Samsung Elec sees profit decline on weak chip demand after strong third quarter earnings

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(Reuters) – Samsung Electronics Co Ltd said on Thursday it expects fourth-quarter profit to fall due to weak server chip demand and rising smartphone competition, after posting its best quarterly operating profit in two years in the third quarter.

The world’s top maker of smartphones and memory chips flagged a recovery in the mobile and chip markets next year although it was wary of disruption from the coronavirus pandemic and U.S.-China trade tensions in the short-term.

“Global demand is forecast to increase year on year, but uncertainties are unlikely to ease given the possibility of additional waves of the pandemic,” Ben Suh, Samsung’s executive vice president of investor relations, said in an earnings call.

After a comparatively difficult fourth quarter, the South Korean company said next year would see a gradual recovery in the smartphone market. Mobile chips were also expected to show solid growth in the first half, when server DRAM chip demand may also rebound.

Operating profit in the July-September period jumped 59% on the back of Samsung’s highest quarterly smartphone profit since 2014 at 4.45 trillion won ($4 billion).

A near 50% surge in smartphone sales likely reflected gains in Samsung’s share of the market as U.S. restrictions hit Chinese rival Huawei Technologies Co Ltd, analysts said.

Lower marketing costs amid the coronavirus pandemic were also a likely factor.

Samsung said its chip profit leapt 82% to 5.54 trillion won from a year earlier, as higher sales of low- and mid-end smartphones and inventory buildup from Huawei ahead of the U.S. restrictions offset weak demand from servers.

Samsung’s display business, which counts Apple Inc among its customers, reported weaker operating profit because of delays of new model launches by a major customer.

Total operating profit in the third quarter was 12.35 trillion won ($11 billion) from 7.78 trillion won a year earlier, in line with the company’s estimate earlier this month. Revenue climbed 8% to 66.96 trillion won. Net profit rose 49% to 9.36 trillion won.

“Soft prices in server memory due to customers’ inventory adjustments will likely weigh down the Memory Business despite stable demand for mobile and laptop memory,” Samsung said in a statement.

Samsung’s smartphone shipments in the current quarter are expected to drop about 5% compared to the previous period due to competition from Apple’s newest iPhone 12 and a lack of new Samsung flagship models, analysts said.

“With Huawei’s presence becoming fainter in the smartphone market, Samsung’s marketing costs are expected to be higher in the current quarter as Apple, Vivo, Xiaomi and Samsung try to take over Huawei’s market share,” said Park Sung-soon, an analyst at Cape Investment & Securities.

Samsung’s display earnings would benefit from robust demand for Apple’s first 5G iPhones, he added.

Samsung’s shares fell 2% on Thursday, compared to the wider market’s 1.7% fall.

($1 = 1,127.2200 won)

Reporting by Joyce Lee and Hyunjoo Jin; additional reporting by Heekyong Yang; Editing by Stephen Coates

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