On October 31, Samsung Electronics cut its capital expenditures by more than a quarter in 2018 and warned that the company's profits will fall until early next year. Samsung Electronics said that the two-year memory chip boom has ended. Samsung is the world's largest manufacturer of memory chips and smartphones, and their pessimistic forecasts exacerbate investor uneasiness. This month, global demand for mobile and other electronic devices has been declining, disrupting global stock markets.
Samsung said that due to weak demand for memory chips and increased smartphone marketing spending during the year-end holiday, it is expected that the company's revenue will decline in the fourth quarter.
Samsung said in a statement: "Looking forward to 2019, due to seasonal factors, earnings in the first quarter are expected to be weak, but as the business environment (especially the memory market) improves, earnings will increase."
Analysts said that cutting capital spending should ease market concerns about further supply growth and price declines as prices of some memory chips have fallen to more than two years low and competitors will launch new production lines next year.
Samsung Electronics is one of the largest buyers of wafer manufacturing tools. The company said that capital expenditure this year will be 27% from last year's record 43.4 trillion won to 31.8 trillion won (about 28 billion US dollars).
HIInvestment & Securities analyst SongMyung-sup said, "NAND (flash) chip prices will fall further in the first half of next year ... Toshiba's new production line will start, Hynix will begin mass production of one of the NAND production lines."
“The oversupply is expected to continue.”
However, Samsung is trying to ease investor concerns about the sharp decline in the chip market, saying that with the rapid growth of cloud-based data services, server demand is strong.
A Samsung executive said the company is in the midst of a "good beginning cycle" to sell chips to the server industry.
ChunSewon, senior vice president of memory marketing at Samsung, told analysts: "The temporary price changes may repeat itself, but fundamentally, our demand for memory is very strong."
Samsung also said it is considering transforming some of its NAND production lines into DRAM chips next year, rather than increasing capacity when NAND flash chips are oversupply.
Samsung's soft landing
Samsung’s earnings report showed that operating profit for the July-September quarter reached a record 17.6 trillion won, in line with company expectations.
Refinitiv data shows that as wafer prices have weakened after years of strong growth, analysts expect Samsung's fourth-quarter profit to fall 4% from the third quarter.
However, driven by increased chip business efficiency and cost reductions, this number will still increase by 11% over the same period last year. The chip business accounts for nearly four-fifths of Samsung's operating profit.
AVRil Wu, senior research director at DRAMeXchange, said: "Since Samsung continues to reduce (semiconductor) costs, it is unlikely to have a so-called hard landing."
Samsung said that higher server demand will help the memory chip market to stabilize after the first quarter of next year, in line with expectations from South Korean counterpart SK hynix last week.
Samsung Semiconductor's operating profit increased 37% to 13.7 trillion won, while mobile business fell 33% to 2.2 trillion won.
The profit of the Samsung smartphone business fell to its lowest level since the first quarter of 2017, due to Apple's competition in the high-end mobile field and competition from Chinese competitors in other areas.
The company plans to share the development details of its collapsible smartphone at a meeting early next month, hoping that the phone will help it regain its popularity in the high-end mobile space.
Samsung said its third-quarter revenue rose 5.5% to 65.5 trillion won, slightly higher than expected.
Samsung's current market value of 265 billion US dollars, its share price fell 1.2%. So far this year, the company's share price has fallen by 16%.
