October 4, 2018 / 11:40 PM / a month ago

Samsung flags third-quarter profit jump to record, but chip price falls cast shadow

SEOUL (Reuters) - Samsung Electronics Co Ltd estimated third-quarter operating profit jumped by a fifth to a record high, with its semiconductor unit bolstered by robust demand from data centers and gains in production yields.

But sharp price slides for some types of chips have brought an end to a two-year super cycle of tight supply and soaring demand, and analysts expect the July-September quarter will mark a peak in earnings for the South Korean tech giant.

Graphic: Samsung Electronics's operating profit growth to slow - tmsnrt.rs/2zKzlQI

Competition from cheaper Chinese made phones as well as higher marketing costs have also meant that an imminent rebound for Samsung’s mobile unit is unlikely.

“Falling chip prices will pressure profits while its smartphone shipments are not satisfactory and will continue to crimp margins,” said Song Myung-sup, a senior analyst at HI Investment & Securities.

Third-quarter results for the world’s top maker of memory chips and smartphones were, however, impressive. Preliminary operating profit climbed 20.4 percent to 17.5 trillion won ($15.5 billion) on a 4.8 percent gain in revenue, in line with market expectations.

The firm did not elaborate on its performance and will disclose detailed earnings in late October.

Chips account for nearly 80 percent of Samsung’s operating profit and Samsung has benefited from a surge in data centers for cloud computing that has spurred spikes in prices for DRAM chips. DRAM chips, which help devices perform multiple tasks, are its main memory product.

It has also made gains in production technology that allow it to make smaller and faster chips per silicon wafer.

But prices for NAND chips, used for longer-term data storage, have tumbled as supply swamps demand. Prices for DRAM are expected to follow suit, albeit at a much slower pace with some analysts saying Chinese data center demand will lend support.

Market tracker DRAMeXchange predicts an average price decline of 5 percent for DRAM products in the fourth quarter from the previous quarter, steeper than its previous estimate of declines of as much as 3 percent.

Samsung is forecast to still book decent operating profit growth of 12 percent in the fourth quarter, Refinitiv data shows. But that is seen dropping to minimal profit growth in the first half of 2019 followed by small profit declines in the second half.

Shares in Samsung rose 0.2 percent on Friday afternoon, while the broader market fell slightly. The stock has lost 12 percent so far this year on concerns about chip prices, underperforming the broader market which has declined 8 percent.

FILE PHOTO: The logo of Samsung is seen on a building during the Mobile World Congress in Barcelona, Spain February 25, 2018. REUTERS/Yves Herman/File Photo

While income levels for Samsung’s business divisions are yet to be disclosed, analysts expect its mobile business will struggle to deliver profit growth for the next two quarters.

It is working on bringing phones with bendable screens to market but they are not expected to become a huge profit driver.

“Its mobile division will continue to look bad. Samsung’s upcoming foldable phones are not going to be meaningful in terms of sales, more of a symbolic move in terms of innovation,” said Park Sung-soon, an analyst at BNK Securities.

Reporting by Heekyong Yang and Ju-min Park; Editing by Edwina Gibbs

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