Samsung Suffers Hit From Softening Smartphone Demand
Date: Wednesday, July 31, 2019
Source: The Wall Street Journal
The South Korean tech giant’s net profit fell 53%, which still beat estimates, as uncertainty looms regarding the U.S.-China trade conflict and Japan’s new trade curbs
SEOUL— Samsung Electronics Co. ’s net profit dropped 53% during its second quarter, as consumers’ decreasing appetite for smartphones and other gadgets sapped demand for the company’s cash-cow components business.
The world’s largest smartphone and memory-chips maker has been dogged by a global spending pullback exacerbated by the protracted U.S.-China trade fight.
But more recently, Samsung’s core businesses have come under threat from Japan’s new trade restrictions that slow shipments of essential materials needed for semiconductors and flexible displays.
Samsung is a bellwether for global trade, as the company is a major electronics producer itself and supplies parts for products or services offered by other tech companies like AppleInc., Microsoft Corp. and Amazon.com Inc.
On Wednesday, Samsung said it notched a second-quarter net profit of 5.18 trillion South Korean won ($4.4 billion), a decline from 11.04 trillion won a year earlier.
Revenue slid to 56.13 trillion won from 58.5 trillion won a year earlier.
Samsung’s results topped analysts’ estimates that had anticipated net profit of 5.1 trillion won and revenue of 52.4 trillion won for the quarter ended June 30, according to S&P Global Market Intelligence.
Samsung could receive a modest boost in the coming months from the planned releases of two high-end smartphones. The Galaxy Note 10 will be unveiled next week at a New York event, while the company’s much-anticipated foldable-screen device, the Galaxy Fold, will be released by September.
During the first three months of 2019, Samsung’s smartphone shipments fell 8%, a bigger drop than the industry’s 6.6% decline, according to International Data Corp., a market researcher.
Revenue from Samsung’s mobile unit rose, though operating profit declined 42% from the prior year, a sign the South Korean company has needed aggressive promotions to gin up sales. The company’s semiconductor division reported a 71% slide in operating profit.
Several years ago, Samsung reaped most of its operating profit from smartphones. However, consumers have slowed their purchases of upgraded devices, as the updates have left buyers unimpressed and more likely to keep their current phone.
Now, Samsung derives roughly three-quarters of its operating profit from chip sales.
After a series of record profit in 2017 and 2018, Samsung’s winning streak ended late last year when demand from smartphone makers and data-server companies fell, leading to lower memory-chip sales.
To diversify beyond memory chips, Samsung said in April it would invest $116 billion by 2030 in other semiconductor areas, seeking to tap into new growth drivers.
The company has a dominant foothold in both major types of memory chips. During the second quarter, Samsung said its unsold inventories of DRAM memory chips, which give devices multitasking speed, had been reduced, while the glut had been minimized even more for its content-storage NAND Flash memory chips.
Samsung said it expects NAND inventories to balance supply with demand during the July-to-September period, while demand for DRAM chips is projected to rise, said Chun Se-won, an executive vice president for the company’s semiconductor business, on Wednesday’s earnings call.
“Overall demand is expected to increase,” Mr. Chun said.
Samsung Electronics shares slid 2.7% late Wednesday morning in Seoul versus a 1.1% decline for South Korea’s benchmark Kospi index.
Samsung said its display business received a one-time gain in mobile displays.
Analysts have expected the company would receive compensation fees from Apple, which uses some of Samsung’s flexible displays in some of its iPhones. On Tuesday, Apple reported iPhone sales had declined 12% for the three months ended June 29.
Japan’s recent moves to slow shipments of certain chemicals to South Korea took effect July 4, so the financial impact won’t be visible until Samsung reports results for the current quarter.
But Tokyo’s trade policy could have far-reaching implications for Samsung’s business and the global tech supply chain, industry experts say.
On the earnings call, a Samsung investor relations official said the company is facing difficulties because of Japan’s new trade moves, plus the uncertainties created by a longer approval process.