Samsung reports worst profit in 10 years as memory chip sales plummet

An extended slump in the tech sector is hitting Samsung Electronics Co., SSNHZ 0.00% hard, leading to a steep drop in the company's first-quarter profits, which will drop to levels less than half that of the financial crisis, as the slump in the tech sector hits Samsung's memory chip business hard.

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Samsung has stated that its operating profit for the January-March quarter is expected to have declined by around 95.8% from the prior year to 600 billion won, which is equivalent to approximately $455 million. This would be Samsung's lowest quarterly operating profit since 2009. Approximately 63 trillion won is expected to be generated by the company for the three-month period, a decline of 19% compared to a year earlier.

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There has been a decline in profits for this South Korean technology company as a result of global economic slowdown, inflation, and geopolitical tensions that have led to a reduction in consumer and corporate expenditures on technology products, such as computers, smartphones, and servers, which drives demand for semiconductors, such as memory chips.

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According to Samsung, the company is in the process of reducing the production of memory chips, joining its competitors as they have reduced their investments aimed at expanding their capacity and having decreased production to deal with the glut of memory chips and maintain profitability in the memory business. In January, the company announced that it was optimizing its manufacturing lines, a move that was interpreted by the industry as signaling some production cuts that could happen in the near future.

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The current economic situation and the dwindling consumer demand, combined with inventory adjustments from Samsung's customers, contributed to the drop in profits that Samsung reported. To prepare for the long-term demand, the company intends to continue investing in essential infrastructure and to carry out research and development.

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There was a large gap between Samsung's earnings projection for the first quarter and the market's expectations. As per data provided by the data provider FactSet, on average, analysts had expected the operating profit to be 1.4 trillion won and the revenue to be 65 trillion won. A full earnings report is expected to be released by the company later this month as part of its fiscal year.

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In the global technology industry, Samsung is widely considered to be a bellwether. As a key component supplier to many companies, including Apple Inc. and Samsung Electronics, it is the world's top seller of smartphones and TVs as well as a major player in many other consumer electronics areas as well.

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The grim outlook Samsung provided for its earnings is a reflection of an industry that has had a reputation for boom-and-bust cycles over the last few years and is experiencing one of its worst down cycles in recent history. The prices for different types of memory, such as DRAM and NAND flash, peaked during the Covid-19 pandemic, which was caused by the strong demand for tech products at the time. In late 2021, prices began dropping and dropped even more sharply in the second half of last year as rising interest rates and geopolitical uncertainties such as the Russia-Ukraine war and China's Covid-19 lockdown curtailed demand for housing. Inventories have piled up during the past few years, thus making the price slump for memory continue into 2023.

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The DRAM memory in a device enables it to perform more tasks at once, while the NAND flash memory in a device can store data. Among the biggest manufacturers of these types of memory in the world, Samsung is the most prominent.

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The semiconductor division of Samsung -- which is responsible for the majority of the company's revenue -- is expected to register an operating loss of 3.3 trillion won in the first quarter of this year, according to projections released by Hong Kong-based brokerage CLSA. For the same quarter a year ago, the semiconductor division had an operating profit of 8.45 trillion won, whereas it had an operating profit of 8.45 trillion won for the same quarter a year ago.

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Sanjeev Rana, an analyst at CLSA covering semiconductors in Seoul, said that according to his research, memory producers have been experiencing huge losses since the spot prices for their products have fallen below their production costs in the market.

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According to TrendForce Corp., a Taiwan-based market research firm, the average contract prices for DRAM have fallen by up to 20% on a quarter-on-quarter basis during the first three months of 2015, whereas similar contract prices for NAND flash have fallen by up to 15% during the same period. TrendForce predicts that memory prices will continue to decline in the second quarter, with DRAM prices set to fall by up to 15% from the first quarter, and NAND flash prices set to fall by up to 10%.

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Samsung's latest premium Galaxy S23 smartphones showed strong sales in the first quarter, which lifted profits in the first quarter and provided a bright spot for the company. Samsung said this week that sales of the S23 Ultra were around 60% of the total sales of the S23 series globally, helping to drive higher profits by driving up the number of sales. CLSA reports that global shipments of the Galaxy S23 series of devices are expected to be more than 20% higher than those of the previous year's series.

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As a result of the supply glut, several major memory-chip makers have already announced that they will be scaling back investments aimed at expanding capacity or lowering output to contain the surplus, including SK Hynix Inc., Micron Technology Inc., Western Digital Corp., and Tokyo-based Kioxia Holdings Corp.

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Micron reported a net loss of $2.3 billion for its latest fiscal quarter ending March, which was the most amount the company has ever lost in a single quarter in its history. Micron has already reduced its workforce, reduced executive salaries, and cut back on its capital investment in the past few years.

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Park Jung-ho, SK Hynix vice chairman and co-chief executive officer, said in a shareholder's meeting held last month that the market conditions would remain challenging during the first half of this year due to sluggish demand and continued inventory adjustments on the part of customers.

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While Mr. Park expressed the hope that the market would improve in the latter half of this year, as memory makers' production cuts will reduce supplies and China's economy will recover, thereby increasing the demand for tech products.

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The memory-chip makers are considering expanding their operations in the U.S. despite the industry downturn. There are a number of companies contemplating subsidy applications under the Chips Act, including Samsung, SK Hynix, and Micron.