Samsung warns of profit slide after virus slams tech sector

Seoul

SAMSUNG Electronics warned that earnings may decline this quarter after the novel coronavirus outbreak hurt demand globally for smartphones and gadgets, wiping out gains from a surge in online activity by people sheltering at home.

South Korea's largest company reported a 4 per cent slide in net income to 4.9 trillion won (S$5.69 billion) in the three months ended March. Samsung, which had reported better-than-expected operating profits earlier this month, said the pandemic continued to hammer demand across an array of markets.

The warning from the world's largest maker of memory chips, smartphones and consumer appliances underscores the uncertainty gripping the global industry. As the pandemic spread in the first months of the year, the technology sector took hits from both supply and demand. Samsung joins peers such as Intel Corp in cautioning about the impact of a global economic slowdown.

"Covid-19 has created unprecedented challenges for the global community. At this point, it is impossible to determine how big of an impact it will have or how long it will affect our society and economy, leading to a period of extremely heightened uncertainty," Ben Suh, executive vice-president, said on an earnings call. "Considering heightened Covid-19 related uncertainties especially in the second half, we will not be providing any annual guidance at this time."

The South Korean conglomerate said overall earnings are likely to decline from the previous quarter because of the hit to several core products. In particular, Samsung said a drop in smartphone earnings is "inevitable" in the second quarter because of store closings and other factors, while profits would also slip in mobile displays. Executives on a post-earnings conference call refrained from offering full-year guidance on the memory market but said the company will continue to invest in semiconductor expansions and research.

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The Covid-19 pandemic has emerged as one of the largest economic shocks in recent years, disrupting both consumer demand as well as supply chains worldwide. Factories in countries such as China were temporarily shut, crimping orders for Samsung components like displays.

Meanwhile, retail stores, including those of client Apple, were closed to avoid spreading infections. That has been offset in part by demand for the memory chips used in data centres and computers, which allow people to work and study from home. Samsung's shares stood largely unchanged on Wednesday.

"Samsung Electronics' downbeat Q2 profit guidance reflects its smartphone-shipment plunge amid the Covid-19 outbreak," said Bloomberg Intelligence analyst Anthea Lai. "In contrast to a sequential as well as year-on-year increase, according to Bloomberg consensus, Samsung expects Q2 earnings may decline. We expect its memory chip profit will stay sturdy in Q2 since most contracts should have been concluded with customers."

Should the pandemic persist into the second half, the tech giant foresees missing its own 2020 revenue projections by a double-digit percentage, Bloomberg News has reported. A prolonged virus outbreak may also disrupt its supply chain. Delays in marquee events such as the Olympics will prompt changes in marketing plans for TVs, a big revenue generator. A prolonged outbreak could also slow the international rollout of ultra-fast fifth-generation wireless technology, hurting everything from phones to Samsung's own networking business, an executive said on the call.

Predicting the outlook is difficult due to Covid-19 in the US and Europe, said Samsung Securities analyst Hwang Min-seong. "But the good news is that China is showing signs of a fast recovery," he said. "Still, there are concerns over whether chip demand will be sustainable in the second half despite improved sentiment on server demand."

SK Hynix and Micron Technology, which control the bulk of the memory chip market together with Samsung, have told investors that strong demand from data centre clients boosted sales and profits and that the trend is expected to continue in the first half.

Chip companies have projected that the contract prices for dynamic random-access memory (DRAM) and NAND storage technology will remain solid throughout the second quarter. In addition to server expansions, the pandemic is seen as a catalyst for expediting the transition to 5G and autonomous or touchless technology, driving component sales.

Apple and Huawei Technologies supplier Hynix said there was a possibility that even server demand could lose steam if the economic downturn is prolonged. Intel withdrew its full-year sales forecast last week for the year, citing "significant" uncertainty.

"Demand for server and PC to remain solid as more people work from home, but a decline in mobile demand to remain a risk," Samsung said on Wednesday in an earnings presentation.

Sluggish sales of Samsung's flagship S20 line-up will be reflected in the current quarter, eroding profitability at the smartphone division, which has been reeling from plant and store shutdowns in some regions. BLOOMBERG