Samsung Electronics on Tuesday forecast its third-quarter operating profit to fall below market expectations due to weak chip demand for smartphones and one-off costs.

The disappointing result prompted the chief of Samsung's chip business to issue an apology after the market described the performance as "almost an earnings shock."

The tech giant announced its earnings guidance for the July-to-September period, forecasting a consolidated operating profit of 9.1 trillion won ($6.76 billion) and sales of 79 trillion won.

Operating profit surged 274.49 percent from a year earlier, but plunged 12.84 percent compared to the previous quarter. Given last year’s global slowdown in the chip industry, the quarter-on-quarter decline is more significant, indicating that the company’s profitability has regressed within just three months.

9.1 trillion won operating profit falls significantly short of Monday's brokerage consensus of 10.77 trillion won. Initially, analysts had projected that Samsung Electronics would achieve at least 13 trillion won in operating profit for the third quarter. However, they had been revising their forecasts downward since September due to concerns over weakening demand for DRAM in the future.

Shortly after announcing the guidance, Jun Young-hyun, Samsung Electronics vice chairman and head of the Device Solutions (DS) division, issued a public apology to investors and employees. This is the first time that a Samsung Electronics senior executive has apologized for the company’s performance.

“With performance falling short of market expectations, we have caused concerns about our fundamental technological competitiveness and the future of the company,” Jun said.

“A lot of people are talking about Samsung’s crisis, and the full responsibility lies with us, those who are leading the business … We will turn the grave situation into an opportunity for a new leap forward. Our management team will take the lead in overcoming this crisis.”

The earnings guidance does not break down Samsung Electronics’ performance by business division, but analysts estimate that the DS division, which oversees the semiconductor business, reported an operating profit below 5.3 trillion won in the third quarter, dragging down the company’s overall profit.

In the memory business, chip demand for servers remained strong in the third quarter, but demand for smartphones and personal computers slowed. One-off costs, such as provisions for incentives and the stronger Korean won, are also believed to have impacted the division’s profitability.

Another possible factor is Samsung's delayed supply of AI-specific high-bandwidth memory (HBM) 3e chips to Nvidia. Samsung was initially expected to begin supplying its eight-layer HBM3e chips for Nvidia's AI processors within the third quarter. But the chips have yet to pass Nvidia's quality tests. Additionally, Samsung's plans to begin delivering advanced 12-layer HBM3e chips later this year remain uncertain.

“To distinguish itself from rivals, Samsung Electronics needs to prove its competitiveness in the HBM business,” Hana Securities analyst Kim Rok-ho said. “The top priority is to dispel current market concerns surrounding its prowess as the world’s top memory chip manufacturer.”

Meanwhile, LG Electronics projected disappointing third-quarter earnings, anticipating a 20.9 percent year-on-year decline in operating profit to 751.1 billion won, while forecasting sales of 22.18 trillion won, a 10.7 percent increase during the same period.

While LG Electronics’ third-quarter sales reached their highest level ever, operating profit fell well below the market consensus of 1 trillion won. Analysts suspect that rising shipping and marketing costs may have impacted the company’s profitability.

By: DocMemory
Copyright © 2023 CST, Inc. All Rights Reserved