Samsung expects profit to slump by one third in Q3 as chip demand wanes

Company's preliminary results add to gloom in semiconductor industry as other chipmakers have flagged dismal expectations

The Samsung Electronics semiconductor manufacturing plant in Hwaseong, Gyeonggi Province, South Korea. The company is due to release its full third-quarter financial report on October 27. Bloomberg

Samsung Electronics, the world's biggest mobile phone manufacturer, expects its operating profit to slide by almost a third in its fiscal third quarter as demand for semiconductors has waned.

Profit for the three months ended September is estimated at 10.8 trillion won ($7.65 billion), about 32 per cent less than the 15.82tn won it posted a year ago, the Seoul-based company said in guidance on its website on Friday.

Analysts had projected 12.1tn won on average, which would have been a drop of almost a quarter, according to Bloomberg. The preliminary profit figures would be Samsung's first annual decline in three years.

Revenue is forecast to increase 2.7 per cent to 76tn won from the third quarter of 2021, Samsung said. The company is due to release its full third-quarter financial report on October 27.

South Korean disclosure regulations do not allow profit estimates to be offered as a range, and the values, therefore, represent a median value.

Samsung shares lost about 2 per cent after the guidance release but recovered and were up about 0.4 per cent in midday trading in Seoul.

"Memory chip business is worse than expected, Dram [dynamic random access memory] chip shipments may be down by higher-teens percentage versus the second quarter," said Park Sung-soon, an analyst at Cape Investment and Securities.

"Price negotiation trend seems to suggest customers' demand rapidly worsened during the quarter."

Samsung, the manufacturer of the Apple iPhone's rival Galaxy series, is also one of the world's top semiconductor makers and has benefited from a surge in demand for chips during a shortage in the industry.

The Covid-19 pandemic, which started in early 2020, caused an unprecedented surge in demand for consumer electronics, catching the industry by surprise and upending supply chains, causing shortages.

The semiconductor industry had a record 2021, with sales rising 26 per cent to $555.9bn, its highest annual total yet, the Semiconductor Industry Association reported in February.

Chip sales in the fourth quarter grew 28 per cent on an annual basis and about 5 per cent on a quarterly basis to $152.6bn.

A record 1.15 trillion semiconductor units were shipped last year as chip companies increased production to address high demand during the global shortage, the SIA said.

The market was projected to reap nearly 14 per cent more in revenue this year compared to 2021 and reach $676bn, research firm Gartner said in May.

But a decline in demand for electronics has the chip industry bracing for a potential repeat of 2020, as consumers feel the pinch of the effects of soaring inflation, higher interest rates and the disruption caused by Russia's military offensive in Ukraine.

Shipments of personal computers dropped 15 per cent year-on-year to 70.2 million units in the second quarter, the lowest level since a similar disruption occurred in the first quarter of 2020 when the pandemic started to take hold, research firm Canalys said.

Smartphone shipments in the three-month period ended June, meanwhile, declined 9 per cent annually, also because of weaker demand, it added.

Samsung in July reported a more than 12 per cent surge in second-quarter net profit, as well as record revenue during the period, as semiconductor sales hit a new high.

The company's performance at the time tempered investor fears about the chip industry, but at the same time also acknowledged the geopolitical factors at play that were impacting demand.

"Although server demand remained solid, demand for consumer products such as mobile weakened due to widening impacts of macro issues, resulting in Dram and Nand shipments to come in below bit growth guidance," it said, referring to two of the most widely-used memory chips in the market.

Samsung's guidance also added to the gloom in the industry and came after Advanced Micro Devices on Thursday said it expected $5.6bn in revenue for the third quarter, which is more than 16 per cent down from its initial estimates.

The company, however, has made no plans to cut semiconductor production, an executive told journalists in the US, according to a report from the Seoul-based Yonhap news agency.

But its fellow chipmakers are feeling the pressure more. US-based Micron Technology last week said it would slash investments for 2023, the first chipmaker to officially state such plans, while fellow Korean company SK Hynix has hinted at a potential decrease in investment.