Samsung Electronics flags first profit drop in two years on weak chip demand

Samsung employees wave from stage beneath an image of the new Samsung Galaxy Note 9 during a product launch event in Brooklyn, New York, US, 9 August 2018 – Reuters file photo

SEOUL (Reuters): South Korea’s Samsung Electronics Co. Ltd. on Tuesday estimated a 29% drop in quarterly operating profit, its first decline in two years, as it flagged tough memory chip and mobile phone markets in a rare commentary.

Weaker earnings at the world’s biggest maker of smartphones and semiconductors adds to worries for investors already on edge after Apple Inc. last week took the rare move of lowering its quarterly sales forecast, citing poor iPhone sales in China.

Samsung, in a regulatory filing, estimated profit at 10.8 trillion won ($9.67 billion) for October-December last year, down 29% from the same period a year earlier. That compared with the 13.2 trillion won average of 26 analyst estimates in a I/B/E/S Refinitiv poll.

It also estimated an 11% on-year revenue decline at 59 trillion won.

The company does not usually explain the details behind its estimates, but on Tuesday issued a background statement along with its fourth-quarter earnings guidance to “ease confusion” among investors as its estimate was far below market forecasts.

“We expect earnings to remain subdued in the first quarter of 2019 due to difficult conditions for the memory business,” it said.

It released a similar note for investors in late 2014, when it also missed market estimates as mobile profit fell.

On Tuesday, the South Korean tech giant said weaker-than-expected demand from some of its data centre customers adjusting inventories drove down chip prices and hurt earnings. It did not identify the customers.

“Poor chip sales to Chinese major cloud companies raised Samsung’s inventory level which led to chip price declines,” said analyst Kim Young-woo at SK Securities.

“Second- and third-tier Chinese smartphone makers saw drastic drops in their sales, which also took a toll on chip demand,” Kim said.

Samsung’s memory and processor chips, which account for over three-quarters of its earnings and about 38% of sales, power smartphones including those from China’s biggest handset maker Huawei Technologies Co Ltd.

Samsung will disclose detailed earnings later in January.

Analysts expect Samsung’s profit to decline through 2019 as a slowing Chinese economy erodes demand for its chips and handsets.

Prices for DRAM chips, which provide devices with temporary workspaces and allow them to multi-task, declined 10% in the fourth quarter, according to industry tracker DRAMeXchange.

Prices of NAND flash memory chips, which hold data permanently, slipped 15%.

DRAMeXchange anticipates memory chip prices to fall 10% on an average in the first quarter of 2019.

Samsung said the memory market is likely to improve from the second half of the year due to the adoption of new central processing units as well as smartphone launches.

It also said a “stagnant and fiercely competitive smartphone market” pressured its income and that the firm would continue to innovate its product line such as foldable and 5G models.

“If Apple’s not selling, then is it Samsung that’s selling well? It is not. The smartphone market is already saturated,” said senior analyst Greg Roh at Hyundai Motor Securities.

“Apple’s iPhones have not been selling well in China at least since Huawei’s chief finance officer was arrested. That’s even worse for Samsung because that would drag its chip prices down,” Roh said, referring to Apple as a Samsung chip client.

Huawei CFO Sabrina Meng was arrested in December in Canada at the request of the United States in relation to Iran-related transactions. The firm has said it was not aware of any wrongdoing.