SK Hynix says that the chip downturn will get worse in Q1 and reports a record quarterly loss.

As it posted a record quarterly operating loss on Wednesday, SK Hynix Inc. of South Korea warned that the chip industry downturn, which is the worst in over a decade, will get worse in the coming months.

SK Hynix, the world’s No. 2 memory chipmaker after Samsung Electronics, said that the market will slowly get better by the end of the year as chipmakers cut supply in response to a drop in global tech demand and customers buy chips again at low prices (OTC:SSNLF).

“The recent drop in memory prices is the biggest since the fourth quarter of 2008,” SK Hynix’s finance chief, Woohyun Kim, said in an earnings call. “Industry-wide inventory is probably at an all-time high,” he added.

He thinks that inventories will reach their highest point in the first quarter, then slowly go down as chipmakers cut back on production. This will improve supply and demand in the second half.

SK Hynix said that chip prices will go down in the next three months.

Shares of the company went up 3.3% at the end of the day, boosted by hopes of a recovery later in 2023. This was more than the 1% rise in the benchmark.

For the fourth quarter that ended in December, SK Hynix went from making a profit of 4.2 trillion won to a loss of 1.7 trillion won, which was worse than expected. Since SK Group bought Hynix in 2012, this is the biggest loss for a quarter.

Refinitiv SmartEstimate says that analysts had expected an operating loss of 1,3 trillion won.

“PRODUCTION ADJUSTMENTS NEEDED”

Since late 2022, the global technology industry has been dealing with a sudden and sharp drop in demand. Companies are spending less on tech products and services, and consumers are spending less on non-essential goods because inflation is going up.

Chipmakers tried to sell chips at low prices in the fourth quarter to get rid of their stockpiles, which caused the asset value of NAND Flash chips to go down.

Analysts say it hasn’t been easy to sell because clients have chosen to use their own stock because the economy is uncertain.

Nam Dae-jong, an analyst at eBest Investment & Securities, said that it took 46.1 weeks from the time SK Hynix’s products were made until they were sold. This is based on data from the fourth quarter.

Even though this is expected to go down to 39.9 weeks in the first quarter, Nam said, “It’s still too much… “Production needs to be adjusted actively.” It was under 10 weeks last year.

SK Hynix said in October that it plans to cut its investment in 2023 by more than half compared to 2022. This comes after the company warned of an “unprecedented” drop in demand for memory chips.

SK Hynix said on its earnings call that it will put most of its efforts into making advanced chips to get ready for a market upturn in 2024. As of the end of 2022, it had a free cash flow deficit of $4.23 trillion.

Samsung (KS:005930) Electronics, on the other hand, says it has no plans to cut investment, even though its chip operating profit fell 97% from October to December.

“Samsung has more money than Hynix does.” Its free cash flow is very low, and it has been borrowing more,  analyst Eo Kyu-jin at DB Financial Investment said. “Cutting capex is a choice that has to be made.”

($1 = 1,232.4700 won)