Samsung expects Q4 profit to decline despite record third-quarter revenue

World’s biggest smartphone and chip manufacturer says Q3 profit jumped 59% to $10.6bn

People walk past the Samsung logo at the company's showroom in Seoul on October 29, 2020.  / AFP / Jung Yeon-je

Samsung Electronics expects a dip in fourth-quarter profit due to “weakening memory chip demand” and “intensifying competition” despite posting its best three-month profit in two years, the company said on Thursday.

The world’s biggest smartphone and chip manufacturer posted a 59 per cent year-on-year jump in operating profit to 12.35 trillion Korean won ($10.6 billion) in the three months to September 30, marking its highest quarterly profit since the fourth quarter of 2018 and almost 52 per cent more on a quarter-on-quarter basis.

The company’s consolidated revenue jumped to a record, rising 8 per cent to 66.96tn won, beating analysts’ estimates of 64.7tn won.

Samsung attributed the increase in earnings to a boost in demand for smartphones and consumer electronics, as well as efficient cost management.

"Even as the Covid-19 pandemic continues around the world, reopening of [the] key economies led to [a] significant increase in consumer demand," Samsung said in a statement, adding that it was able to respond aggressively through "flexible global supply chain management".

The company’s smartphone sales jumped almost 50 per cent, boosted by the launch of new flagship models such as the Galaxy Note20 and the Galaxy Z Fold2 in the third quarter. Stronger sales of budget models in key regions such as India also boosted earnings, it added.

“Efficient cost management through component standardisation and a reduction in marketing expenses led to a significant improvement in profitability,” Samsung said.

In its guidance for the fourth quarter, Samsung forecast a decline in profit amid weakening memory chip demand from server customers and intensifying competition in the smartphones and consumer electronics market.

Industry analysts say an oversupply of chips could bring prices down, which could affect Samsung’s business in the coming months.

The average selling price for memory chips is expected to remain weak in the fourth quarter of this year, despite many manufacturers stocking up in the wake of US restrictions on Huawei, according to semiconductor researcher TrendForce. It predicts prices could decrease by nearly 10 per cent on a quarterly basis.

The South Korean technology giant is also expecting smartphone sales to decline amid increasing marketing costs due to the competitive market environment.

“In consumer electronics, profitability is expected to weaken on growing competition and rising costs, despite solid demand,” Samsung said.

“For 2021, the company expects a recovery in overall global demand but uncertainties will remain over the possibility of recurring epidemic waves of Covid-19,” it added.

Samsung is planning to expand its portfolio of foldable and 5G smartphones worldwide, while strengthening its global positioning in the network business on the back of the growing commercial 5G services.

The company’s capital expenditures in the third quarter stood at 8.4tn won, which includes 6.6tn won spent on semiconductors and 1.5tn won spent on displays.

It expects capital expenditure to reach 9.7tn won in the fourth quarter, taking full-year expenditure to nearly 35.2tn won.

“This year’s capital expenditures on the memory business will exceed last year’s due to migrations to advanced process nodes and capacity expansion to address [the] future demand,” Samsung said.

The display panel business reported higher quarter-on-quarter profit led by growing mobile display sales. Despite the impact of Covid-19, Samsung said customers are buying more smartphones, TVs and monitor panels.

“Mobile display earnings rose as recovering demand from major customers for smartphone screens lifted utilisation rate … losses from large displays narrowed slightly on increasing panel prices and higher sales of ultra-large TV and high-performance monitor panels,” it added.