SK hynix, the world’s second-largest memory chip maker, reported an operating loss of 2.8 trillion won ($2.1 billion) in the second quarter of this year, falling into the red for the third consecutive quarter amid a severe market downturn.

While the quarterly loss is the second-largest since SK Group acquired the chipmaker in 2012, the company said earnings are on track for recovery with market demand increasing for high-value-added chips related to artificial intelligence technology.

In a regulatory filing, SK hynix said its sales in the April-June period marked 7.3 trillion won and a net loss of 2.9 trillion won. While sales appear to have plunged 47.1 percent on-year, it’s an increase of 44 percent when compared to the previous quarter.

“Amid an expansion in the generative AI market, which has largely been centered on ChatGPT, demand for AI server memory has increased rapidly,” the company said during an earnings call held Wednesday.

“As a result, sales of premium products such as HBM3 and DDR5 increased, leading to a 44 percent sequential increase in revenue for the second quarter, while operating loss narrowed by 15 percent.”

SK said the sales of both DRAM and NAND flash products increased in the second quarter, with higher average selling price of DRAM largely contributing to revenue growth. According to the chipmaker, the shipment of DDR5 and HBM products more than doubled in the second quarter.

SK explained the price for general DRAM products such as DDR4 continued to decline on sluggish PC and smartphone demand, but DRAM Blended ASP rose in the quarter, offset by increased sales in high-end products used for AI servers.

“Having passed the trough in the first quarter, the memory semiconductor market is seen to have entered the recovery phase,” said Kim Woo-hyun, vice president and chief financial officer at SK hynix.

Along with the company's cost reduction efforts, lower inventory valuation loss helped reduce operating losses. Production reductions carried out by memory chip makers are also having a clearer effect on recovery, the company said.

SK said it will further reduce NAND production given that its higher inventory level compared to DRAM.

While SK plans to reduce the consolidated investments by 50 percent this year when compared to 2022, the chipmaker said it will still be making investments, focusing resources on expanding the production capacity of high-density DDR5 and HBM3.

The company said announced that it will improve the quality and yields of 1b-nanometer technology, the fifth generation of the 10-nanometer process technology, DRAM and 238-layer NAND this year. It also plans to expand the scale of mass production once the industry upturn is visible.

While the company's estimated HBM sales growth is based on the current situation where big tech companies are aggressively increasing their investment in AI technologies, an idle period could follow. Over this concern on the impacts of such a chasm occurring, SK hynix explained the demand will continue as the AI industry has more areas to develop.

“If there is a chasm, it is going to be short or very weak because there are several platform companies making such investment at different time intervals,” Park Myung-soo, the head of DRAM marketing at SK hynix, said during the earnings call.

“The platforms are currently focusing on training for AI. … But we believe that it is ultimately going to go the path of personalization, meaning that there are going to be customized services arising from the AI services."

Park added that enterprise services that now come as pre-trained would have to be developed further for real-time processing of data. There are applications and APIs that are also placed on top of the platforms which could potentially lead to “explosive” growth in demand for AI-related chips, he said.

Over the news that US-based Western Digital and Japan’s Kioxia are in negotiations for a merger, SK hynix said it is closely monitoring the situation. It has not found any specific terms of consolidation that have been agreed on between the two firms so far, it said.