Samsung Says Chip Recovery Is Taking Hold After Profit Beat

(Bloomberg) -- Samsung Electronics Co. predicted the long-depressed memory chip market is heading for recovery, after reporting profit for the third quarter well ahead of analyst estimates. 

The South Korean giant’s net income totaled 5.5 trillion won ($4.1 billion) in the September quarter, more than double expectations of 2.52 trillion won, according to data compiled by Bloomberg. A significant chunk of the profit, 1.9 trillion won, came from a one-time income tax gain. 

Samsung’s chip division posted a 3.75 trillion won operating loss, narrower than the 4.4 trillion won loss a quarter earlier. On a conference call after results, executives said artificial intelligence is driving demand in the tech industry, and memory chip inventories are rapidly declining after peaking in May.

“It’s very encouraging to see that chip inventory is coming down,” said Sanghyun Park, an analyst who publishes on the SmartKarma platform. “However, we still need more evidence that the memory demand is set to recover next year.”

Samsung shares were little changed on Tuesday and have climbed about 21% this year. Samsung reported preliminary results earlier this month, showing revenue slid 13% in the quarter and operating income dropped 78%.

The $160 billion memory chip market has been battered by a downturn in demand for smartphones and personal computers, the most important products that incorporate the semiconductors from Samsung and rival SK Hynix Inc. Prices for memory chips tumbled, and most chipmakers pulled back on investments in new capacity. 

South Korea’s largest company said it plans to trim capital expenditures for the semiconductor division to 47.5 trillion won this year, from 47.9 trillion won in 2022. Overall, its capital spending for 2023 is expected to reach a record 53.7 trillion won, compared with 53.1 trillion won last year. 

The company’s display division, which makes mobile screens for the likes of Apple Inc.’s iPhone 15, more than doubled operating profit to 1.94 trillion won from the previous quarter. Samsung said the increase was due to the release of flagship models from major customers, without identifying them.

Samsung’s division that includes its mobile business posted an operating profit of 3.73 trillion won, aided by new Galaxy Z foldable smartphones launched in the second half of this year. Daniel Araujo, vice president at the mobile division, said foldables will be “a key engine” for Samsung’s growth in the near future.

“We’re open to the possibility of expanding the foldable category from only smartphones into other product groups like laptops and tablets,” he said.

Samsung voiced optimism for the memory chip market overall. It predicted that prices will rise in the current quarter compared with the third quarter. It said overall demand for such components will rise with the development of artificial intelligence applications, such as OpenAI’s ChatGPT. 

Samsung executives said they will continue to invest in high-density memory chips, particularly in high-bandwidth memory, where they plan to increase capacity by 2.5 times next year. HBM is a type of advanced memory chip that vertically stacks DRAM dies in order to process data more quickly. It works in tandem with AI hardware such as Nvidia Corp.’s graphics accelerators, which speed up data processing for intensive tasks like training artificial intelligence models. 

“We have already completed supply talks for next year with our key customers for this volume,” said Jaejune Kim, executive vice president at the memory division, during the conference call. “We expect the recovery trend in the memory market to accelerate.” 

The Korean giant finds itself in the unusual place of trying to catch up in HBM with SK Hynix, which is now the sole supplier of next-generation DRAM to Nvidia. SK Hynix introduced HBM in 2013, about three years before Samsung, and has pushed forward with subsequent versions including HBM3, which it developed for the first time in 2021. Samsung is currently mass-producing HBM3 while making progress on the next-generation product, HBM3E. 

“We plan to meet the demand for high-performance, high-bandwidth products by increasing our portion of HBM3 and HBM3E sales by leveraging the highest HBM product capacity in the industry,” said head of investor relations Ben Suh.

Because Samsung and SK Hynix are still losing money in their memory chip businesses, the two companies are banking on the HBM as a new revenue stream. The chips are much pricier than the widely used DDR4 memory chips.

Given the rising importance of HBM chips to support AI training, it may make sense that Nvidia wouldn’t want to rely too much on one supplier. Competition from a rival like Samsung could keep a check on HBM prices and SK Hynix’s negotiating clout.

Tuesday’s report of Samsung’s full quarterly earnings comes weeks after the US granted the company and SK Hynix an exemption to acquire the equipment they need to sustain and expand their chipmaking operations in China. That’s lifted some uncertainty hanging over the two memory leaders, allowing them to operate in the world’s biggest chip arena over the longer term.