Samsung’s surprise warning shows weaker chip sales hurt Q1 earnings

It’s not common for public companies to release statements about quarterly results before an upcoming earnings guidance. The guidance serves as a benchmark for the market to base its predictions for the full quarter earnings on. Samsung released a surprise warning today, saying that it would most likely miss market expectations in Q1 2019 due to weak chip sales.

Samsung said today that its first-quarter results will be short of estimates due to declining prices for memory chips and slow demand for display panels. Samsung did tell its shareholders during the annual meeting last week that slower global economic growth and soft demand for memory chips would impact earnings in 2019.

Surprise warning signals investors of a steep decline

Samsung had warned of an earnings decline for the year in its Q4 2018 results as well. It expected demand for memory products to remain weak in the first quarter of this year. It also predicted a decline in the profitability of OLED panels. The company might be the top global smartphone vendor but that’s not where most of its profits come from. 79 percent of Samsung’s 2018 operating profit came from its components business which includes memory chips and display panels. A decline would thus have a noticeable impact on the bottom line particularly when the mobile division can’t do much to plug the gap.

The market has already been predicting for a few quarters that chip demand will bottom out soon. Samsung and other manufacturers have said that the current slide in demand is indicative of a low point in the memory industry. They predict that once the inventory has been worked through, demand and prices for these products will improve in the second half of 2019.

Samsung is expected to post a 12 percent decline in first-quarter revenue. This would be its biggest decline since the first quarter of 2015. This surprise warning can thus be taken as a signal from Samsung to the market so that investors are not blindsided by the steep decline when it posts the first-quarter earnings guidance next week.

It’s not like Samsung hasn’t been planning for this eventuality. It does need to offset the earnings loss due to the decline in demand for memory products. Samsung heir Lee Jae-yong recently said that the company will increase its focus on the non-memory chip and foundry business for future growth.