After multiple warnings, even from Samsung itself, we now have the official numbers for Samsung's financial performance in Q1 2019, and it's every bit as bad as expected. Samsung’s operating profits plummeted 60% in Q1 2019, compared to the same quarter last year. This is less than a year after the company reached record-breaking profits, due to the high-priced RAM modules the company was selling.
Samsung Profits' Sharp Decline
Samsung’s revenue fell 13% year-on-year to $45 billion, while the company’s Q1 operating profit dropped to $5.33 billion, which is a 60% drop from the same period a year before. Although the company reported “solid” results for the latest Galaxy S10 flagship device, the financials were ultimately “weighed down” by the negative performance in the memory chip and display markets, two of the company’s most profitable markets not too long ago, Samsung said in its announcement.
Samsung blamed the semiconductor chip price decline on high inventories at data center customers. The company expects the DRAM market to remain slow in Q2 as well, but also to recover somewhat in the following quarters.
The display business, which has been a strong income generator for the company in the past few years, showed loss in the last quarter as customers seemed much less interested in flexible OLED panels than they were before. However, Samsung is now seeing increased demand for larger displays and high-resolution TVs.
Despite solid sales for the Galaxy S10, Samsung also saw lower profitability, as competition increased in the low to mid-range mobile markets.
For the System LSI Business, demand for image sensors was also slow, but the company saw increased earnings for the division due to it beginning to sell the world’s first 5G chipset solution.
Increased Demand In 2H 2019
Samsung expects to do better in the second half of the year, primarily due to the seasons but also because of new product launches, such as a new Galaxy Note and 5G and foldable phones.
The Korean company expects its SSD business to start growing in the second half of 2019, primarily due to data center companies starting to purchase more high-density server SSDs. Additionally, Samsung is expecting to lower costs for high-density storage products with its fifth generation NAND-V technology in the second half of the year. It's also expecting smartphones with 256GB or larger storage to help keep demand "stable" in Q2.
Samsung predicted its DRAM business will improve in the second half of the year, as new CPUs appear and consumers demand higher amounts of RAM in their smartphones. Samsung plans to making more LPDDR4X memory for high-end smartphones, while also focusing on the transition to the 1y-nm process in major applications.
The Korean firm intends to start offering 3D/fingerprint-on-display sensors and chips for automotive and Internet of Things (IoT) applications. Furthermore, the company aims to strengthen its competitiveness through tape-out of the EUV 6nm process and by completing development of the 5nm process.
Samsung’s Profits Closely Tied to Memory, Storage Margins
Over the past two years, Samsung’s profits have kept climbing with strong presence in the DRAM and NAND markets and the high prices (and margins) for those products during this time. The company reached record operating profit of $15.1 billion in Q3 2018. However, once the demand started falling for high-priced RAM and SSD products started falling, so did Samsung’s profits. The company saw a sharp 29% decline in profits by Q4 2018 to $10.8 billion, and profits suffered another 60% drop this last quarter.
Samsung's financial performance is apparently tightly connected to the kind of profit it can make from selling memory and storage products, two categories that have historically seen steady and significant declines in price every year. If Samsung wants to maintain the kind of profits it's been saw previously, it might need to consider focusing more on products that have traditionally had high profit margins, such as cutting-edge processors, wireless modems, etc.
