Samsung Electronics two quarter earnings call conference profit will continue to rise steadily

Samsung Electronics two quarter earnings call conference profit will continue to rise steadily

Samsung Electronics Co Ltd 2018 fiscal year second quarter earnings conference call

July 30, 2018, 9 p. m. east time in the United States

Senior Executive

Robert Yi, senior vice president of investor relations

Sewon Chu, senior vice president of memory marketing

Ben Hur Gok, vice president of system LSI

Sang Hyun Lee, vice president of wafer foundry market development

Tae Kwon Young, vice president of Samsung display

Lee County, vice president of IT and mobile communications

Kyung Chull Park, vice president of visual display business

Samsung display planning department Kwonyoung Choi

KyeongTae Lee, vice president of mobile communications services


HSBC analyst Ricky Seo

Korea investment and securities company analyst JongWoo Yoo

SK Kim, an analyst at big and capital markets

Nicolas Gaudois, an analyst at the United Bank of Switzerland

Peter Lee, analyst at Citigroup Global Finance Ltd.

NH investment securities analyst Hyunwoo Doh

Claire Kyung Min Kim, an analyst with Daxin securities

J.J. Park, an analyst at JP Morgan

Robert Yi, senior vice president of investor relations: I am Robert Yi, Samsung investor relations. Thank you for joining us in the second quarter of fiscal year 2018. Sewon Chu, vice president of system LSI, Ben Hur Gok, Sang Hyun Lee, vice president of Samsung display and Tae Kwon Young, vice president of mobile communications department and vice president of visual display business.

First of all, I would like to remind you that what we are saying today is forward-looking, based on the circumstances we are seeing. Moreover, all of these statements are affected by certain risks and uncertainties, which may lead to a great difference between our actual results and what is expressed in today's discussion.

Before we discuss the second quarter earnings report, I would like to talk about the dividend situation in the second quarter. The board today approved dividends of 3.541 million won per share for common and preferred shares in the second quarter, which will be paid simultaneously in August. At the time of the split calculation, the dividend was 17700 won per share, unchanged from the first quarter. At the same time, the total dividend in the second quarter will reach 2 trillion and 400 billion won.

Now, we can discuss the performance in the two quarter. In the second quarter, despite strong memory performance, total revenue was only 58 trillion and 500 billion won, slightly down, mainly due to the decline in sales of smartphones and display panels.

Gross profit in the second quarter was 27 trillion and 200 billion won, a decrease of about 1 trillion and 400 billion won compared with the same period last year, and the gross profit margin declined correspondingly. Compared with last year, the absolute value of SG& A spending has declined, and the proportion of sales has declined as advertising spending has fallen.

Despite the decline in the performance of IM and EP, the company's operating profit increased by 800 billion won over the same period, reaching 14 trillion and 900 billion won, thanks to the strong performance of the memory business and the decrease of SG& and A expenditure.

Operating profit rose 2.4 percentage points year-on-year, to 25.4%. The ratio of operating profit to operating profit margin has declined slightly. In the second quarter, the won was relatively weak against the dollar, compared with strong momentum against other currencies such as the euro and the Brazilian real. This has had a negative impact on operating profit, resulting in a year-on-year decrease in operating profit of about 40 billion won, of which SET business was the most seriously affected.

Now, I will briefly review the company's operating profit. In memory services, with the NAND flash price weakening, the data center's demand for DRAM remains strong, and the demand for high capacity storage is very large, and our profits will continue to rise steadily.

We focus on selling high-density, high value-added products, such as the 1X nanotechnology and the 64GB server DRAM of the NAND mobile storage above 128GB, thus consolidating the competitiveness of the product.

In the display business, the sluggish demand for the flexible OLED panel, as well as the sales of the LCD TV panel and the decline in the average retail price, have led to a decline in profits from the same period.

For the IM division, as the high-end market stagnates and Galaxy S9 sales are weak, mobile business earnings fell sharply year-on-year and ring-on-ring. In terms of network business, profits have been improved as overseas customers increase LTE investment.

For the consumer electronics (CE) sector, a major global sports event has promoted the sales of high-end products such as QLED TV and so on, so the profit of TV business has improved over the same period and quarter. In terms of household appliances business, although the seasonal demand is obvious, but because the market demand for air conditioning declined, profit fell year-on-year.

After that, I would like to share with you some of our business prospects. In the second half, because of the good performance of the memory market and the increasing shipments of the flexible OLED panel, we expect that the profit will increase, in which the component business is dominant. In the SET business, we will pay attention to the high-end market through the early launch of 8K TV and Galaxy Note 9, striving to surpass the new products from other competitors and seek the leading advantage in the increasingly competitive industry.

For component services, because of the market's strong demand for server and PC memory and the launch of new mobile products, we expect the memory market situation to continue to maintain a good situation. We will take the initiative to meet the growing market demand for differentiated products, such as high-density server memory and high bandwidth memory.

We will also increase the market share of 10 nanoscale products through 1 years' initial production, and expand the mass production of 3D vertical NAND (V-NAND) flash, thus consolidating our technological lead.

Because the strong seasonality of the smartphone market has driven the demand for application processors and image sensors, it is expected that the system LSI and the profit-making business will be profitable. For the OLED panel, we expect that as the shipments increase, the flexible panel business will increase its profitability, but the rigid panel business may face fierce competition with LTPS products. In the LCD panel business, although the market demand has increased, we expect that the profit situation is not optimistic because the supply of competitors is also increasing.

Go back to our SET business. The introduction of new models and fierce competition in the mobile market may make business development more challenging. In order to cope with the increasingly fierce competition, we plan to launch Galaxy Note 9 as soon as possible, and add new features to our middle and low end products at the same time, so as to find a way to improve the competitiveness of the cost.

As the sales volume of new products such as QLED and 8K TV is increasing, we expect that the profits of TV business will continue to increase. For home appliance business, we plan to boost profitability by promoting sales of high-end products.

In the medium and long term, as the new areas of the Internet of things, artificial intelligence, and 5G have changed the IT pattern, we expect that the component business will have new needs; the opportunities for SET business will increase after introducing new elements and new technologies and increasing the interconnectedness of digital devices.

In the component business, we will rely on advanced semiconductor technology to make full use of the new requirements of the automotive and artificial intelligence applications to the chipset, give full play to our advantages on the OLED panel, and seize the opportunity of the continuous development of the application of the Internet of things and the automotive industry.

In the IM business, we will lead the transition to 5G technology by introducing innovative form factors, such as collapsible displays, to maintain growth and consolidate our leadership.

Total capital expenditure in the second quarter was 8 trillion won, of which 6.1 trillion won was spent on semiconductors and 1.1 trillion won was spent on displays. Total capital expenditure in the first half was 16.6 trillion won, of which 13.3 trillion won was spent on semiconductors and 1.9 trillion won was spent on displays.

Before we continue to see the performance of each business unit, I would like to share with you a few data points in key business areas for discussion.

In the second quarter, DRAM's growth rate of bit shipments showed a moderate increase in units, while our ASP growth rate was a low increase in units. In the third quarter, we expect that the growth rate of bit shipments in DRAM market will reach the double-digit level, slightly exceeding market growth. As for the overall situation this year, we expect that DRAM's bit shipping growth rate will be about 20%, which will keep pace with the market growth.

For the second quarter of the NAND flash, our growth rate of bit shipments showed double-digit growth, while ASP declined, the rate of decline reached a low double-digit. For the third quarter, we expect that the market NAND bit shipping growth rate will remain double-digit, slightly higher than the market. As for the overall situation this year, we expect that the growth rate of NAND shipping will be below 40%, keeping pace with the market.

In terms of panel business, sales of OLED panels account for about 60% of total sales. For mobile services, we sold 78 million mobile phones and 5 million tablet computers in the second quarter. The average price of the mobile phone is about $220. In the total sales volume of mobile phones, the proportion of smart phone portfolio is about 90%.

By the third quarter, we expect the sales of mobile phones and tablets to be flat in the second quarter, but the average price of the mobile phone will be higher than the second quarter. In addition, the proportion of smart phone portfolio in our total sales of mobile phones remained at around 90%.

In terms of TV business, our LCD TV sales in the second quarter decreased, falling to the number of units. For the whole year 2018, we expect total sales to decrease by year-on-year.

Now I will connect the speakers of various business units to let them introduce the performance and prospects of the business.

Sewon Chun

Good morning. I'm Sewon Chun of the memory marketing team. In the second quarter, the seasonal impact was small and the smartphone market did not perform well, but as the data center software demand increased, the overall demand continued to grow.

For the NAND flash chip business, although prices are falling, the demand for chips is mainly from high-density products - the high density trend of smartphones and the increase in software requirements. Another part comes from the server cloud infrastructure and the demand for all flash arrays.

By actively meeting the needs of the China Mobile market for high density embedded storage solutions and focusing on the promotion of 8TB and 16TB high density full flash array, our revenue growth remains stable. The supply capacity of the 64 tier NAND chip in Pyeongtaek plant has also been stable.

For DRAM chips, the demand for servers remains strong due to the high density trend and the expansion of data center infrastructure. Demand for large original equipment manufacturers is also relatively stable. At the same time, because of the increasing demand for games, the demand for image chips has remained stable.

Demand for television and 5G network infrastructure is increasing, as is demand for high-density memory for ultra-high-definition television set-top boxes. Since last quarter, consumer demand has remained stable.

As far as mobile markets are concerned, people are worried about the decline in smartphone growth rates, but because of the high density of memory demand from product differentiation,

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