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Samsung warns first-quarter profits fell by 60 percent

Key Points
  • Samsung Electronics' first-quarter profits likely fell almost 60 percent from a year ago due to weakness in its display and memory business.
  • The South Korean tech giant said on Friday its operating profit for the three months ended March would be around 6.2 trillion Korean won ($5.5 billion), a sharp decline from the 15.64 trillion won seen in the first quarter of 2018.
  • Friday's number also missed analysts' estimate of 6.8 trillion won.
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Samsung Electronics' first-quarter profits likely fell almost 60 percent from a year ago due to weakness in its display and memory business.

The South Korean tech giant said on Friday its operating profit for the three months ended March would be around 6.2 trillion Korean won ($5.5 billion), a sharp decline from the 15.64 trillion won seen in the first quarter of 2018.

Friday's number also missed analysts' estimate of 6.8 trillion won.

Samsung is set to release full earnings for the first quarter later this month.

Samsung shares dipped 0.21 on Friday, tracking behind the Korean benchmark Kospi, which closed in positive territory. The relatively neutral reaction in the stock market was likely because investors were already expecting the profit drop for the January-March period, following a warning from Samsung last month.

In a March regulatory filing, the smartphone and chip maker predicted a bigger-than-expected price decline for major memory products — its main profit-making business — due to seasonal weakness in demand. Those components are used in mobile handsets and enterprise servers.

A slowdown in data center companies buying memory chips, as well as flagging smartphone sales have affected demand for Samsung's memory chips, according to analysts. But the company isn't alone — the entire semiconductor sector is undergoing a period of inventory adjustment, experts said.

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Still, Samsung's earnings are set to take further hits in the coming months, Sanjeev Rana, senior analyst at brokerage firm CLSA, told CNBC's "Squawk Box " on Friday.

"I think this earnings decline will continue for the time being, especially on the memory side," he said, adding that the average selling price for some memory chips could fall as much as 20 percent in the next quarter and continue further declines. "We expect 2Q (second quarter) to be the profit trough for memory earnings for companies like Samsung and (SK) Hynix."

Analysts agree that memory demand — especially from data centers — will likely recover in the second half of the year.

Friday's weaker-than-expected operating profit number could be explained by a likely one-off provision in cost for Samsung's memory business, according to S. K. Kim, executive director and analyst at Daiwa Securities. Excluding the one-time cost, Samsung's guidance was similar to market consensus, he told CNBC's "Street Signs. "

For its display business, Samsung previously said that LCD panel prices fell more than expected due to an expansion in capacity from Chinese competitors while demand from large-scale buyers of its flexible OLED display screens, which are typically used in high-end smartphones like Apple's iPhone, also declined.

Consolidated sales for the first quarter was expected to be around 52 trillion won, down 14 percent from a year earlier, Samsung said Friday. It also missed market expectations.

In January, the world's largest smartphone maker had issued a similar warning for the previous quarter's earnings — operating profit for the three months ended December fell more than 28 percent annually and missed analysts' predictions by 18 percent.

5G potential

Samsung also rolled out its new Galaxy S10 5G smartphones in its home market on Friday, where the next generation of ultra-high speed mobile internet networks are already live. The devices will reportedly cost between 1.39 million won ($1,231) and 1.55 million won ($1,366), depending on the model.

Analysts expect initial volume of 5G phones to be minimal because of the steep price point and due to the continued decline in global smartphone shipments. Plus, the 5G technology itself is still being built in other markets.

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Still, the development of 5G will be "meaningful" to Samsung since it also sells chipsets and network equipment required to build out that technology, according to Daiwa's Kim. "We expect some upside opportunity for the 5G chipset business, including modem, and also its network equipment business," he said.

At the moment, only a handful of companies have a head start in the development of 5G.

China's Huawei and ZTE have had tremendous success getting ahead in the 5G race but those firms are facing mounting fears that their technology will enable Chinese espionage through the high-speed mobile networks. At the moment, several countries, including the United States, have blocked Huawei from participating in 5G development within their borders.

Samsung, for its part, will launch the Galaxy S10 5G in the U.S. with Verizon.

While the company is working with American carriers to bring its smartphone into the market, it also has a big opportunity to sell network equipment for 5G deployment in North America and other markets, according to Hugh Ujhazy, vice president for Internet of Things and telecommunications at the International Data Corporation.

Other 5G competitors include Sweden's Ericsson and Finnish giant Nokia.