Samsung and NXP's Pre-Announcements Yield Mixed Signals About Chip Demand

Samsung shared a better-than-feared Q1 sales outlook, but NXP cut its Q1 guidance and indicated that distributors have been trying to build up inventory.
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While chip sales appear to have held up reasonably well in Q1, there are some signs that industry trends are starting to meaningfully weaken in certain areas.

Samsung Electronics  (SSNLF)  gave the chip industry a bit of good news on Monday evening when it estimated that its Q1 sales rose 5% annually to roughly 55 trillion won ($45.4 billion). While that number fell short of a consensus analyst estimate of 55.6 trillion won ($46 billion), it was better than feared -- particularly given the sales pressures the smartphone industry is currently seeing.

As usual, Samsung, which in addition to phones and chips sells everything from laptops to display panels to washing machines, didn’t provide any details in its pre-announcement about how specific businesses fared last quarter. That will be shared in Samsung’s Q1 report on April 23, which should also feature Samsung’s outlook for how it expects various businesses to fare in Q2 and during the second half of 2020.

But with smartphone and home electronics/appliance demand both believed to be under pressure, many think that strong chip sales -- particularly for Samsung’s massive DRAM and NAND flash memory businesses -- allowed it to deliver positive sales growth.

Two weeks ago, Samsung memory rival Micron Technology  (MU) - Get Report delivered better-than-feared results and guidance. Micron forecast that smartphone, auto and consumer electronics demand would be weaker than it previously expected in its May and August quarters. But Micron also mentioned (echoing comments from Nvidia  (NVDA) - Get Report and others) that the COVID-19 pandemic’s impact on remote work activity and digital content consumption is driving strong orders from notebook and cloud data center clients.

Nonetheless, over the last couple of weeks, there have been signs that NAND prices, which have rallied since last fall, are beginning to slide amid weaker demand for smartphones and flash memory products sold to consumers.

On Tuesday, Taiwan’s Digitimes (citing supply chain sources) reported that Samsung is trying to pare its solid-state drive (SSD) inventory, while adding that the move has raised concerns about how the NAND market will perform during the second half of 2020. The Q1 earnings calls of Samsung and Korean memory rival SK Hynix should yield additional color about how NAND (and DRAM) prices are trending.

NXP Semiconductors  (NXPI) - Get Report, which is believed to get a smaller portion of its chip sales from PC and data center end-markets than Samsung or Micron, shared a somewhat less upbeat pre-announcement on Tuesday morning. The Dutch chipmaker said it now expects to report Q1 revenue of $2.021 billion, down 3.5% annually and below prior guidance of $2.195 billion to $2.255 billion.

Not surprisingly, NXP said that while Chinese supply chain disruptions have begun to subside, end-market demand trends elsewhere “have started to significantly deteriorate.” The company added that automotive market headwinds accelerated in March as production lines were shuttered, and that weaker industrial and mobile end-market demand has led to order push-outs.

Notably, NXP also said that it “chose not to ship roughly $150 million of orders to [its] distribution partners” in order to keep its channel inventory at normal levels. Some of NXP’s peers might not be making similar judgment calls, and NXP itself could still be seeing customer inventories rise among OEMs that buy from it directly rather than via distributors.

On its March 25 earnings call, Micron admitted that -- just as it’s building up its inventory of raw materials to protect itself in the event that its supply chain is disrupted -- some of its customers could be “similarly increasing their inventory of DRAM and NAND products,” and that such inventory-building could be masking end-market demand weakness.

If some of Micron’s top customers are making such moves, it’s quite likely that the same holds for major customers of Samsung and other chip suppliers.