Falling memory-chip prices force Samsung to issue surprise profit warning

Samsung issued a surprise profit warning on Tuesday. Bloomberg

Samsung Electronics said its first-quarter results will fall short of market estimates as demand for memory chips waned, issuing a surprise profit warning ahead of preliminary earnings next month.

Prices for memory chips and displays fell more than expected, leading to the shortfall, the Suwon, South Korea-based company said on Tuesday.

The company, which has said it expects demand to pick up in the second half of the year after customers work through their inventory, said it will use its resources to maintain price competitiveness.

The warning from the world’s biggest chip maker underscores a steeper-than-expected dive in component prices amid a stagnant smartphone market. That is exacerbated by a global economic slowdown and US-China trade tensions that have hit demand for the semiconductors that account for most of Samsung’s profits.

Its shares fell less than 1 per cent in Seoul trading. The stock had gained 18 per cent this year through Monday’s close.

“Samsung’s trying to spread out the shock over its results,” said Song Myung-sup, an analyst at HI Investment & Securities. “Market-watchers are bracing for a bad situation.”

Prices for dynamic random-access memory slid almost 30 per cent from the originally projected 25 per cent in the first quarter, “resulting in the sharpest decline in a single season” since 2011, TrendForce said on March 5. Inventory levels also continued to rise after overall contract prices dropped in the fourth quarter, according to the research company.

Prices for computer memory have been hit by slower orders from data centre owners such as Amazon and Google, which have accumulated stockpiles of unused parts. Personal computer shipments, another major end use of memory chips, have also been limited by a shortage of processors from Intel.

“Most Dram suppliers are currently holding around a whopping six weeks’ worth of inventory,” TrendForce said. “The excessively high inventory will continue to cause down-corrections in prices this year if demand doesn’t make a strong comeback.”

Samsung competitors such as Micron Technology have said that the current weakness is a low point for the memory industry and that, once the inventory has been worked through, demand and pricing will improve in the second half of 2019.

Together with SK Hynix and Micron, Samsung controls the bulk of the market for Dram chips, used to store data on personal computers and servers. Samsung said in January it was reducing spending this year to focus on the profitability of its memory operations after its net income slumped the most in two years.

Samsung usually provides an estimate of its revenue and operating profit days after each quarter ends. The company then provides a full breakdown of its performance later in the same month, holding a conference call with investors.

“In the short term, the company will strengthen the differentiation of its products based on its technological leadership to improve the difficult business conditions, while seeking to improve the price competitiveness through efficient use of resources,” the company said.

Aside from its memory-chip woes, Samsung has been struggling to stem a decline in its smartphone sales as consumers wait longer to upgrade their devices. Its display division, which provides smartphone screens to Apple, has also been hurt by lower-than-expected sales of iPhone devices and competition from Chinese makers of monitors and televisions.