Samsung Electronics' Profitability Plummets... Faded Era of Annual Sales '300 Trillion Won' (Comprehensive)

Operating Profit Plunges 16%... "Weakness in Memory, Smartphones, and Home Appliances"
Q4 Operating Profit at 4.3 Trillion Won... Lowest in 8 Years and 3 Months
More Gloomy This Year... Attention on Whether the "No Production Cut" Policy Will Be Maintained

On the 6th, employees are seen moving at Samsung Electronics Seocho Building in Seocho-gu, Seoul, as Samsung Electronics received a report showing a provisional consolidated operating profit of 4.3 trillion KRW for the fourth quarter of last year, a 69% decrease compared to the same period the previous year. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporters Moon Chaeseok, Han Yeju, Kim Pyeonghwa] Samsung Electronics became the first Korean company to surpass 300 trillion won in annual sales last year, but its brilliance was overshadowed by a record-breaking earnings shock in the fourth quarter. The global economic downturn led to a cliff in memory semiconductor demand, ballooning inventory levels, and sluggish sales of smartphones and home appliances, breaking even the '5 trillion won quarterly operating profit' barrier.

This year looks even bleaker. With the cold wave in the memory semiconductor market expected to continue, there is even a possibility of losses in the semiconductor division (DS) in the first quarter.

Operating Profit in 2022 Falls to the 40 Trillion Won Range After Two Years

On the 6th, Samsung Electronics announced that its operating profit for the fourth quarter of last year was significantly weak, causing the annual operating profit to fall to the 40 trillion won range for the first time in two years. On that morning, Samsung Electronics disclosed that its consolidated operating profit for the fourth quarter of last year was 4.3 trillion won, a 69% decrease compared to 13.8 trillion won in the same period the previous year. During the same period, sales dropped 8.58% from the previous quarter to 70 trillion won.

Accordingly, Samsung Electronics' annual sales and operating profit for last year were recorded at 301.76 trillion won and 43.37 trillion won, respectively. It was the first time for a Korean company to enter the 300 trillion won sales era, but the profitability indicator, operating profit, declined by 16% compared to the previous year (51.63 trillion won), dimming the achievement.

The annual operating profit fell to the 40 trillion won range after two years because the fourth quarter, the peak season for the electronics industry, showed earnings shock-level poor performance. In fact, the 4.3 trillion won operating profit in the fourth quarter of last year was the lowest in 32 quarters since the fourth quarter of 2014, which was 4.06 trillion won. It was also 37.4% below the securities analysts' estimate (6.8737 trillion won). This is interpreted as poor performance across all sectors, including semiconductors, smartphones, and home appliances.

Samsung Electronics explained, "The memory (semiconductor) business was affected by customers adjusting overall inventory due to concerns about weakened consumer sentiment, resulting in a much larger-than-expected drop in fourth-quarter purchasing demand," adding, "In the MX (Mobile Experience) division, demand weakened amid ongoing macroeconomic recession forecasts, leading to reduced smartphone sales and revenue, and the home appliance business also saw lower profitability due to weak market demand and cost burdens."

Memory Shock and Smartphone Demand Decline Mark a Downward Trend

The problem is that the downward trend is just beginning. The cold wave in the memory semiconductor market is expected to continue in the first half of the year. There is even a possibility that the semiconductor division (DS) could turn to a loss in the first quarter.

The fourth quarter is usually considered the peak season for the electronics industry. However, Samsung Electronics' performance slump is deeply entrenched. Demand has shrunk due to the global economic recession and inflation. The Russia-Ukraine war and China's zero-COVID policy also contributed to the continued sluggish market conditions.

The semiconductor cold wave was more severe than expected. Although segment-specific results have not yet been announced, securities firms predict the average operating profit for the DS division in the fourth quarter to be 1.3368 trillion won, an 85% plunge compared to the same period last year. The decline is also significant compared to the previous quarter. The DS division recorded an operating profit of 5.12 trillion won in the third quarter of last year. The decline in sales prices due to customer inventory adjustments in the fourth quarter appears to have worsened the results. According to market research firm DRAMeXchange, the fixed transaction price of DRAM was $2.21 as of December last year, a 40% drop compared to the same month the previous year.

Due to the consumption slump, IT device performance also appears to have dropped significantly. Samsung Electronics' Mobile (MX) division posted an operating profit of 3.24 trillion won in the third quarter of last year. The securities industry expects the fourth-quarter operating profit to fall to the high 1 trillion won range, nearly halving. This is attributed to reduced smartphone sales and revenue.

The home appliance (CE) business is expected to see operating profit shrink to around 200 to 300 billion won due to continued weak market demand and cost burdens. Considering that sales are estimated to be in the high 10 trillion won range, this is barely above the break-even point.

This Year's Outlook Is Even More 'Bleak'

Samsung Electronics at least saved face by surpassing 300 trillion won in annual sales last year. It was the best performance since the company's founding and the first such achievement in Korean corporate history. However, this year's performance outlook is bleak. Samsung Electronics' consensus for this year is sales of 301.1248 trillion won and operating profit of 32.1523 trillion won. The operating profit margin is expected by the securities industry to possibly fall to an unprecedented low of 10%.

Business divisions such as MX and CE·TV are expected to face increased financial burdens due to sluggish sales and growing inventory burdens. In particular, the DS division, dominated by the memory business, is expected to see a sharp decline in performance, raising concerns about a quarterly loss turnaround. Market research firm Gartner forecasts the global memory semiconductor market size to shrink by 16% compared to the previous year.

Do Hyunwoo, a researcher at NH Investment & Securities, said, "The downward trend in Samsung Electronics' operating profit is expected to continue until the second quarter," adding, "A loss in operating profit in the semiconductor division in the second quarter is inevitable." If this prediction holds, the DS division will record a quarterly loss for the first time since the 2008 financial crisis.

The reason predictions are emerging that Samsung Electronics, which had insisted "there will be no production cuts," might adjust its investment scale is because of this. Kim Dongwon, a researcher at KB Securities, predicted, "Samsung Electronics will reduce memory facility investment by 15% compared to the original plan this year." Global investment bank Citi Global Markets Securities also expects investment to be difficult to increase this year. However, improvement in market conditions is expected from the second half of the year. Regarding memory inventory, it is expected to peak in the second quarter, with prices turning upward from the second half and improvements anticipated from the third quarter.

Meanwhile, LG Electronics, which is scheduled to announce its preliminary earnings report this afternoon, is also expected to present poor results. The estimated annual sales for last year are 84.3528 trillion won, and the estimated operating profit is 3.9107 trillion won. Although sales are higher than last year's 74.7216 trillion won, operating profit is expected to remain at a similar level to 3.8637 trillion won.