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Samsung says its second-quarter profit likely fell 56% from a year ago

Key Points
  • Samsung Electronics said on Friday that profits for the three months that ended June more than halved from a year earlier following continued weakness in price and demand of memory chips.
  • The world's largest smartphone maker and supplier of memory chips said operating profit was at 6.5 trillion Korean won ($5.5 billion), which was slightly better than an industry estimate of 6 trillion won, but was down about 56% from a year earlier.
  • Memory components, which are used in mobile handsets and enterprise servers, comprise Samsung's main profit-making business.
A man walks past the logo of Samsung Electronics outside the Samsung building in Seoul, South Korea.
Jung Yeon-Je | AFP | Getty Images

Samsung Electronics said Friday that profits for the three months that ended June more than halved from a year earlier following continued weakness in the price and demand of memory chips.

The world's largest smartphone maker and supplier of memory chips said operating profit was at 6.5 trillion Korean won ($5.5 billion), which was slightly better than an industry estimate of 6 trillion won, but was down about 56% from a year earlier.

Memory components, which are used in mobile handsets and enterprise servers, comprise Samsung's main profit-making business.

"Results were actually somewhat better than market expectations, but then there is some one-off that the company is talking about," said Sanjeev Rana, senior analyst at CLSA.

Samsung said it saw one-off gains in the display business that were reflected in operating profits. Reuters reported that analysts said the smartphone giant received reimbursements worth about 800 billion won for display panels sold to Apple as the iPhone maker missed a sales target on which the two companies had agreed.

"If you exclude that one-off, actually, it seems that apart from the semiconductor business, which did somewhat better than market expectations, we believe smartphone business performance was ... worse than expected," Rana told CNBC's "Squawk Box " on Friday.

Samsung shares were down 1.2% in afternoon trade, trailing the South Korean benchmark index, which traded near flat.

Experts have said that the entire semiconductor sector is undergoing a period of inventory adjustment, which is keeping demand low and causing a supply glut that's squeezing the price. Some have predicted continued excess inventories in both DRAM and NAND memory chips, which would push back the sector's recovery to the second half of 2020.

DRAM chips allow computers, phones and tablets to run multiple applications at the same time whereas NAND chips function as primary storage.

Final figures for the quarter are due later this month.

If those numbers match with Friday's guidance, as they typically do, it would be the second consecutive quarter where Samsung's operating profit more than halved from the same period a year earlier.

In the three months that ended March, Samsung's profits fell about 60% on-year to 6.2 trillion Korean won ($5.3 billion).

Rana said the company's earnings will likely recover in the second half. Already, operating profit in the second quarter was slightly higher than first-quarter numbers.

"That should accelerate," he said, referring to the third and fourth quarters. "It's simply because of the seasonality, so we have new models coming from Apple as well as some other smartphone makers."

"In our earnings estimate, we are expecting (the) company's earnings to recover 18% half-on-half in the second half," he added.

Japan-South Korea trade tension

The simmering tension between Seoul and Tokyo will likely exacerbate the situation for Samsung, as well as other semiconductor rivals in South Korea like SK Hynix.

There is a growing dispute between the two countries over wartime forced labor, which resulted in Japan announcing Monday stricter restrictions on exports of crucial high-tech materials that are used by South Korean electronics companies to make chips and smartphone displays.

For its part, South Korea said Thursday it may retaliate.

Analysts at Citi said they expect this week's ruling from Tokyo will "have limited short-term impact on Samsung and SK Hynix thanks to high inventory level, but (those companies) will face some difficulty in sourcing semiconductor materials soon."

Others have pointed to ripple effects in the semiconductor and display sectors.

"Because of the volumes of chemicals required within the semiconductor manufacturing process, it is unlikely that the major chip suppliers will be able to find suitable quantities from suppliers outside Japan," Len Jelinek, executive director of semiconductor research at IHS Markit, wrote in a recent note.

— Reuters and CNBC's Patti Domm contributed to this report.