Samsung's Q3 Earnings Miss Expectations, Lee Jae-yong Denies Chip Division Rumors

Samsung's Q3 Earnings Miss Expectations, Lee Jae-yong Denies Chip Division RumorsSamsung Electronics, South Korea's tech giant, on Tuesday released its third-quarter earnings forecast, revealing that its operating profit fell short of market expectations, raising concerns among investors. Despite a remarkable 274% increase in operating profit from its display business, the overall results lagged analysts' predictions, reflecting Samsung's challenges in fully capitalizing on the surging demand for AI server chips

Samsung's Q3 Earnings Miss Expectations, Lee Jae-yong Denies Chip Division Rumors

Samsung Electronics, South Korea's tech giant, on Tuesday released its third-quarter earnings forecast, revealing that its operating profit fell short of market expectations, raising concerns among investors. Despite a remarkable 274% increase in operating profit from its display business, the overall results lagged analysts' predictions, reflecting Samsung's challenges in fully capitalizing on the surging demand for AI server chips.

Samsung projected an operating profit of 9.1 trillion won (approximately $6.78 billion) for the quarter ending September 30, slightly lower than analysts' average estimate of 10.3 trillion won (about $7.66 billion). In comparison, its operating profit was 2.43 trillion won (about $1.8 billion) in the same period last year and 10.44 trillion won (about $7.76 billion) in the previous quarter.

Samsung stated in its announcement that while demand for high-bandwidth memory (HBM) and server chips remained strong, increased supply of "traditional" products from Chinese competitors and inventory adjustments by some mobile device customers offset these positive effects, leading to a decline in earnings from its memory chip business.

Despite the recovery of the chip market from the post-pandemic slump driven by high-profit AI server chips, Samsung continues to lag behind SK Hynix in supplying HBM chips to leading player Nvidia. Analysts point out that demand for commodity chips, such as those used in personal computers and smartphones, remains weak, and Samsung relies more heavily on these compared to its competitors.

Samsung Electronics shares have fallen over 20% this year, and they dropped another 0.7% following the release of the earnings forecast.

No Plans to Spin Off Chip Design and Manufacturing Business

Analysts suggest that Samsung's chip design and manufacturing services for other clients are facing billions of dollars in annual losses due to persistent market weakness, partly contributing to its overall performance struggles. To lessen its reliance on memory chips, Samsung has been aggressively expanding its logic chip design business and increasing investments in foundry chip manufacturing. Logic chips are the core components for data processing and play a crucial role in Samsung's strategic transformation.

Lee Jae-yong, Samsung's vice chairman, outlined an ambitious vision in 2019 to become the world's largest chip foundry by 2030, surpassing TSMC. To achieve this goal, Samsung has announced multi-billion dollar investment plans to build new foundries in South Korea and the United States. However, informed sources reveal that despite significant investments, Samsung is facing challenges in securing major client orders to fill its expanded capacity.

When asked about Samsung's potential plans to spin off its foundry business or its system LSI logic chip design operations, Lee Jae-yong responded: "We are passionate about growing this business and have no plans to spin them off." He made these remarks while accompanying South Korean President Yoon Suk-yeol on a visit to the Philippines.

Taylor Chip Factory Project Faces Challenges

Lee Jae-yong acknowledged that Samsung's newly built chip factory in Taylor, Texas, is facing challenges, stating, "Due to current changes in circumstances and election factors, the project has encountered some difficulties." He didn't elaborate further, and Samsung Electronics hasn't provided any additional comments.

South Korea has become a major foreign investor in the U.S. in recent years, driven by incentives for green energy and chip industry financing. However, as the November U.S. presidential election approaches, potential policy changes are making some companies, such as LG Energy, more cautious.

In April, Samsung postponed the production schedule for its Taylor project from late 2024 to 2026, stating operations would proceed in phases based on customer demand. This move indicates the challenges Samsung faces in surpassing its larger competitor, TSMC, which boasts major clients like Apple and Nvidia.

According to the average estimates of nine analysts, Samsung incurred a loss of 3.18 trillion won (approximately $2.4 billion) from its foundry and system LSI businesses last year. Although Samsung hasn't disclosed detailed financial figures for these businesses, analysts expect them to incur another loss of 2.08 trillion won (about $1.5 billion) this year.

Analysts point out that even though Samsung separated its chip manufacturing and design operations in 2017, foundry clients remain concerned about potential leaks of their trade secrets to Samsung's design department. Lee Jong-hwan, a professor of system semiconductor engineering at Sangmyung University who previously worked at Samsung, commented, "In principle, it would be best for Samsung to spin off its foundry business to gain customer trust and focus on other operations." However, he also notes that if the foundry operates as an independent company, it may struggle to continue receiving financial support from the memory chip business.