Samsung Electronics said Tuesday that operating profit plunged in the fourth quarter of last year, as global economic headwinds snuffed out demand for semiconductors and smartphones—the company’s two key revenue sources.
The South Korean tech company said that its operating profit came in at 4.3 trillion won (USD 3.5 billion) for the three months through December, a decline of 69% from the same period the year before and the worst result since the third quarter of 2014.
Revenue stood at 70.5 trillion won for the same period, marking a fall of 8%.
The figures were in line with earnings guidance the company announced earlier this month.
Net profit, for which the company does not issue guidance, was 23.8 trillion won, up 120% from a year ago thanks to a legal change that led to a one-off decline in Samsung’s corporate tax for the quarter.
“The business environment deteriorated significantly in the fourth quarter due to weak demand amid a global economic slowdown,” Samsung in a statement after releasing the figures. “Earnings at the memory business decreased sharply as prices fell and customers continued to adjust inventory.”
The overall poor performance by the world’s biggest maker of memory chips and smartphones comes as the South Korean economy contracted 0.4% in the fourth quarter of 2022 from the third quarter of the year, the lowest growth in two-and-a-half years. It was largely due to low shipments of semiconductors, the country’s top export item, and underscored broader problems in the global market for the key components.
Investors sold Samsung shares, with the company’s stock price closing 3.6% lower at 61,000 won. The earnings were released shortly before the market opened.
Liz Lee, associate director at Counterpoint Research, said that there was no respite on the horizon as the chip industry continues to suffer.
“The point is that Samsung and other semiconductor makers are expected to face more significant difficulties in the first half of 2023 as demand for memory and other chips continues to decline amid a deepening economic downturn,” Lee told Nikkei Asia in an email before the announcement. “Semiconductor inventories across the industry are higher than ever, so corporate profits will deteriorate due to such an inventory burden with price drops.”
The semiconductor industry is highly cyclical and companies often calibrate their investments accordingly. Some of Samsung’s rivals are cutting back. But Samsung appears to be sticking with its spending plans, continuing to buy new equipment, largely for cutting edge chips, according to multiple suppliers.
Samsung said it sees appetite for memory chips turning around later this year. “The company expects market demand to recover in the second half, centering on HPC and auto sectors,” said Samsung in a statement. HPC stands for high performance computing.
The slump was also evident over a shorter time frame. Quarter-on-quarter, Samsung’s operating profit was down 60.3%, with revenue lower by 8.2%.
For all of 2022, operating profit fell 16% to 43.4 trillion won from the previous year, with revenue increasing 8.1% to 302.2 trillion won.
By sector, the chip unit took the hardest blow in the fourth quarter as its operating profit sank 96.9% to 270 billion won from the year before. Operating profit in the company’s mobile and network business, meanwhile, fell 36.1% to 1.7 trillion won during the same period.
Geopolitical risks are also hovering over Samsung’s memory chip business due to US controls on the export of chip production technology to China. So far, however, President Joe Biden’s administration has issued a one-year license for Samsung to use chip production equipment that utilizes American technology in China.
Samsung operates a facility producing NAND flash memory chips in the Chinese city of Xian. Samsung Vice President Kim Jae-joon touched on the sensitivity of the operation amid such uncertainty.
“The company has already spent a lot of time and investment to stably operate it in China,” Kim said on a conference call to discuss the earnings. “So, it requires very careful consideration. The company is considering a wide range of factors such as mid- and long-term market [conditions], global customer demand, economic [value] and profitability.”
One positive sign for Samsung came in the foundry sector, which produces made-to-order chips for corporate customers. The company said that its foundry business posted a record for quarterly revenue, while profit increased year-on-year on the back of capacity and customer base expansion and application diversification. But it did not release detailed numbers for the sector.
CW Chung, a senior analyst at Nomura, said that Samsung’s challenges go beyond semiconductors and smartphones to all segments including displays.
“Poor demand [for memory chips] led to [a] significant earnings fall and still higher inventory,” Chung said in a note earlier this month. “Display, mobile experience and consumer electronics earnings seem also weaker than expected due to poor demand and higher marketing cost[s].”