Samsung Issues Shock Profit Warning, Amid Slowing Chip Demand

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Another sign of tech slowdown? Samsung warns weak chip demand will keep profits subdued

Samsung Electronics has issued a shock profit warning, and told investors to expect a fall in revenues, as well as subdued profits for the three months ending December 31st 2018.

The South Korean electronics giant blamed weak demand for memory chips, coupled with intensifying competition in the smartphone business.

The news from Samsung after Apple shocked investors last week when it warned of a “magnitude of the economic deceleration, particularly in Greater China,” that forced it to lower its revenue forecast for its fiscal first quarter (ending 29 December) to $84bn (£67bn).

Profit warning

And the fact that Samsung has now added to this, will add to investor concerns of a tech slowdown, in the midst of a growing trading war between the United States and China.

Samsung said that it expected operating profit to drop 29 percent to about 10.8 trillion won (roughly $9.6 billion). It also expects revenues to fall 11 percent to 59 trillion won (approximately $52.5 billion).

The news shocked investors, who had been expecting operating profit of 13.2 trillion won, as well as revenues of 62.8 trillion, according to Reuters.

So where did it go wrong for Samsung?

Well, it reported cited difficult conditions in memory chips, but the firm did say that the market was likely to improve in the second half of the year as customers release new smartphones.

Samsung, it should be remembered, supplies memory chips to most of the leading smartphone markets, including Apple and China’s Huawei Technologies.

Indeed, Samsung’s memory and processor chips account for over three-quarters of overall profit and about 38 percent of Samsung’s total sales.

Samsung also cited weaker-than-expected demand from data centre customers, which impacted inventories drove down chip prices and hurt earnings.

And a slowing Chinese economy has also reportedly eroding demand for chips, with matters not helped by the fact that firms such as Apple are struggling to sell their iPhones in China.

Looking ahead to the current quarter, Samsung warned that earnings would remain “subdued” because of ongoing slow memory demand, but things are expected to pick up in the second half of the year.

Smartphone slowdown

On the positive side, Samsung hopes that 5G and foldable devices will improve its mobile division’s performance, and it also believes that its OLED panels for smartphones will continue to increase market penetration.

But there is little doubt that both Samsung and Apple have been hurt by slowing demand for smartphones.

Apple is mostly blaming a tough market in China, but Samsung is also facing intense competition in that market as well from the likes of Huawei and Xiaomi.

The arrest in early December 2018 of Huawei’s chief financial officer Meng Wanzhou in Canada at the US’ request, as well as President Donald Trump’s aggressive posturing on trade, is also said to have driven a spike in Huawei sales in China as Chinese consumers reacted to the US move.

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Author: Tom Jowitt
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