SEOUL - Samsung Electronics flagged a worse-than-expected 32 per cent drop in quarterly operating earnings on Friday, as an economic downturn slashed demand for electronic devices and the memory chips that go in them.

Samsung’s memory chip shipments likely came in below already downgraded expectations and prices could fall further this quarter, analysts said, as customers react to rising inflation, higher interest rates and the impact of Russia’s invasion of Ukraine.

The world’s top maker of memory chips, smartphones and televisions is a bellwether for global consumer demand, and its disappointing preliminary results add to a flurry of earnings downgrades and gloomy forecasts.

Estimated profit fell to 10.8 trillion won (S$10.9 billion) in the period from July to September - the first year-on-year decline in nearly three years - from 15.8 trillion won a year earlier, the company said in a preliminary earnings release.

The result was 8.5 per cent below a Refinitiv SmartEstimate of 11.8 trillion won. Companies and consumers have tightened their belts, with memory chip buyers such as smartphone and PC makers holding off on new purchases and using up existing inventory, driving down shipments and ushering in an industry downcycle.

Mr Park Sung-soon, an analyst at Cape Investment and Securities, said the “memory chip business is worse than expected” and that Dram chip shipments may be down by a higher percentage compared with the second quarter.

“The price negotiation trend seems to suggest that customers’ demand rapidly worsened during the quarter,” he said.

Analysts expect memory chip prices to continue to plunge in the current quarter, causing a further dip in Samsung’s fourth-quarter profits. Demand is not expected to recover until early next year.

Rival Micron Technology last week became the first memory chip maker to officially cut its investment plans for next year, and larger rival SK Hynix has hinted at a possible investment cut.

Chipmaker Advanced Micro Devices on Thursday provided third-quarter revenue estimates that were about a billion dollars less than previously forecast due to weak PC demand, signalling that the chip slump could be much worse than expected.

Samsung is currently not discussing a memory chip production cut, an executive told reporters in the United States on Wednesday, according to Yonhap news agency.

Investors will be interested to hear whether Samsung is considering a cut in capital expenditure, planning a lot of chip equipment maintenance, or pursuing a strategy of profitability, said Mr Park, adding that “this will signal chip supply conditions”.

Samsung is due to release detailed earnings on Oct 27, when executives will also provide briefings for media and analysts.

Its shares, which have fallen nearly 30 per cent this year, rose 0.2 per cent in morning trade, versus a 0.3 per cent drop in the wider market.

High-end phone demand

Counterpoint Research said estimated smartphone shipments by Samsung’s mobile business in the third quarter were about 66 million, a 5 per cent drop year on year, as Samsung launched its new flagship foldable phones during the quarter.

“The high- and premium-tier market is relatively resilient with solid demand despite the recent economic gloom,” said Ms Liz Lee, associate director at Counterpoint. In the US, “the initial sales for the Galaxy Z4 series were higher than the Galaxy Z3 series sales”.

Analysts have said Samsung remains overexposed to demand-dependent businesses, such as mobile phones and memory chips that are vulnerable to economic downturns, in the absence of a larger share in long-term chip contract manufacturing.

“Samsung needs product lines with a high share of long-term agreements, exclusive market dominance and a premium brand with high consumer preference, but it still needs time to get there,” said Mr Greg Roh, head of research at Hyundai Motor Securities.

Foldable display panels and advanced foundry processes were “important” for the company to become less exposed to economic downturns, Mr Roh added.

Quarterly revenue likely rose 3 per cent from the same period a year earlier to 76 trillion won, Samsung said. REUTERS