In This Article:
Samsung Electronics (NASDAQOTH: SSNLF) recently warned that its fourth-quarter revenue and operating profit would miss analysts' expectations by a wide margin, mainly due to weakness in its memory chip and smartphone businesses.
The South Korean tech giant expects its revenue to fall 11% year over year to 59 trillion won ($52.8 billion) for the quarter, compared to the consensus estimate of 62.8 trillion won ($56.1 billion). It expects its operating profit to drop 29% to 10.8 trillion won ($9.7 billion), which was also less than the consensus forecast of 13.2 trillion won ($11.8 billion).
Image source: Samsung.
Samsung's bleak forecast wasn't surprising, since memory prices peaked last year and Apple's (NASDAQ: AAPL) recent guidance cut indicated that demand for premium smartphones was waning. Let's see how Samsung got stuck between a rock and a hard place, and whether it may recover over the next few quarters.
Understanding Samsung's business
Samsung Electronics is split into four main units -- Consumer Electronics (CE), IT & Mobile Communications (IM), Device Solutions (DS), and Harman, the maker of car audio and infotainment systems it acquired in 2017.
The DS unit, which produces memory chips, displays, and other components, generated 53% of Samsung's revenue during the third quarter. Sixty-one percent of that total (or 32% of Samsung's total revenue) came from sales of its memory chips.
Samsung is the largest manufacturer of NAND and DRAM memory chips in the world, which leaves it vulnerable to supply gluts and declining prices in both markets. Softer demand from data center customers and consumer electronics makers is exacerbating that pain. TrendForce's DRAMeXchange expects NAND and DRAM prices to decline another 20% in 2019.
The DS unit also supplies displays and memory chips to Apple. Therefore, a recent slowdown in iPhone sales (which led to Apple's guidance cut earlier this month) also hurt Samsung -- which reportedly made $110 in revenue on every iPhone X.
Samsung's IT & Mobile Communications unit, which makes its mobile devices, generated 38% of the company's revenue during the third quarter. Samsung's smartphone business faces many of the same challenges as Apple -- the market is saturated, customers aren't inclined to upgrade their devices annually, and aggressive competitors (especially in China) are launching more innovative phones at lower prices.
The Galaxy Note 9. Image source: Samsung.
Samsung's smartphone shipments tumbled 13.4% annually during the third quarter, according to IDC, as its global market share declined from 22.1% to 20.3%. Its biggest rivals in China -- Huawei, Xiaomi, and Oppo -- all grew their market shares, likely at Samsung's expense.