Reports quarterly operating profit of KRW 6.45 trillion on sales of KRW 55.33 trillion
Memory earnings improve on solid server and PC demand
Second quarter results likely to decline as COVID-19 to impact demand of core products
Samsung Electronics today reported financial results for the first quarter ended March 31, 2020. Total revenue was KRW 55.33 trillion, a decrease of 7.6% from the previous quarter mainly due to weak seasonality for the Company’s display business and Consumer Electronics Division and partially due to effects of COVID-19. From a year earlier, revenue rose 5.6% due to increasing demand for server and mobile components.
Operating profit was lower by KRW 0.7 trillion quarter-on-quarter to KRW 6.45 trillion, affected by the same factors that weighed on revenue with a corresponding decrease in operating margin, even though memory earnings were higher. Compared with a year earlier, operating profit increased by KRW 0.2 trillion with an improved product mix in the mobile business and additional diversification of the Company’s customer base in mobile OLED.
In the quarter, foreign exchange movements had little impact on the overall operating profit as the positive effects from a stronger U.S. dollar and euro against the won – felt mainly in the component business – were offset by weakness in currencies in major emerging markets.
Earnings from the Memory Business improved as demand was solid mainly from servers and PCs, while demand from mobile remained steady. Profits from the logic chip business rose as supply of mobile components increased to major customers and the foundry business saw a profit decline due to lower demand for high-performance computing (HPC) from China.
In the Display Panel Business, mobile displays posted a decline in earnings amid weak seasonality and lower sales in China due to COVID-19 related shutdowns, while losses narrowed in the large panel business.
The Mobile Communications Business saw profits increase from the previous quarter and from a year earlier despite weakening sales toward the end of the first quarter. The profit improvement was a result of an improved product mix with the launch of flagship Galaxy S20 devices and efficient management of marketing expenses.
The Consumer Electronics Division posted lower earnings as weaker seasonality and impact from COVID-19 affected quarterly results. Compared to the previous year, profits from the TV business declined amid pricing pressure from intensifying competition, while home appliances saw an improvement on the back of strong sales of new premium products.
Looking ahead to the second quarter, the Company expects the memory business to remain solid, but overall earnings are likely to decline from the previous quarter because COVID-19 will significantly impact demand for several of its core products.
For the component business, memory demand is expected to remain robust for servers and PCs as more people work from home, but it is possible the mobile market may soften. Earnings from OLED screens are likely to be weaker due to a stagnant smartphone market.
Sales and profits of set products business, including smartphones and TVs, are expected to decline significantly as COVID-19 affects demand and leads to store and plant closures globally. To address this, the Company will leverage its global production flexibility and supply networks as well as strengthening its online sales capabilities.
In the second half, uncertainties driven by COVID-19 will persist as the duration and impact of the pandemic remain unknown. The Company plans to focus on optimizing resource allocation in the short term, while continuing to strengthen its technology leadership and develop innovative set products.
For the Memory Business, the Company plans to address market changes through flexible investments and product mix adjustments. For OLED, it will actively meet demand for new product releases and expand presence in new application areas such as foldable displays.
The Mobile Communications Business aims to strengthen its product lineup by introducing new premium models and expanding offerings of 5G models for the mass market. The Networks Business will focus on developing technologies and enhancing global competitiveness to reinforce the 5G business.
For the Consumer Electronics Division, under the risk of current economic uncertainties, the Company will closely monitor the market situation and will continue to focus on minimizing negative impacts by investing in efficient marketing and promotions tailored to each region and by optimizing its logistics.
In the first quarter, Samsung Electronics’ capital expenditure totaled KRW 7.3 trillion, including KRW 6.0 trillion spent on semiconductors and KRW 0.8 trillion on displays.
Semiconductor Earnings Improve Despite Weak Seasonality
The Semiconductor businesses posted KRW 17.64 trillion in consolidated revenue and KRW 3.99 trillion in operating profit in the first quarter.
The Memory Business saw solid demand in the period, despite weak seasonality and the effects of COVID-19, thanks to continued investments in 5G infrastructure and increased demand from cloud applications related to remote working and online education.
Specifically for DRAM, datacenter demand remained solid as usage of streaming services and online shopping rose. For mobile, decrease in set demand due to effects of COVID-19 and seasonality was offset by expanded adoption of high-density products by major customers. For PC, demand remained steady on the back of the increase in virtual meetings.
For NAND, mobile demand was relatively solid due to the expansion of products from major customers adopting high-density storage greater than 128GB. Demand for server SSD, mainly for datacenters, continued to grow alongside rising demand for high-volume content.
Looking to the second quarter, demand for DRAM is expected to remain firm across all applications due mainly to robust growth in server demand caused by the rapid rise in remote working, online education and streaming services. However, mobile demand may face high uncertainty. The Company will flexibly manage its product mix with a focus on growing server demand and strengthen cost competitiveness by expanding technology migration.
As for NAND, the market is seen as continuing to stabilize in the second quarter as the impacts from a decrease in smartphone set demand are offset by growing SSD demand from datacenters. The Company will focus on expanding demand for high-density server SSD of more than 2TB while continuing to extend migration to 5th-generation V-NAND.
For the second half, while mobile demand – most affected by COVID-19 – remains as one of the uncertainties, overall memory conditions are likely to be favorable due to server and PC demand for a faster and more reliable cloud service experience. However, a prolonged COVID-19 crisis poses risks of reduction in overall demand.
Despite the challenges, the Company expects the recent proliferation of cloud-based services to accelerate further in the mid- to long-term. This will result in continued demand growth for high-end, high-performance memory. With a flexible product mix and investment approach based on market changes, the Company will focus on accelerating transition to 1Z-nm DRAM and 6th-generation V-NAND.
Meanwhile, earnings for the System LSI Business increased on the back of rising demand for 5G mobile processors and ultra-high-resolution image sensors for flagship smartphones. In the second quarter, the Company expects demand to contract owing to fading effects of launches of flagship smartphones and weak consumer sentiment due to COVID-19. However, the Company will focus on minimizing impacts by maximizing the supply of high-pixel image sensors and expanding the 5G SoC market.
As for the second half, launches of 5G smartphones are expected to boost demand for 5G SoC while demand for premium image sensors is forecast to remain solid. In response to continued uncertainties due to COVID-19, the System LSI Business will closely monitor the market and respond flexibly while also seeking to expand opportunities through highly competitive new products.
The Foundry Business saw a slight decrease in earnings due to a decline in demand for HPC chips from Chinese customers. In the second quarter, the Company aims to expand EUV leadership, beginning with the start of mass production of 5nm products, while closely monitoring the uncertain market situation caused by COVID-19.
In the second half, to address current uncertainties, the Foundry Business will focus on diversifying applications beyond mobile to include areas such as consumer and computing applications. It will also continue investing in advanced processes for the future and will start mass-producing 5nm products this year and focus on the development of GAA 3nm process.
Display Earnings Decline on Lower Shipments; Demand Expected to Weaken in Q2
The Display Panel Business posted KRW 6.59 trillion in consolidated revenue and KRW 0.29 trillion in operating loss for the first quarter. It posted an operating loss due to sales decline of mobile displays.
Mobile display earnings saw a profit decline because of slower sales and lower fab utilization amid weak seasonality. For large displays, the operating loss narrowed, helped by short-term market factors including a smaller drop in ASP and favorable foreign exchange movements.
Looking ahead to the second quarter, the Company expects a further drop in mobile display earnings due to falling demand in the US and Europe, driven by the impact from COVID-19. The Company will strive to enhance profitability by offering more panels with distinctive design and performance.
For large displays, earnings are likely to remain weak owing to the market slowdown accelerated by the postponement of mega sporting events such as the Summer Olympic Games. The Company will focus on providing value-added products such as panels for ultra-large and 8K TVs as well as curved monitors.
In the second half, uncertainties are forecast to linger due to the effects of COVID-19. Under these circumstances, the Company will prepare for various scenarios by establishing a system to respond quickly to market changes including new mobile product launches. The Company is also strongly committed to keeping continued leadership in the OLED market by exploring new applications including displays for foldable phones and other IT devices.
For large displays, while it winds down the LCD business, the Company will continue to address demand from its customers and accelerate product development based on new technologies such as QD Displays.
Mobile Demand to Decline Sharply on COVID-19; Market Uncertainty to Remain High
The IT & Mobile Communications Division posted KRW 26 trillion in consolidated revenue and KRW 2.65 trillion in operating profit for the quarter.
Due to the impact of COVID-19, overall market demand fell significantly QoQ and the Company’s smartphone shipments also declined in the first quarter. However, the Company maintained sound profitability by improving the product mix, increasing the sales portion of 5G models and using marketing expenses efficiently during the period. In particular, the ASP of flagship smartphones increased compared to last year on the back of higher-than-expected share of Galaxy S20 Ultra sales as well as solid sales of the Galaxy Z Flip.
Looking ahead to the second quarter, demand is expected to drop sharply in most regions due to an economic downturn caused by COVID-19. The Company expects a decline in product sales and its overall business performance as the market shrinks and effects of store closures continue to have direct impacts. Amid the market uncertainty, the Company will focus on improving cost efficiency and strengthening its online and B2B channels. In case of any additional disruptions at production facilities, the Company will respond by flexibly utilizing its diversified manufacturing capabilities across the globe.
For the second half, amid uncertainties including the possibility of a prolonged pandemic, market competition is forecast to intensify as manufacturers strive to recover from the weakness in the first half. The Company will continue to offer differentiated products in the premium segment with the launch of new foldable and Note models. The Company also plans to enhance product competitiveness by expanding 5G adoption to mass-market smartphones and improve operational efficiency across all areas throughout R&D, production, supply, channel and marketing.
As for the Networks Business, earnings in the first quarter improved QoQ thanks to the expansion of 5G commercialization in South Korea and other markets. While the possibility of a delay or cutback in 5G investment in the second quarter exists due to the impact of COVID-19, the Company will solidify its core competencies and improve 5G business capabilities for the mid- to long-term.
Premium Appliances Support Sales in Q1; Second Quarter Market Conditions to Worsen
The Consumer Electronics Division, comprised of the Visual Display and Digital Appliances businesses, recorded KRW 10.3 trillion in consolidated revenue and KRW 0.45 trillion in operating profit in the first quarter.
Demand for TVs declined both QoQ and YoY due to weak seasonality and lower global demand seen since March due to COVID-19. Digital appliances saw slight improvement from the previous year on the back of strong sales of new premium products including the Grande AI Washing Machine and Dryer.
In the second quarter, sales of TVs are expected to decline on weakened consumer demand prompted by the impact from COVID-19, cancelation of major global sporting events and the postponement of the Summer Olympic Games. As such, the Company will focus on risk management and identifying new sales opportunities in online demand.
For the second half, the TV and digital appliances divisions will address risk factors including the extension of global uncertainties and potential further economic downturn. Under these possibilities, the Company will strengthen our efforts in target marketing and expand its online product lineup and promotional offerings. Samsung will also strive to bolster cooperation with channels to optimize marketing strategies.