Samsung profit tumbles by 69% in historic drop on chip price falls

Samsung Electronics Co.’s profit dropped by 69% in its worst fall in more than a decade, as an economic slowdown pummeled memory chip prices and demand for IT gadgets and servers.
 

Operating profit fell to 4.3 trillion won ($3.4 billion) for the three months ended December, according to a company statement, missing the average estimate of 6.7 trillion won by analysts. Sales fell to 70 trillion won. Samsung is slated to provide a full financial statement with net income and information on divisional performance on Jan. 31. 

South Korea’s largest company has been grappling with weak demand for memory chips, smartphones and displays as consumers tamp down holiday spending amid soaring interest rates and inflation. Adding to demand woes, Apple Inc., one of Samsung’s biggest customers for displays and memory chips, suffered production delays at its iPhone assembly complex in the Chinese city of Zhengzhou.

“The decline in 4Q demand was greater than expected as customers adjusted inventories in their effort to further tighten finances,” Samsung said in its statement. The company saw greater-than-expected price declines in memory and added that “smartphone sales and revenue decreased due to weak demand resulting from prolonged macro issues.”

The crisis in the memory chip market has been further exacerbated by US sanctions on some chip-related exports to China, hurting demand from some of Samsung’s key clients. Chip sales in South Korea — a bellwether for global tech demand — fell 29% from the previous year in December, in the fifth consecutive monthly drop and on the heels of the biggest year-on-year decline since 2009 in November. 

After ramping up production to record levels to meet a pandemic-era surge in demand, chipmakers have since had to slash spending on new production and cut costs to cope.

Memory chipmakers including Micron Technology Inc. have said they don’t expect a recovery until the second half of this year and have lowered budgets for new equipment and plants and cut costs. Micron further warned it’d be difficult to return to profitability this year, announcing a 10% reduction to its workforce, as well as more cuts in capital expenses. SK Hynix Inc. has said that it’d cut its capex in half for 2023.

What Bloomberg Intelligence Says
 

Samsung Electronics’ operating profit in 4Q could drop sequentially and from a year earlier due to weak demand for memory chips, missing consensus estimates. Its bit demand shipments for DRAM and NAND may have fallen short of guidance, as peer Micron posted severe bit sales and a profit decline. Memory-chip prices could have dropped significantly in 4Q.

— Masahiro Wakasugi, BI analyst

In contrast to its rivals, Samsung, the world’s largest memory chipmaker, said in October it had no immediate plans to cut output. Since then, however, memory chip price falls have accelerated as competition intensified over server clients. In the last three months of the year, Samsung’s memory output in terms of storage capacity grew by roughly 10% but average selling prices slumped about 28%, according to an investment note by eBEST Investment & Securities dated Dec. 22.

The gloomy outlook is lifting speculation that Samsung may need to lower its capex to protect its profitability. 

Flash memory chips are now at price levels matching Samsung’s cost of production, Peter Lee, an analyst at Citigroup, said in a note. Given the bigger-than-expected price declines, “we think Samsung is likely to modify its 2023E capex strategy to a more dovish stance and refrain from a capex increase,” he said.