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Samsung Warns Profits Fell Sharply in Q4 as Phone, Memory Sales Drop

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Samsung may have just had its highest quarterly profits ever three months ago, but the end of the fourth quarter brought ugly news for the Korean electronics giant. The company has warned that its sales fell 11 percent to $ 52.5B, while operating profit fell roughly 29 percent, to $ 9.6B.

The drop, according to the company, was brought on by lackluster demand for memory and competition in smartphone markets. Some of this was expected — we’ve been discussing the decline in RAM prices and overall demand for months, and one reason for that drop is the overall decline in smartphone sales. The company missed estimates by 18.18 percent. Samsung also warned that its data center-driven demand has been lower than expected. If true, we should expect to see that reflected in other enterprise computing company sales as well. It’s not clear, at this point, if there are implications for Intel’s own data center business.

“What’s happening is that memory demand has really fallen off a cliff in (the fourth quarter),” Mark Newman, managing director at Sanford C. Bernstein, told CNBC’s “Street Signs” on Tuesday. According to Newman, the major data center companies like Samsung, Google, and Amazon have largely finished buying cycles after two years of high demand. Unlike Apple, Samsung’s smartphone sales declines aren’t thought to have been driven by softening Chinese demand — Samsung only has a tiny share of the Chinese smartphone market. Its memory business, however, is still impacted by shifts in the Chinese market.

The implications of a slowdown in the smartphone market globally, however, could be significant for the company. Both app store development and indie developers more generally have depended on robust smartphone market growth this past decade. If growth in developing countries can’t sustain it, the shakeout will be considerable.

Samsung’s semiconductor manufacturing and its substantial overhead costs are being blamed for the sharp decline in operating profit. Foundries have high fixed costs and technology ramps require significant investment before a single wafer shoots out the door. Samsung is in the midst of ramping its 7nm EUV node for volume manufacturing and therefore presumably is prepping its own Exynos products to use that node come next year. As the price of each new node rises, it becomes ever-more important to keep fabs utilized and producing profitable parts. The number of leading-edge manufacturers has been declining for years, but we’re now down to just two foundries, not counting Intel, and it’s not clear how much smaller the market can actually become.

Samsung has teased a folding phone, but nobody expects it to save the company’s financials this year.

Right now, Samsung isn’t saying much, except that it expects memory demand to improve in the second half of 2019. The company will share additional details during its actual quarterly call later this month. To some extent, what we’re seeing is expected, given declining user upgrade rates in the smartphone market and the predicted decline in overall RAM prices, but analysts are evidently concerned that the declines are hitting a bit harder than predicted.

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