, including DDR5 and LPDDR5X and the rising demand for high density products.
System LSI, through the reorganization of its SoC business, will be in position to bolster its competitiveness and solidify the position of our flagship products. And in Foundry, we will establish a foothold to narrow the gap with our lead competitor by reinforcing technology leadership in advanced nodes and increasing new orders in HPC and automotives, among others.
For Display, in the mobile panel business, we will continue to focus on expected strong demand from premium smartphones and on expanding into new application areas such as IT and gaming. So large panel business will increase sales of QD-OLED by expanding our lineup and further enhancing performance, while also working towards profitability.
The MX business will seek to grow revenue by enhancing the product mix and expanding the sales of flagship products based on the high growth of foldable devices and increased sales of the S Series. Furthermore, we will secure a solid profit margins through our efforts to continue upgrading premium large screen tablets, sustain high growth of wearables and enhance operational efficiency.
For Network, we will pursue continued revenue growth with timely responses to major overseas business expansion opportunities and reinforce our technology leadership in 5G core chips in virtualized radio access networks.
BD should continue to lead the ultra large screen and premium market segments. We will continue solidifying our industry leading position by enhancing user experiences as we link more products seamlessly to our screens.
For digital appliances, we will keep innovating highly efficient, eco-friendly products and aim to achieve revenue growth centering on the premium segment through global expansion of our bespoke lineup.
Now turning to capital expenditures. CapEx in the third quarter was KRW 12.7 trillion, of which KRW 11.5 trillion was invested in the DS division and KRW 0.5 trillion in Display. The cumulative total CapEx at the end of the third quarter is KRW 33 trillion, with KRW 29.1 trillion invested in DS and KRW 2.1 trillion in Display. We expect full year CapEx to reach approximately KRW 54 trillion, with KRW 47.7 trillion allocated to the DS division and KRW 3 trillion to display. As a reminder, the full year numbers are projections and the actual figures may differ depending on factors such as future market conditions and the timing of equipment deliveries.
We expect Memory investments to concentrate on infrastructure at P3 and P4, as well as on advanced technologies such as EUV to enhance our market competitiveness.
Foundry investments will center on expanding the production capability of our Taylor and [indiscernible] sites to address the demand for advanced processes using EUV. This is in line with our Shell First strategy that enables swift and flexible responses to customer demand.
Display will expand the capacity of flexible displays for mobile products and enhance the efficiency of large QD-OLED panel production.
Next, I would like to share some of our key activities in sustainability management. First, I would like to recap the September announcement of our new environmental strategy. This strategy contains our commitment to combating the climate crisis and our ambition to achieve net zero carbon emissions by 2050 as the world’s largest IT manufacturing company.
More specifically, we target reaching net zero carbon emissions by 2030 for the DX division and by 2050 for all global operations, including the DS division, but we will strive to achieve this earlier.
In conjunction, we also joined the global RE100 initiative, under which we will run all operations outside Korea as well as DX division on renewable energy within five years and aim to match electric power needs with renewable energy by 2050 for all operations globally.
Furthermore, we will reduce power consumption in the product use stage through the development of innovative ultra-low power consumption technologies. And we will bolster resource secularity throughout the entire lifecycle of our products, from raw materials to disposal.
For semiconductors, we will secure ultra-low power technology by 2025 to significantly reduce the power needs of memory products used in data centers and mobile devices. Moreover, we will apply low power technologies in major models of seven consumer products, with the goal of lowering power consumption by an average of 30% by 2030 versus comparable models released in 2019.
To enhance water resource efficiency, we will endeavor to maximize water reuse to keep actual water withdrawals in 2030 to 2021 levels despite the growing number of production lines at domestic semiconductor worksites.
Further, we will actively develop carbon capture and utilization technologies to help tackle global environmental challenges and reduce particulate matter.
Next, on October 11, 2022, Samsung Electronics topped the Forbes list of The World’s Best Employers for the third consecutive year. To compile the ranking, Forbes surveyed 150,000 workers from 57 countries. This is a meaningful and proud achievement, the recognition of our efforts on social responsibility, product and services improvements for our customers and corporate culture enhancements for employees.
Last, but not least, in September, we received the highest ranking on the 2021 evaluation from the Korea Commission for Corporate Partnership for the 11th consecutive year, an unprecedented achievement among Korean companies.
It is a recognition of our ceaseless efforts to foster win-win partnerships not only with our primary, secondary and tertiary partners, but also with non-partner SMEs also. We will continue to reinforce ESG management going forward.
I will now turn the conference call over to the gentlemen from each business unit to present third quarter performances and outlooks for their respective business segments. We will start with EVP, Han JinMan, of the Memory business. Thank you.
JinMan Han
Good morning. This is Han JinMan from the memory global sales and marketing office. For the memory market in the third quarter, on the continued macro uncertainties, the scale of customers inventory adjustment exceeded market expectations and demand for consumer products continued to slow down. As a result, DRAM and bit growth were both below guidance and our performance declined compared to the previous quarter.
In DRAM, overall demand for servers decreased as customers reduced their purchasing budgets and strictly managed inventory levels, while some components’ supply issues remained.
For mobile, customer sentiment worsened amid ongoing macro issues such as inflation and COVID-19 lockdowns and demand declined due to high inventory levels at customers.
And for PC, while overall purchasing sentiment weakened because of the economic slowdown, demand decreased due to inventory adjustment at major OEM customers.
In the face of a worsening slowdown in demand across the industry, we maintained the disciplined sales strategy focused on profitability and our inventory levels increased. Consequently, bit growth was below guidance due to impact of weak demand across the market.
Next I will talk about the NAND market. For server SSD, overall demand slowed due to component supply issues starting last year and expanding stance of customers’ inventory adjustment, triggered by increased macro uncertainties.
For mobile, although the high density portion of products kept increasing, consumer sentiment shrank due to macro issues and demand weakened because of factors such as COVID-19 lockdowns.
For client SSD, despite a continuously increasing need for high density products, memory demand decreased as set shipments weakened and customer inventory increased.
We strengthened our product portfolio by consistently increasing the high density portion in mobile in several OEM applications. But our overall bit growth was below guidance due to high inventory levels at major customers and weak set demand, mainly mobile customers, which accounts for a significant portion of our sales.
Now let’s move to the outlook for the fourth quarter. We expect the impact of various macro issues continue until the end of this year, and that our customers will maintain their stance towards inventory adjustment. Even under these market conditions, we aim to deliver bit growth that exceeds market for both DRAM and NAND, mainly due to base effect, focusing on high density and 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 the mid to long term demand and strengthen our technological competitiveness.
I will now go over the outlook by each product. For DRAM in server, while the shortage of some components is easing gradually, we expect fundamental server demand to remain steady, given key infrastructure investment in AI and 5G, et cetera. However, our customer stance on inventory adjustment 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 towards 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 on spending as OEM companies are increasingly burdened with inventory adjustments. However, we need to observe how company’s end of the year promotions affect consumption.
We will keep strengthening our cost competitiveness and securing profitability by expanding cutting edge node migration for several products, and we will also focus on preparing 16 gig based products to cope with demand for high density products of 64 gigabyte and higher. Moreover, we will continue to strengthen our market leadership by responding to LPDDR5X demand for new flagship mobile models.
For NAND, we expect our customers remain disciplined on inventory for server SSD, at least 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 256 gigabyte and above will remain solid, driven by a combination of new smartphone launches in fourth quarter and a continued preference for high end models.
Also, there is potential for year-end promotions to spark a temporary rebound in demand, considering the fact that 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, a sluggish sell out weighed on demand from PC, inventory adjustment at customers are likely to continue. As a result, we expect the effects of peak seasonality in fourth quarter to be somewhat limited. However, in terms of storage, high density demand is projected to keep increasing.
We will actively respond to the demand for high performance and high density products generated by customers who strive for securing growth momentum in the market, while also capitalizing on NAND’s high price elasticity to steadily unlock new demand and continue to expand market leadership.
Now let’s move on to the outlook for 2023. Ongoing macro issues such as the war in Ukraine and austerity measures in various countries to deal with inflation are expected to partially impact demand in the first half of next year.
Looking at each application, first for server, demand should improve gradually throughout the year as we expect the adoption of DDR5 for new CPUs to expand and high density trends to widen. Moreover, cloud companies are projected to resume construction of data centers that were previously delayed. However, as various micro issues have weakened demand, we will keep preparing for various scenarios in observing market conditions.
For mobile, it is highly likely that demand will remain soft – slow in the first half of the year, with consumer sentiment expected to remain somewhat sluggish on top of effects of weak seasonality. On the other hand, as we enter the second half, we believe the adoption of high density products in new models and the expansion of new form factors will partially help boost mobile demand, which has been suppressed.
For PC, similar to mobile, set inventories that accumulated due to sluggish sell out would be depleted in the first half of the year, but we are likely to see a dramatic recovery in demand. If the macroeconomy stabilizes as we move into the second half, we will continue to watch for signs of improving in demand.
While striving to secure a reasonable level of strategic annual supply contract, mainly with major customers, we plan to proactively address demand for products showing relatively higher demand growth, such as servers. Moreover, through our ongoing efforts to optimize our portfolio, we will also address the growing and diversifying demand of our customers in various applications.
Additionally, we’ll focus on planning to link our supply operations to our mid-term plans, as we expect the recent increases in complexity of tech migration to cutting edge nodes and growing lead times to constrain bit growth across the industry. Also by responding to rising demand for new interfaces, such as DDR5 and LPDDR5 and LPDDR5X, as well as for high density products, we will continue to secure our sustainable market leadership.
Thank you.
Kenny Han
Good morning. This is Kenny Han from the System LSI business. In the third quarter, System LSI earnings declined due to a decrease in demand for major components, resulting from a slowdown in mobile, TV and PC demand, triggered by an economic downturn. However, SoC revenue grew, thanks to an increased portion of 5G and higher sales of products for use in premium segments.
In addition, we signed our long-term supply agreement for modem products with a tier one Android smartphone customer. And we reinforced the basis for mid to long term growth for automotive SoCs by winning OEM orders from a number of premium European brands, including one in the UK, and by expanding strategic cooperation with them.
In the fourth quarter, we expect sales in the SOC business to increase due to the effects of a new product launch by the tier one Android smartphone company. Furthermore, our new low to mid-priced SoCs targeting smartphones are scheduled to start mass production, which will contribute significantly to the revenue in 2023.
In addition, we expect imaging sensors to deliver improved earnings, with a number of smartphones featuring our 200 megapixel sensors being released in August.
For 2023, visibility in mobile, a major application, is becoming increasingly limited due to heightened economic uncertainties. However, analysis of smartphone purchase patterns suggest that demand will continue to polarize between premium and low price performance.
In order to respond to this divided market, we will expand sales in the value zone [ph] while also strengthening the competitiveness of flagship products. Furthermore, we will work closely with foundries in order to smoothly supply various 200 megapixel sensors, helping ensure our major customers successfully launch flagship models.
Thank you.
Moonsoo Kang
Hello. This is Moonsoo Kang from the Foundry business.
In the third quarter, we achieved our highest ever quarterly revenue and operating profit due to steady yield improvement in advanced process and increased revenue contributions via the enhancement of matured process.
[indiscernible] of the world’s first 3 nanometer GAA product, we will further strengthen our technology leadership by developing 2 nanometer and 1.4 nanometer process technology.
In particular, we presented 2 nanometer and beyond node plan as vision for future innovation to follow GAA with introducing new processes such as backside power delivery network, which can efficiently deliver power inside a semiconductor chip to enhance performance and early adoption.
In the first quarter, revenue is expected to see double-digit growth sequentially on solid demand from various applications, maximum production with optimized product mix and increased advanced node portion. In addition, we expect to deliver record high revenue and operating profit on annual basis in year 2022.
In 2023, demand in the first half is expected to be slow temporarily due to macro uncertainties, economic slowdown and inventory adjustment at customer side. However, since we expect to recover in the second half of the year due to the increasing production contributed by orders from new customers and continuing strong demand in HPC and automotive, we will keep momentum of steady growth on annual basis.
We will focus on expanding new customer engagement in advance node and enhance our presence in automotive and IoT applications by developing specialty and mature processes for stable future growth. Thank you.
KwonYoung Choi
Good morning. I’m KwonYoung Choi from the corporate strategy team at Samsung Display. I will now summarize our result for the third quarter of 2022. In the third quarter, for the Mobile Display business, we improved our result quarter-on-quarter, thanks to growth in demand attributable to launches of new models by major smartphone brands.
We achieved record high quarterly earnings, thanks to our business strategy, which concentrates on premium OLED products amid increasing polarization of the smartphone market between the low end to mid-range and high end segments.
For the logic display business, sales of QD-OLED products continue to rise, driven by expanding launches of QD-OLED monitors by global IT brands and ongoing improvements in our yields. However, the business deficit remained similar quarter-on-quarter due to initial investment costs.
Next, let me share the market outlook and Samsung Display’s strategy for the fourth quarter and for 2023. In the fourth quarter, we expect market growth to be weaker than normal due to the sluggish consumer spending amid high interest rate and high prices despite continued strong seasonal effects for the smartphone and IT products.
However, Samsung Display will try to maintain earnings growth quarter-on-quarter by utilizing our competitiveness in the high end market in which demand is relatively stable and by capitalizing on favorable exchange rates despite a challenging business environment.
In 2023, while macroeconomic challenges may persist, we will focus on solid earnings through preemptive investments, development of differentiated technologies and effective management to ensure stable quality and yield, all of which has been by delivering our differentiated results.
We will strive to collaborate more closely with our customers to increase our OLED market share by promoting the advantages of OLED in the new application areas, such as IT, automotive and gaming, an endeavor that Samsung Display has long been preparing in order to diversify its business. In particular, in the AR/VR market, which is projected to enjoy full flagship growth from 2023, we’ll develop the technologies that our customers need and we’ll complete our upstream, downstream SCM in order to fortify our innovative leadership in the development industry. Thank you.
SungKoo Kim
Good morning. This is SungKoo Kim from the MX business. I would like to share our results for Q3 2022 and the outlook for the MX business. In Q3, amid continued inflationary pressure and geopolitical instability, the market grew slightly compared to seasonally weak Q2.
For our MX business, both revenue and operating profit increased Q-o-Q, driven by launches of new models. As for smartphones and wearables, the new models launched in Q3 have recorded strong sales, backed by smooth supply, driving solid sequential growth in revenue and operating profit.
In particular, Fold 4 and Flip 4 launched in Q3 have made great strides compared to their predecessors despite the challenging environment. And we believe the mainstreaming of foldables is on track. Keeping pace with the foldables, the S22 series, launched in the first half of this year, also maintained solid sales momentum and saw significant Y-o-Y revenue growth.
In addition, through our continued efforts to enhance the efficiency of our resource management, we secured solid profits, despite high market uncertainties, which included currency effects.
Let me now move on to the Q4 outlook. In Q4, macroeconomic instability and geopolitical issues are likely to continue. We expect market demand for smartphones and wearables to increase Q-o-Q due to year-end seasonality.
As for our MX business, we will strive to sustain strong sales of flagship products, such as new foldable series and the S22 series. We also seek to expand the sales of Galaxy ecosystem devices, such as tablets and wearables through various sales initiatives during year-end peak seasonality. Also, successful launches of new mass market smartphone models will help drive sales volume and further solidify our position in emerging markets.
Amid intensifying market competition and persistent macroeconomic challenges, such as currency headwinds, we will also focus on profitability through flagship driven sales and efficient resource management.
Now, let me share the outlook for the next year. In 2023, the global economic environment is likely to remain unstable. We expect the smartphone market to grow Y-o-Y, led by growth in flagships. Wearables, which provide rich digital life experience and value to customers, are expected to continue to see high growth in the double digits.
As for tablets, we expect the market for mid to low priced products to contract slightly as the world transitions to an endemic and consumer demand softens. But the market for premium tablets should stay solid.
To strengthen our leadership in the market, our flagships are becoming increasingly important. MX will further bolster the completeness of their flagship experience, leveraging our technology leadership to press ahead with high growth of foldables and increased sales of the S series. Through the efforts, we will consistently expand our premium user base, improve our product mix and continue flagship centered revenue growth.
As for tablets, we will continue to increase revenue by reinforcing our lineup of premium products, in line with the trend toward large screens and by enhancing the tablet experience, such as features using S Pen.
When it comes to wearables, we will strive to maintain high growth momentum centered on new models and outperform the market in revenue growth. Moreover, by advancing consistent and convenient multi device experiences based on smart things, we endeavor to keep enhancing the role and value of the Galaxy ecosystem that our users enjoy in their daily lives, further solidifying Samsung as a premium brand, while also boosting profitability through growth of Galaxy ecosystem business.
With these efforts, we will achieve revenue growth in 2023 and secure solid profitability supported by our continued efforts on operational efficiency to respond to unstable market conditions.
Finally, we will invest with a view to the mid to long term and continue open collaboration to secure advanced technologies and build an ecosystem of future growth drivers, such as digital health, digital wallet, and more. Thank you.
Young Moo Kim
Good morning. I’m Young Moo Kim from the sales and marketing team of Visual Display.
First, I’d like to review the market conditions and our performance in the third quarter of 2022. TV market demand increased quarter-on-quarter based on the seasonality, but it contracted year-on-year caused by decrease in consumer confidence resulting from high interest rate, inflation and other macroeconomic factors.
For Samsung, our performance declined due to intensifying competition caused by decreasing market demand with a subsequent increase in cost and currency movement effects in some regions. However, we improved our sales structure qualitatively and further strengthened our market leadership, centering on the premium segment.
Now let us look at the outlook for fourth quarter and year 2023. Although we expect market demand in Q4 to increase quarter-on-quarter due to year-end peak seasonality and global sporting events, several macroeconomic risks are likely to continue to cast uncertainties on our TV demand.
Through strategic partnerships with major channel partners, Samsung will proactively utilize sales opportunities, such as Black Friday and global sporting events, to capture peak season demand with high value-added products, such as Neo QLED, super big and life size screen. We also focus on securing profitability through optimized operations and efficient cost management.
Regarding the TV market in 2023, along with various external uncertainties that are expected to carry over into 2023, overall TV demand is projected to remain stagnant, but demand for premium products, including super big TVs, should keep growing. We will continue to innovate premium products and lead the ultra-large screen market, while also strengthening sustainable, eco-friendly management and providing new customer experiences that connect screens and various products, all to further solidify our position as an industry leader. Thank you.
Ben Suh
So that sums up the third quarter results presentations. Before we move on to the Q&A session, I would like to share several data points in key business areas. Comparative figures are on a sequential basis for quarterly data and a full-year basis for annual data.
For DRAM, in the third quarter, our bit growth declined by a percentage in the high teens and ASP fell by around 20%. For the fourth quarter, we expect market bit growth to be in the high-single digit range and our bit growth should be above market. On a full-year basis, market bit growth and our bit growth should be similar in the low to mid-single digit range.
For NAND in the third quarter, our bit growth decreased by a percentage in the high-single digits, while ASP saw a decrease in the low 20% range. In the fourth quarter, we expect market bit growth of a mid-single digit and we should be above market. For the year, we expect market bit growth to be in the mid-single digit range and our bit growth should be similar.
For display in the third quarter, the mobile portion of revenue was a percentage in the high 90s and sales volume declined by a percentage in the mid-single digits.
In mobile in the third quarter, shipments were approximately 64 million units for smartphones and 7 million units for tablets. Smartphone ASP was $282. For the fourth quarter, we expect shipments of smartphones and tablets to rise, but smartphone ASP is likely to decline.
For TVs, sales volume in the third quarter increased by a percentage just into the double digits. For the fourth quarter, we expect sales volume growth to be in the high 20% range. On a full year basis, sales volume will likely decline by a percentage in the low-single digits.
I will now move on to the Q&A session. First, we will start taking questions from the conference call.
Question-and-Answer Session
Operator
The first question will be presented by Peter Lee from Citigroup.
Peter Lee
I have two questions. The first question is about the overall company inventory. We’re noticing that two quarters in a row the company’s inventory has significantly increased. Can you give us some details about the reasons and how you plan to address the increased inventory?
Second question is about the mobile, the smartphone business. Overall, there has been issues regarding certain supply of parts and also increased intensity of competition. Considering all of that, can you give us, first of all, the smartphone market outlook for next year, how the company plans to secure the MZ, the generation MZ customers, and also your strategies regarding expanding sales of your flagship models.
Ben Suh
To answer your question about the inventory, to just give you the inventory at the corporate level, third quarter, inventory was KRW 57.3 trillion and this is a KRW 5.2 trillion increase quarter-over-quarter.
As we mentioned before, a part of that is the DX inventory where we have, during the first half of this year, been expanding our inventory in order to ensure stable supply of our products despite the disruptions in the global supply chain. And as we mentioned during the last call, the DX related inventory is continuing to stabilize during the second half of this year. That is why most of the inventory increase that occurred in the third quarter is related with the memory business and, therefore, Mr. JinMan Han of the Memory division will be answering your question further.
JinMan Han
Now, to answer your question from the memory side, we are aware that there is concern in the market about our higher level of inventory due to worsening market conditions. And, yes, I agree that it is a fact that our inventory levels have increased due to weak demand, driven by various macro issues this year.
That said, I do like to emphasize once again that we have to consider the change in the production constraints. Especially in the case of DRAM, we’re seeing longer equipment lead time, also the migration – new migration is becoming more and more difficult. And also, there is a chip size penalty that occurs with the expansion of DDR5 production. And so, we think that there is a greater amount of production constraint on bit growth. And we will start to see and feel this impact starting gradually from next year.
And that is why, considering all of that, we actually think that the level of balanced inventory should be set higher than past levels in order for us to be in a good position to effectively capture market demand. And that is why I think that it is a bit unreasonable to judge current inventory levels using past yardsticks.
That said, the customer’s inventory adjustments that happened in the third quarter did go beyond what was originally expected. And our inventory did rapidly increase during the third quarter and we are continuing to work to manage our inventory to balanced levels.
Ben Suh
First of all, to answer your question about smartphone market outlook next year, we do think that the smartphone market at a general level will be able to grow slightly on a year-on-year basis and that the flagship segment will actually record a higher growth rate than overall smartphone market. Accordingly, we will be focusing our growth strategy next year around the flagship segment that is further expands the foldable and also provides even better and enhanced Galaxy S series that embodies all of the innovation and values that we pursue.
I think what is also important in the smartphone business going forward is to understand that there is a shift from a smartphone standalone to an ecosystem experience emphasis. And that is why we are also working on providing a more consistent experience across all Galaxy devices based on a one UI and also provide services that our users find very useful in their everyday lives, such as digital wallet and digital health in order to provide customers a more rich and enjoyable digital life through our offering.
You’ve also asked about how we plan to appeal to the generation MZ. And I think we can do that in two main directions. One is design and the other is in terms of marketing. In terms of design, the key word will be essential design identity. This concept focuses on simplifying just the key factors in the design, but then achieving a higher level of completeness in the details. Also, developing new colors for our devices would be a way of capturing women as well as gen MZ users.
In terms of marketing, in order to appeal to the younger generation, we will emphasize social media communication that showcases the Galaxy experience within the everyday lives of our customers and also emphasize our ESG activities, for example, by adopting ecofriendly material on our products, which are values that the MZ generation feels are important. Also, we will be highlighting our security functions such as the Samsung Knox metrics.
Operator
The next question will be presented by Nicolas Gaudois from UBS.
Nicolas Gaudois
This question is about memory. Unlike some of the prior cycles, it appears that all major memory makers have taken early steps to reduce peak production growth, including lowering wafer starts or wafer outs, reduced CapEx and [indiscernible] spending budget into next year and delayed tech migration. Could you add some color on what you are doing on your side?
Ben Suh
I recall that it was in early October. It was at the Tech Day event held in the US when I said that we’re not considering any artificial reduction of production. And I have felt that that comment did attract quite a lot of attention.
First of all, I would like to say that we stand behind that position that we’re not considering any artificial reduction in our production. And I think I can go into a bit more detail about what I mean.
And as I mentioned during the speech, there is weak demand. And we think that the current weak demand is explained, number one, by the macro issues that are currently persisting, as well as the inventory adjustments that the customers have been going through, the magnitude of that inventory adjustment has been larger than what was expected.
But then looking towards next year, there are plans for increase of server data centers. And we do expect there to be a greater adoption of DDR5 coupled with a new CPU. There are actually some third-party sources that are saying that they expect the second half market to improve around the DRAM next year. So, given that, what we’re looking at, 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 strategical 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 that 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 you a bit more eye 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 investment to be in line with industry situation. That is how we are able to create a sustainable foundation for profit.
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 in DRAM, starting from 50 nano, and we have been rolling out EUV, going full EUV to advance 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.
Now, even that increase in CapEx year-over-year is on a Korean won basis, which does reflect the strong dollar. And therefore, if you convert our CapEx spending this year to dollar terms, actually, it appears to have decreased year-over-year.
Since we’re on the topic of CapEx, if we look towards next year’s investments, we’re currently discussing next year’s CapEx plans, but we’re actually considering various multiple scenarios in the mid to long term, given the high level of market uncertainty and also various macro issues out there.
That said, as we mentioned, because we’re planning to stand behind our original infrastructure investment plans to get the clean rooms ready for mid to long term demand, the only room for adjustment for our CapEx plan next year will be within the equipment investment, which would be a limited amount of flexibility there.
And so, once again, I would like to emphasize that regarding CapEx, the total overall CapEx number is not as relevant in forecasting short-term production and supply as it was before.
Operator
The next question will be presented by Ricky Seo from HSBC.
Ricky Seo
I have two questions. The first question is about the QD-OLED, you’ve launched the QD-OLED TV and monitor. Can you give us some initial customer and market responses to the QD-OLED based products? I’ve also been hearing that you are planning to increase capacity going forward. Does that mean that you are planning to take QD-OLED as your mainstream technology?
Second question is about the NAND market. The market situation in NAND is even worse than memory and competition is becoming even more fierce. Even though NAND does have a price elasticity, the situation is deteriorating, and I would like to know how the company plans to respond to the deteriorating NAND market conditions.
Ben Suh
Well, to answer your question about the QD-OLED, the QD-OLED that we had launched earlier this year as our response to the premium large display market has received very positive responses from customers as well as end consumers. We have also launched the OLED based monitor in the second half. And therefore, we are very well positioned to significantly increase our QD-OLED business next year.
We had closed down our LCD operation in the first half and this was in part to concentrate our resources on the QD-OLED. This has worked. Our yield is rapidly climbing. And we have also been diversifying our customer base and product lineup.
What we’re noticing in the market is that, since the pandemic, the consumers are having a stronger demand for high quality displays, a smartphone level, high quality display even in large displays, so that they can watch videos and also play games even on a large size display as if they are doing on a smartphone. And that is why we think that, given this market demand, we will be able to significantly increase sales volumes and expand our market share starting from next year.
Regarding additional investment plans, given the uncertainty in the market, we are looking into additional investment plans while closely collaborating with our customers and also carefully watching market demand, so that we are able to supply demand without disruptions.
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. And as you know, in NAND, Samsung has a very favorable cost competitiveness. And by leveraging the price elasticity that you’ve mentioned, we are planning to preemptively create demand for NAND.
We also agree that the market conditions are challenging. But also, we actually sense that at the end user level, there’s a relatively strong demand for storage and solution products, especially the higher density products. For example, you would notice that, in the market, even the low end smartphones now have around 256 gigabytes of content. And flagship models are now ranging from 512 gigabytes to 1 terabyte of content, and even storage and servers are – actually, we’ve confirmed that there is a need for up to 16 terabytes. And so, we will be focusing in the case of NAND on creating market continuously by continuing to reduce our cost base internally and also collaborating with customers based on our wide range of product portfolios. And we will use this as an opportunity to further expand our position in the large density market and across various applications.
Operator
The next question will be presented by [indiscernible].
Unidentified Participant
I have a question about foundry. I think there’s some different opinions about what the foundry market outlook would be. I wonder what your outlook is for foundry market conditions next year and also in the mid to long term? And how does Samsung plan to respond to that market outlook?
Ben Suh
First, our market outlook for foundry market outlook for next year is that there will be demand uncertainties at least until the first half due to continued slowdown in global economy. But based on the customer demand data that we currently have, we expect the foundry market to improve next second half as the inventory is consumed and also demand becomes solid around key applications such as HPC and automotive.
Even though that is the outlook we have based on our customer demand data, there is still a possibility that the macroeconomy may not have a soft landing. And so, given that uncertainty, we continue to carefully monitor the market and have prepared strategies regarding that.
Now regarding the mid to long term foundry market outlook, we do think that especially in the advanced nodes, demand in the mid to long term will remain solid. And that’s why we will be focusing our resources on the advanced nodes in terms of investments, creating multipath for rapid ramp up, improving yield, and also leveraging the customers’ multivendor strategy. So we will be focusing on increasing our market share around the advanced nodes. But also in terms of the matured nodes, we will respond flexibly to customer demand by developing customized value-added processes.
Operator
The next question will be presented by SK Kim from Daiwa Capital Markets.
Sung Kyu Kim
I have two questions. The first question is about the memory division. We noticed that the Memory division’s third quarter profitability has decreased significantly overall in the market. ASP is declining. But on the other hand, today, you seem to be very confident and proactive about your forward CapEx plan and how you plan to address the NAND inventory. Would that have any negative impact on the profitability of the division going forward?
Second question is about the display. I do notice that you delivered very strong results in the third quarter, especially it seems small to mid-size OLEDs have overperformed quite significantly competition. That is quite noticeable. But given that overall smartphone market is expected to be stagnant, do you think such significant outperformance can be sustained?
Ben Suh
As you know, the Memory business, the market environment changes and with that the profitability also goes up and down. And right now, I agree that we are in a period where profitability is on a declining trend.
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.
We’re also noticing that, unlike before, the customers’ demands are becoming more diverse. And that’s why having the right product mix in advanced, the right product mix planning across various product groups are becoming that much more important, especially as new product market such as DDR5 and LPDDR5X expands.
By having the right product mix planning, we’re able to capture the customer demand, especially around the high end and high density products. And this is another way for us to secure profitability by capturing the demand without missing any of it.
We do notice that it is a rapidly changing market environment. But our focus has always been to secure sufficient profitability that would enable us to sustain our investment program for future businesses. Because we have maintained that position despite the difficult environment we currently see, we have been able to maintain good profitability.
To answer your question about the mid to small size OLED, yes, we have achieved quite a strong performance in third quarter versus competitors. You asked whether that will be sustainable. Our strong performance in the third quarter, we attribute to two main factors, one is a change in the market. In the past, I think the display market moved in sync regardless of application. However, recently, we’re seeing a divergence of demand patterns across different applications and segments. And our focus on mobile and premium OLED has been one of the reasons why we were able to produce a stable business result.
The second reason of our stronger performance is explained by our outstanding technology and mass production capabilities that has enabled us to produce and supply the OLEDs that customers want on time. As you know, we have a very long track record of producing OLED. We have the technology, the know-how and very experienced experts in-house that has provided us with a competitive advantage. And also, on top of that, having made the preemptive investments has given us the benefits of economies of scale. And this, I believe, is now showing up in visible results.
Regarding whether our advantage and our performance is sustainable, we are looking at fourth quarter and next year markets are with grave concern. It may be a very challenging market. And if the market deteriorates further from now, it may be difficult for us to stay immune from the challenging market conditions. But that said, we believe that even if the market becomes more challenging, the advantages I’ve just described would still remain valid. Our advantages being the focus that we have placed on the high end segments, the OLED technology and know-how that we have, our capabilities in mass production and execution, and also the cost competitiveness we have achieved by the preemptive investments and achieving economies of scale would still remain valid. And therefore, we are confident that even if environments become more challenging, we would be able to deliver strong results.
Operator
The last question will be presented by Dongwon Kim from KB Securities.
Dongwon Kim
My first question is about the EV memory market. The overall EV market is expanding and so will the EV memory market. What is your EV memory market outlook and your business strategies regarding the automotive memory business?
Second question is about the TV next year. What is the company’s TV demand outlook for next year? And there are various different technologies in the next generation premium TV segment, such as micro LED, Neo QLED and the QD-OLED, what is the overall strategy of the business division for growth in the next generation premium TV segment?
Ben Suh
Well, first of all, I would like to thank you for asking a question that is not about short term market situation, even though I agree that the current market situation is challenging. I think these are the times when we actually need to focus more on developing new demand sources and applications, and I think your question actually hits on that point. We have been expecting the importance of automotive semiconductors to increase in line with the growth of the EV market. And that is why we have been implementing a mid to long-term strategy to address that.
Regarding the EV market, you would have noticed that the EV market has been exponentially growing since around 2020. Also, per vehicle, we’re not only seeing increase in memory content per vehicle, but also the memory that is being used on vehicles, the specification itself is being raised.
Also, when we think forward, when there are more autonomous vehicles out there, we can think of, for example, a data center that will be necessary for these vehicles. That would also be another source of demand. We think that, by around 2030, automotive may become one of the three main pillars of applications together with server and mobile.
Since we first started to supply memory to automotive applications, we’ve actually been recording new revenue records for seven consecutive years based on a very strong relationship and trust from the customers. And this is because, initially, we have placed a special focus on technology and quality, such as LPDDR4X and high capacity UFS 2.1.
Going forward, we will focus on preemptively expanding the automotive product lineup we have, especially around the high performance and high specification products such as LPDDR5X, GDDR7 and server class SSD. The concept that we have is server on wheels for automotive applications and we will make this into a reality. So, regarding the automotive semiconductor market, we plan to actively contribute to its growth by focusing on quality and also safety.
Regarding the TV market outlook next year, while the overall TV market is expected to be somewhat stagnant as the various internal and external risks continue into next year, we think that within the TV market, the ultra large and premium demand will continue to grow.
And so, looking forward to next year, under that market outlook, we will continue to maintain our sales strategy focused on the premium segment, especially focused around the Neo QLED, but also in order to provide consumers with a wider range of choice, we will strengthen the sales competitiveness around OLED.
Also next year, we will also start to boot up sales of micro LED, which is currently the top level display technology yet. We will implement this into various sizes and provide differentiated customer experiences to increase sales. And so, overall next year, we will focus on actually creating a new market demand around the ultra-high end segment, together with the ultra large size 98 inch premium TV.
Together with these new products, we will focus also on providing high quality content and services by actively cooperating with global partners and also providing new customer experiences by connecting the TVs with other screens and various products in order to maintain the leadership we have in the global TV market.
Well, we will now answer questions that were submitted online in advance. As you know, we have been accepting questions via our website in advance of the earnings release as part of our efforts to strengthen communication with individual investors and enhance understanding of the company. And we’ve received a wide variety of questions for this quarter.
I believe the majority of the questions were sufficiently answered during the Q&A session. And so we will answer one more question on a topic that garnered a high level of interest from our shareholders, but were not addressed during the Q&A session
And the question addresses our mobile division. The question was the strong dollar is expected to persist for some time being. Considering that, what is the possibility of raw material prices or logistics cost decreasing? And how do you plan on securing a double digit profitability?
On the raw material side, other than memory, the visibility is still low for other raw materials. For logistics costs, the situation has eased somewhat, especially as the port traffic congestions that were caused by COVID has been eased. That said, the impact of the weak Korean won, the strong dollar is expected to be quite strong. And so, even though the market outlook next year is expected to the challenging, we think that within the overall mobile market, the flagship segment will continue to grow. And that is why next year, we will continue to focus our resources on the flagship and premium segments. We will focus on providing an even more complete customer experience, enhancing our brand equity, improving our product mix as a way of improving our ASP.
Also, in addition to the smartphone itself, we have to look towards the Galaxy eco experience that provides seamless connection with between our smartphone, tablet and wearable. This is an opportunity for us to not only provide greater value to our customers, but also is a way of us to improve our profitability, and we will further improve our profitability or make our profitability more solid by improving our operational efficiency across development, manufacturing, logistics and sales. And by these internal and external efforts, we plan to secure solid profitability next year.
I would like to thank everyone who shared their valuable opinion and we will be sure to refer to them in our decision making process.
Ben Suh
That completes our conference call for this quarter. We wish all of you and those close to you, stay strong and in good health. Thank you
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