Business

Samsung estimates a 56% fall in profit even as Apple reimburses $684 million

Samsung has sent out its earnings guidance for the April-June period today and it corroborates reports that its profits will nosedive due to a weak memory chip market. Samsung estimates a 56 percent fall in its operating profit in Q2 2019 compared to the same period this year.

Q2 2018 essentially capped the record profit run that Samsung was enjoying. It was actually the company’s slowest quarterly profit growth in over a year. Samsung posted 14.87 trillion won or $13.3 billion in operating profit this time last year. Q2 2019 will be Samsung’s third consecutive quarter with a year-on-year profit decline.

Going gets tough for the semiconductor business

Samsung’s semiconductor business has long been the company’s cash cow. The super cycle in the memory market which saw demand and prices rise sharply has withered. Samsung’s balance sheet is now reflecting that. The company acknowledges that this slowdown poses significant challenges to its business and it’s now looking for other growth avenues.

According to its earnings guidance for the second quarter of this year, revenues will clock in at 56 trillion won or $47.89 billion, a decline of 4 percent compared to Q2 2018. The operating profit will crash by 56 percent to 6.5 trillion won or $5.56 billion. The supply glut of DRAM and NAND flash chips has been consistently pushing prices down. They account for over two-thirds of the company’s sales, hence the steep decline in profitability.

The market appears to be going in the opposite direction of what Samsung had earlier predicted. It expected memory chip earnings to improve in the second quarter as inventory levels stabilized and demand picked up. It’s not going to get any better soon. Not only are prices expected to fall by up to 15 percent in the second half of this year, Samsung is also going to feel the pinch of Washington’s ban on Huawei. The Chinese conglomerate is a major customer of Samsung’s memory chips. Some in the mobile division might relish the breathing space afforded by the ban on Huawei. Others in the memory chip division may want the uncertainty to end soon.

The Q2 2019 profit would actually have been lower if Samsung didn’t record a one-time gain for the display business. It is reflected in the $5.56 billion profit estimate. Samsung doesn’t provide the details about this one-off gain. Analysts tell Reuters that Samsung Display was reimbursed nearly 800 billion won or $684 million by Apple as it missed a sales target previously agreed with the company. A recent report had suggested that Samsung will seek a penalty from Apple for not buying as many OLED panels for its iPhones as it had agreed to.

We’ll get to see the performance breakdown for all divisions when Samsung releases the full earnings result for Q2 2019 towards the end of this month.

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jmagoon
jmagoon

I wonder if Samsung will pay taxes on that…