Samsung Record Profit Overshadowed By Slumping Smartphone Sales; Chip Price Fears

With lower-cost Chinese handset makers nipping at Samsung's heels, and Apple maintaining its unassailable dominance of the premium market, the South Korean consumer-tech giant reported a stunning 33% drop in operating profits for its mobile business in its Q3 earnings on Wednesday. Mobile-phone profits fell to 2.2 trillion won ($1.9 billion) last quarter, even as growth in its memory chip business helped the company post a record 17.6 trillion won operating profit, up 21% from 14.5 trillion won ($13 billion) from the same time last year, surpassing the expectations of Wall Street analysts.

While the underlying softness in the smartphone segment was widely cited as a cause for concern among analysts, it didn't stop the world's largest manufacturer of smartphones and semiconductors from reporting a 13.15 trillion South Korean won ($11.5 billion) net operating profit, the company's highest ever, representing an 18% increase from 11.19 trillion won ($9.8 billion) a year earlier.

"Looking further ahead to 2019, earnings are forecast to be weak for the first quarter due to seasonality, but then strengthen as business conditions, particularly in the memory market, improve," Samsung said in a statement.

Samsung

Per Reuters and WSJ, analysts had expected Samsung to post a Q3 profit of 12.9 trillion won, and revenue of 64.9 trillion won. But despite its strong overall bottom line, the softness in Samsung's smartphone sector was difficult for analysts to ignore.

As the company, which ships one of every five smartphones sold globally, said mobile revenues declined 10% to 24.91 trillion won, down from 27.69 trillion won a year earlier. Samsung attributed this to the fact that shipments were flat during the quarter, while "increased promotional costs" and "a negative currency impact" - which, along with trade war fears, has been a perennial favorite excuse for underperformance offered by corporate managers this cycle. In Samsung's case, these excuses were merely window-dressing, as the weakness in the mobile business could be attributed almost exclusively to the fact that the company's Samsung Galaxy S9, which is priced in the premium range, has sold poorly. In fact, the device's lackluster sales forced Samsung to move forward the release of its Galaxy Note 9 to Aug. 24, weeks ahead of the previous year. Apparently, the company's widely touted introduction of animated human emojis wasn't enough to offset the steep price of the S9. 

While consumers have been holding on to their smartphones longer than ever before, leading to purchases of smartphones to plateau for all manufacturers, many are also waiting for next year's release, as Samsung is expected to introduce a foldable-screen phone.

All of this did little to ease investor fears that the memory-chip boom that had lifted Samsung's share price in recent years (though shares have retreated this year as growth concerns have festered) could be coming to an end, as many fear the semiconductor shortage that helped drive the company's series of record profits may have peaked.

According to WSJ, the prices for DRAM chips, one of Samsung's core products, are expected to slide in the coming months, which would be the first drop in two years. And this softness isn't limited to DRAM chips: Prices of NAND chips are already dropping and could shed another 25% to 30% next year, DRAMeXchange told WSJ.

"NAND (flash memory) chip prices will further decline through the first half of next year...(as) Toshiba’s new production line will start and Hynix starts mass production of one of its NAND lines," said Song Myung-sup, an analyst at HI Investment & Securities.

"Oversupply is expected to continue."

Still, analysts noted that, as Samsung continues to cut costs, it will likely soften the blow somewhat from the shifting dynamics in the semiconductor market. 

"Since Samsung continues to reduce the costs of (semiconductors), it is not very likely to witness a so-called hard-landing situation," said Avril Wu, senior research director at DRAMeXchange.

Samsung, the world's largest maker of DRAM and NAND chips, isn't the only chip maker to warn about a slowdown in demand. Executives at SK Hynix said the company is planning to cut investment in 2019 to reflect "global economic uncertainties." Meanwhile, Texas Instruments,, a U.S. maker of communications chips, said last week in an earnings statement it saw a slowdown in demand across most markets. Samsung shares were flat toward the close of the Asia trading session.

Samsung