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Hynix 1st-Qtr Net Income Declines 8.6% on Provisions (Update2)

April 20 (Bloomberg) -- Hynix Semiconductor Inc., the world's second-largest maker of memory chips, reported first- quarter profit declined 8.6 percent from a year earlier because of provisions against patent disputes.

Net income fell to 289 billion won ($305 million), the Ichon, South Korea-based company said in a regulatory filing. Operating profit, which excludes provisions, climbed 26 percent to 376 billion won. Revenue increased 18 percent to 1.5 trillion won.

Chief Executive Officer Woo Eui Je, 61, boosted production of flash chips used in consumer electronics after iPod maker Apple Computer Inc. agreed to buy at least 20 percent of the company's NAND flash memory until the end of the decade. Rival chipmakers Samsung Electronics Co. and Toshiba Corp. have also increased production, leading to a glut.

The company was expected to report net income of 362 billion won, operating profit of 369 billion and revenue of 1.5 trillion won, according to the median estimate of seven analysts surveyed by Bloomberg.

First-quarter non-operating costs rose by 68 billion won mainly because of provisions against legal disputes with companies including Rambus Inc., said James Kim, head of Hynix investor relations.

Hynix and its rivals have boosted production of NAND flash memory as demand has surged for devices that use them, such as Apple's iPod Nano music player and Sony Corp.'s PlayStation Portable game machine. Sales of the chip climbed 55 percent last year, outpacing all other types of semiconductors with annual industry sales of at least $10 billion, according to estimates by the World Semiconductor Trade Statistics.

Flash in the Pod

Apple, the world's largest maker of portable music players, agreed last year to buy at least 20 percent of Hynix's NAND until 2010, Hynix said in its annual report last month. Cupertino, California-based Apple yesterday reported a 41 percent rise in first-quarter profit, buoyed by iPod sales.

Hynix boosted flash memory production to account for 36 percent of revenue during the first quarter, compared with about 10 percent a year earlier, Hynix said today in its statement.

The increased production led to oversupply and pushed prices down. Samsung Electronics, the world's largest NAND chipmaker, last week blamed a glut of the chip for the drop in its first- quarter semiconductor profit, though it forecast demand to exceed supply in the current quarter. Spot prices for the chips have plunged 67 percent this year.

Slower Declines

The decline in NAND prices, which fell 29 percent from the fourth quarter, will probably slow during the current quarter, Senior Vice President Kwon Oh Chul said during a conference call with analysts today. Samsung last week forecast a 20 percent drop in NAND prices this quarter.

Still, Hynix's profit margin from NAND was about 45 percent during the first quarter, more than triple the 11 percent margin for computer chips known as dynamic random access memory, according estimates by Morgan Stanley in an April 17 report.

Hynix's average NAND price during the first quarter fell 50 percent from a year earlier, compared with the 52 percent drop in costs, according to estimates by Citigroup Inc. analyst Jay Choi in an April 11 note to clients.

By comparison, Hynix's average first-quarter DRAM price fell 27 percent from a year earlier, while costs declined 24 percent, according to the Citigroup report.

Including overseas affiliates, net income fell 8.2 percent to 294 billion won, operating profit rose 12 percent to 360 billion won and revenue gained 14 percent to 1.4 trillion won, the company said.

To contact the reporter on this story:
Young-Sam Cho in Seoul at [e-mail]

Last Updated: April 19, 2006 21:44 EDT

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