Not Even a Giant Can Withstand the Tech Storm

(Bloomberg Opinion) -- Samsung Electronics Co.'s second-quarter numbers show just how bad the technology slump is.

South Korea's biggest company posted revenue and operating profit estimates that exceeded analyst expectations, according to data compiled by Bloomberg. Yet a single line in Friday morning's statement hints at the weakness behind this apparent beat, disclosing that the estimates include a “one-time gain related to the display business.” Because this is only preliminary data, we don't get to see the full sales and income breakdowns.

Samsung sought compensation from Apple Inc. to make up for organic light-emitting diode panel orders that fell short of the iPhone maker's initial expectations, South Korea's Electronic Times reported two weeks ago. Citigroup Global Markets estimates that Samsung could have got as much as 1 trillion ($850 million) won compensation from a U.S. customer, Bloomberg News reported.

On that basis, Samsung's underlying operating profit would be closer to 5.5 trillion won, a three-year low. And operating margin would be closer to 9.8%, the lowest in five years, instead of the 11.6% based on preliminary earnings.

There's a deeper concern for investors. If Samsung did secure such compensation from Apple, then it means the Cupertino-based company will have to wear a cost of as much as $850 million for a product (displays) that it didn't even buy.

Furthermore, Apple is usually pretty good at predicting its needs – though it may sometimes overestimate in order to push suppliers to boost capacity. If Apple CEO Tim Cook and his team can't get it right, there's a high chance that others in the sector have  miscalculated demand and are holding onto supply estimates that remain too rosy.

The overhang of climbing inventories and lengthening sale times has worsened in the past year, as I outlined in late June. Samsung's latest figures add to a chorus of information that's warning of weakness in the sector, and will chip away at the belief that the second half will be much better.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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