Samsung Q4 Profit Drops on Weak Chip Demands

Samsung Electronics shocked the market on Tuesday with an expected 29 percent drop in quarterly profit, blaming weak chip requests in a rare commentary issued to “ease confusion” among investors already worrying about a worldwide tech stoppage.

Samsung logo.

The South Korean company also said profit would stay subdued in the initial quarter because of difficult circumstances in memory chips. However, that market is possible to enhance in the second half of the year as clients release new smartphones.

Weaker income at the world’s largest creator of smartphones and semiconductors adds to concerns for investors already on border after Apple Inc. a week ago took the rare move of cutting its quarterly sales estimate, quoting poor iPhone sales in China.

China boasts the world’s large smartphone market, but a slowing economy, worsened by a trade war with the United States, has seen request for gadgets drop across the tech sector. Developing support for domestic champions has also affected foreign brands, with Samsung’s market share tumbling to 0.9 percent from a high of 18.2 percent in 2013.

Nevertheless, the South Korean company’s chips power the handsets of most major creators, including Apple and China’s market leader Huawei Technologies Co Ltd. Its memory and processor chips account for over three-quarters of generally profit and about 38 percent of sales.

For October-December, Samsung expected operating profit of 10.8 trillion won, missing the 13.2 trillion won average of 26 analyst approximations in an I/B/E/S Refinitiv poll. It also expected an 11 percent fall in revenue at 59 trillion won.

Samsung routinely releases expected income figures before posting detailed results and elaboration to the end of the month. For the just-ended quarter, though, it issued its first commentary since late 2014, when mobile phone profit plunged.

It said weaker-than-expected request from data center customers adjusting inventories drove down chip prices and hurt income in the face of growing macro uncertainty. It did not disclose the clients or elaborate on the macro uncertainty.

Data center request – generally from the United States – now accounts for as much as closely 30 percent of request for Samsung’s DRAM chips compared with 5 percent five years ago, said analyst Kim Yang-jae at KTB Investment & Securities.

“Smaller investment from data centers, a really bad smartphone market in China, and impact from the U.S.-China trade war have all hit Samsung’s chip business,” Kim said.

In general, analysts expect Samsung’s profit to drop through 2019, with a slowing Chinese economy eroding request.

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

Prices for DRAM chips, which provide devices with temporary workstations and let them to multi-task, dropped 10 percent in the fourth quarter, showed data from industry tracker DRAM exchange. Prices of NAND flash memory chips, which hold data permanently, slid 15 percent.

DRAM exchange anticipates memory chip prices to tumble 10 percent on an average in the initial quarter of 2019.

Samsung also said a “stagnant and fiercely competitive smartphone market” pressured earnings and that the company would continue to innovate its product line such as with foldable handsets and models capable of fifth-generation (5G) networking.

“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… That’s even worse for Samsung because that would drag its chip prices down,” Roh said, referring to Apple as a Samsung chip client.

Shares in Samsung opened 1.9 percent lower on Tuesday and were fall 0.4 percent around midday against a 0.2 percent drop in the benchmark Kospi index. The stock lost 24 percent a year ago in the midst of a worldwide tech selloff prompted by investor fears over the impact on supply chains of the Sino-U.S. trade war.

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