Another Setback for Samsung as Profit Misses Estimates

(Bloomberg) -- Samsung Electronics Co. joined rivals in cautiously predicting a rebound in chip prices in the second half of the year as demand from server-makers picks up.

The South Korean company's guarded outlook, which echoed recent comments from SK Hynix Inc., came after it posted first-quarter profit that missed estimates. It's the latest setback for a technology giant grappling with falling memory-chip revenue and the embarrassing delay of its highly touted foldable smartphone. Its shares were little changed in Seoul.

The slowing expansion of data centers around the world has hurt demand for memory, while Chinese competition has eaten into Samsung's smartphone and display businesses. This month, plunging chip sales led the company to report its worst operating profit in years, while it was forced to postpone the release of the Galaxy Fold after reports of screen failures. Still, Samsung now predicts improvement in the second half as customers reduce inventory and shift to higher-capacity chips.

“With memory in a pretty sharp downturn and LCD display prices also in a pretty sharp downturn, investors' focus isn't so much on today's profitability,” said Mark Newman, senior research analyst at Sanford C. Bernstein. “The question really is recovery in the second half of the year.”

Net income fell to 5.11 trillion won ($4.4 billion) in the three months ended March. That compares with the 5.7 trillion won average of estimates compiled by Bloomberg.

Read more: Chip Analysts Say ‘Proceed With Caution' After Weak March Data

Income from the chips unit still amounted to 4.12 trillion won and most of the company's profits. Samsung said in a conference call with investors that it will optimize its semiconductor lines in a move that could affect production volumes.

Contract prices for 32-gigabyte DRAM server modules, used to store data on PCs and servers, fell by 38 percent in the March quarter, according to InSpectrum Tech Inc. Prices for 128-gigabit MLC NAND flash memory chips, which store data on mobile devices, dropped by 23 percent.

SK Hynix said last week it was seeing clear signs of recovery starting in the second quarter, after posting its own sharp profit decline. Micron Technology Inc. said last month it was cutting production while forecasting improved demand in the second half.

Together with Hynix and Micron, Samsung controls the bulk of the market for DRAM, or dynamic random access memory. On Tuesday, Samsung executives said the company will sharply reduce investment in memory-related chipmaking gear, a move that could tide it over a lull as it awaits a stronger industry rebound.

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Samsung's mobile division posted 2.27 trillion won in operating income. While the company remains the world's biggest phone maker, its share of the market has been shrinking as Chinese rivals Huawei Technologies Co. and Oppo catch up. The company, which shipped 78 million smartphones in the first quarter, expects sales to fall again in the second quarter.

The display division lost 560 billion won for Samsung, which supplies OLED screens for Apple's iPhones. Samsung's consumer electronics unit, which includes TVs and appliances, recorded profit of 540 billion won. Samsung didn't provide a new date for the delayed launch of its Galaxy Fold.

“Revenue for the mobile business will likely improve in the second quarter,” Park Sung-soon, an analyst with BNK Securities sad. “What's more important is chips. A recovery in the chips market will lead to a strong rebound in earnings in the second half.”

--With assistance from Min Jeong Lee.

To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net

To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Robert Fenner

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