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COMMENTARY

Samsung's earnings surprise shows confusion in tech sector

SAMSUNG Electronics's second-quarter earnings seem like good news. But it's really not as simple as that.

Revenue beat estimates by around 3.6 per cent while operating profit topped even the highest of sell-side analyst estimates by 6.3 per cent, the South Korean giant reported on Tuesday. Right off the bat, those numbers carry a caveat: The company posted a one-time gain related to its display business that would have helped the bottom line.

Still, there's no denying that the top line was largely ahead of expectations - likely due to sales of memory chips used in servers. That doesn't mean that Samsung has beaten the Covid-19 pandemic, though. Total revenue is 7.4 per cent lower than a year earlier. These numbers reflect the mid-point of guidance, which Samsung provides within days of a quarter's closing.

We don't yet know the size of that one-time profit on its display business. However, Bloomberg News reports that it could be as much as one trillion won (S$1.2 billion) in compensation from Apple for fewer-than-promised orders of screens used in iPhones, iPads and other devices. Such a figure would account for most of the discrepancy between earnings and estimates.

Rather than being good news, the payment would represent a bad sign for the technology sector, reflecting weaker demand for gadgets. We saw further signs of that late Monday, with Foxconn Technology Group's Hon Hai Precision Industry reporting a 9.1 per cent slump in June sales, closing out second-quarter revenue with a 2.3 per cent drop.

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Hon Hai assembles iPhones. This is traditionally low season for Apple's flagship device, so much of that decline will be for other products that Foxconn makes, including personal computers, servers and data-centre equipment. While a single-digit drop isn't terrible given what's happening in the global economy, it does contrast with the optimism shown in stock markets in recent weeks. Apple shares are at an all-time high, while Amazon.com's market value just topped US$1.5 trillion.

Samsung investors seem a little befuddled, too. Its shares rose as much as 1.6 per cent on Tuesday after the announcement, but fell later in the morning as the market started digesting the news. The reaction also tells us that rather than being a positive sign, this earnings tidbit highlights just how confusing the current situation is.

Samsung's results are an allegory for much of what we see in the tech sector these days: Bad news (revenue dropping) taken as optimistic because it beat estimates, while seemingly good news (operating profit surpassing expectations) actually being a sign of weakness due to it being a compensatory payment.

These are the kinds of conflicting signs we'll see a lot more this earnings season. Investors need to get used to flying blind. BLOOMBERG

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