Samsung profits for Q2 likely fell 56% year-on-year, warned the company today. The company has provided guidance of 6.5T Korean won ($5.6B). If accurate, as the company’s guidance usually is, that would make for the third quarter running that year-on-year profits have fallen.

Samsung’s profits have suffered a triple-hit, say analysts …

Samsung profits take triple-hit

First, reports The Street, poor sales of flagship smartphones have combined with aggressive price promotions to keep mid-range ones afloat.

“We assume weaker earnings for the mobile business led to softer-than-expected earnings for 2Q19,” said Daiwa Capital Markets analyst SK Kim. “Although we assume an increase in sales of smartphones (77m units, up 7% QoQ), weak sales of premium smartphones (GS10) and aggressive promotions for mid-end models such as the Galaxy A series, which is a lower-margin product, negatively impacted product mix and earnings in 2Q19.”

Samsung has almost certainly been hit by the US blacklisting of Huawei products, as the Chinese company sources chips from Samsung. Weaker Huawei sales means reduced component orders.

Finally, and partly related to this, CNBC reports that the overall market for mobile RAM and storage chips is poor, resulting in price cuts.

Experts have said that the entire semiconductor sector is undergoing a period of inventory adjustment, which is keeping demand low and causing a supply glut that’s squeezing the price. Some have predicted continued excess inventories in both DRAM and NAND memory chips, which would push back the sector’s recovery to the second half of 2020.

DRAM chips allow computers, phones and tablets to run multiple applications at the same time whereas NAND chips function as primary storage.

Apple ‘fine’ provided some relief

There was some relief for Samsung in the quarter: a one-off payment from Apple of some 800B won ($683M). As our sister site 9to5Mac recently reported, this was a penalty payment for Apple failing to buy the agreed number of iPhone displays from the company.

The penalty goes back to Apple’s insistence that Samsung Display build a facility to exclusively manufacture OLED displays for the iPhone. Apple had told Samsung Display it would need 100 million OLED iPhone displays a year. But a slump in iPhone sales had a knock-on effect for Samsung Display, which saw its operating profits halve in a year, falling from 5.7 trillion won in 2017 to 2.62 trillion won in 2018.

At the time, we knew the penalty had to be at least $170M, possibly more, but $683M is quite a chunk of change, and came in a quarter when Samsung really needed the cash.

Mixed prospects ahead

One analyst said that Samsung profits should increase this quarter, thanks again in part to Apple.

CLSA senior analyst Sanjeev Rana said the company’s earnings will likely recover in the second half. Already, operating profit in the second quarter was slightly higher than first-quarter numbers.

“That should accelerate,” he said, referring to the third and fourth quarters. “It’s simply because of the seasonality, so we have new models coming from Apple as well as some other smartphone makers.”

“In our earnings estimate, we are expecting (the) company’s earnings to recover 18% half-on-half in the second half,” he added.

However, growing trade tensions between Japan and South Korea may constrain Samsung’s supply of raw materials going forward.

There is a growing dispute between the two countries over wartime forced labor, which resulted in Japan announcing Monday stricter restrictions on exports of crucial high-tech materials that are used by South Korean electronics companies to make chips and smartphone displays […]

Analysts at Citi said they expect this week’s ruling from Tokyo will “have limited short-term impact on Samsung and SK Hynix thanks to high inventory level, but (those companies) will face some difficulty in sourcing semiconductor materials soon.”

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