Samsung to cut chip production after dismal earnings report

Samsung Electronics is cutting chip production "to a meaningful degree," after reporting worse-than-expected earnings for the first quarter.

Samsung Electronics' chip production line [SAMSUNG ELECTRONICS]

Samsung Electronics is cutting chip production "to a meaningful degree," it said Friday, after reporting worse-than-expected earnings for the first quarter.

The announcement is a dramatic about-face for the company, which just a few months ago insisted it would not reduce semiconductor output despite terrible market conditions and all competitors rapidly retrenching.

"The company is in the process of curbing memory chip production to a meaningful degree for the products with sufficient supply on top of the ongoing efforts to adjust production lines," the statement read.

Word of the cuts pleased the market, with the company's stock rising by 4.33 percent Friday to close at 65,000 won ($49).

Samsung Electronics suffered a 95.75 percent decline in operating profit in the first quarter, according to an earnings guidance released by the company Friday, amid a severe downturn in the chip business.

The preliminary estimate of 600 billion won ($455 million) was a 14-year-low, since the first quarter of 2009. The figure is far below the consensus estimate of 1 trillion won compiled by FnGuide.

First quarter sales were forecast at 63 trillion won, down 19 percent on year and short of the market expectation of 64.2 trillion won.

No breakdowns were provided.

The tech company explained that its businesses across the board – from chips to display and electronic devices – experienced weak demand.

“With a continued slump in demand for electronic devices, the financial result of the company declined by a large margin compared to the previous quarter,” the company noted in the disclosure.

It cited a surge in inventory levels of memory chips as a factor for weak result while macroeconomic woes and unfavorable seasonality lowered profits of system-on-chips and panel-making divisions compared to the pervious quarter.

Analysts believe that losses in the chip business were a major drag on earnings. The memory chip division alone may have lost 4 trillion won in the first quarter, according to their estimates.

“In terms of semiconductors, the memory chip division’s loss is estimated at 4 trillion won which includes 1 trillion-won worth of inventory valuation loss,” said Kim Sun-woo, an analyst at Meritz Securities.

“Alarmed by serious concerns about steep earnings decline, Samsung Electronics has come up with different maneuvers to defend the drastic decrease in chip prices, which limited a further plunge of selling prices,” Kim said.

The analyst projected 800 billion won of operating profit in the display-making business, 3.8 trillion won in the smartphone and network equipment business and 200 billion won in consumer electronics segment.

The company was hit by falling memory chip prices and slumping sales of electronic devices, from smartphones and televisions to home appliances.

Production cuts will likely improve profitability and could boost sentiment.

“The production cut, which remained unclear for the time being, was made official,” said Kim Uno, an analyst at IBK Securities. “The move will significantly restore investment sentiment and address the supply glut in the semiconductor industry quicker than expected,” the analyst said.

The analyst expects that the effects of the adjustment will become apparent in the second half.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]