Samsung's Earnings Forecast Is Solid, but Only Tells Us So Much
Samsung
Samsung's (SSNLF) third-quarter earnings forecast was a little better than feared, but it doesn't tell us a lot about what its seasonally big fourth quarter will look like.
On Thursday night, the Korean tech and electronics giant forecast it will report Q3 revenue of 64 trillion to 66 trillion won (up about 5% annually and equal to $57.2 billion to $58.9 billion) and an operating profit of 17.4 trillion to 17.6 trillion won (up about 20% and equal to $15.4 billion to $15.6 billion) later this month. At the midpoints, the numbers are slightly above a FactSet analyst consensus for revenue of 64.9 trillion won ($57 billion) and an operating profit of 17.3 trillion won ($15 billion).
Samsung's shares closed nearly unchanged in Seoul following the news. They're down 17% on the year amid worries about smartphone share losses and softening memory prices.
As usual, Samsung's earnings pre-announcement isn't accompanied by any specifics about how particular businesses fared during the quarter. Thus for now, investors are left to guess as to just how much the company's numbers benefited from say, the August Galaxy Note 9 launch relative to server and mobile DRAM demand, or OLED display panel shipments to Apple (AAPL) - Get Report for the iPhone XS and XS Max launches.
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Just as importantly, while Samsung's earnings reports are accompanied by commentary on its near-term outlook for various parts of its empire -- see the fifth and sixth slides in its Q2 report -- no such information is shared in its pre-announcements. And considering recent trends for what are perhaps its two most valuable businesses, such commentary is particularly valuable right now for gauging what Samsung's near-term business trends look like.
Samsung is coming off a Q2 in which its mobile division saw its revenue drop 22% annually to 22.7 trillion won ($20 billion). The fact that the company launched the Galaxy S9 a little earlier in the year than its launched the S8 in 2017 played a role here, but so did market share losses -- to Apple on the high-end, and to Chinese OEMs such as Huawei and Xiaomi at lower price points.
In its Q2 report, Samsung cautioned that it expects its mobile business environment to "remain tough" during the second half of 2018 "due to growing competition to offer higher specifications and lower prices." A solid debut for the iPhone XS and XS Max certainly doesn't help matters for Samsung's phone business, even if its display and memory chip businesses benefit from it.
Samsung is trying to counter, in part, by offering better specs for its mid-range Galaxy A phone line; the Galaxy A9, a device that will reportedly have four rear cameras, is expected to be unveiled at an Oct. 11th event.
Expected Q4 sales also remain a big question mark for Samsung's very profitable memory business, which is by far the world's largest maker of DRAM and NAND flash memory. A strong demand and pricing environment (particularly for DRAM) helped Samsung's memory sales rise 33% annually to 18.5 trillion won ($16 billion), and chances are that the business also posted solid (if somewhat slower) revenue growth in Q3.
However, NAND conditions have been rapidly deteriorating as the industry's rapid bit production growth makes itself felt. And though they remain relatively strong thanks to more restrained bit growth, it does look as if DRAM prices are slipping a little following a big two-year surge.
Notably, Micron (MU) - Get Report , a top-3 DRAM maker and a top-5 NAND maker, is less than two weeks removed from providing a below-consensus November quarter outlook to go with an August quarter sales and earnings beat. In addition to noting (like many others) that NAND prices are slumping, Micron indicated its November quarter numbers would be hurt by an Intel (INTC) - Get Report PC CPU shortage, a "limited inventory adjustment" at certain DRAM clients and the impact of new tariffs on Chinese imports. Since Samsung's memory business is more dependent on NAND than Micron's, its second-half sales pressures might be worse.
All things considered, given how volatile business trends currently look for both Samsung's phone and memory operations, it's best to wait and see how the company expects Q4 sales to trend before rendering judgment on the company's near-term financial performance.