Samsung warns profit could half on weak chip and display demand

The world leader in smartphones and chips has released a profit warning for its Q1 results, due to be announced next month. Analysts estimate its operating profit could halve from a year ago.

The company announced that it would miss market expectations, due to hard hits for sales in its key display and semiconductor business units. “The company expects the scope of price declines in main memory chip products to be larger than expected,” said Samsung.

Semiconductor and display have been the major revenue and profit generators for Samsung Electronics over the last few years. In 2018, these two business lines, combined to form Samsung “Device Solutions” (DS) business unit, delivering 49% of total revenues and 79% of its operating profit. However, it has already come under pressure. In Q4 last year, the operating profit of DS dropped by 29% from a year ago.

This communication should not come entirely as a surprise. In the company’s AGM on 20 March, Samsung already outlined its 2019 outlook for both the overall business and for individual business units. On the macro business environment, Samsung predicted “In 2019, we expect business conditions to remain difficult as global trade conflicts persist and changes in monetary policies of developed nations may lead to financial uncertainties in emerging economies.”

On the semiconductor front, especially for NAND business, Samsung warned “uncertainty persists over supply-demand dynamics caused by capacity expansions in the industry and a potential slowdown in demand following inventory stocking by customers.” On the display business Samsung expected “conditions to worsen in 2019 as competition rises amid a relatively stagnant market.”

Samsung did not give more specific indicators on the level of miss, but investment analysts predicted the company to report a $6.4 billion operating profit for Q1, down from $13.8 billion in Q1 last year, with revenues expected to come down to $47.4 billion from $53.5 billion, according to Refinitiv SmartEstimate.

“Inventories piling up on its memory chip side and the weak performance of its display panels business due to bad sales of Apple’s iPhones are hurting profitability for Samsung,” said Lee Won-sik, an analyst at Shinyoung Securities, quoted by Reuters.

The soft smartphone market including that experienced by Apple, Samsung’s main rival as well as customer, has been attributed the main reason behind the difficulty. But Samsung believed it could turn things around, especially the demand for memory products, in the second half of the year, as it told the shareholders last week.

Samsung Electronics share price went down by 0.55% at the time of writing.