SK Hynix Faces Q3 Earnings Shock and Cuts Production... Will Samsung Follow?

SK Hynix Q3 Operating Profit Down 60.3% YoY
Memory Industry Faces Severe Earnings Slump Amid Weak Market
SK Hynix Decides to Cut Production Following Micron and Japan's Kioxia
Samsung Denies Artificial Adjustments but Market Pressure Intensifies

M16 view at SK Hynix Icheon Campus / Provided by SK Hynix

[Asia Economy Reporter Kim Pyeonghwa] SK Hynix's third-quarter operating profit halving signifies that the winter winds blowing through the semiconductor industry were harsher than expected. SK Hynix posted results far below market estimates (2 trillion KRW) as global economic recession sharply reduced demand for DRAM and NAND, leading to declines in both sales volume and prices.

Following the 'earnings shock,' SK Hynix ultimately decided to cut investments and reduce production. However, concerns remain that surviving the harsh semiconductor winter will not be easy. As the economic downturn deepens, demand slowdown is expected to persist for some time. Samsung Electronics, which earlier announced preliminary third-quarter results with operating profit more than 1 trillion KRW below market forecasts, is also likely to release a gloomy report on the 27th. Attention is focused on whether it will announce plans for production cuts.

Third-Quarter Memory Performance Deterioration Becomes Reality

On the 26th, SK Hynix announced its third-quarter operating profit for this year at 1.6556 trillion KRW, a 60.3% decrease compared to the same period last year. Although somewhat anticipated through the results of Samsung Electronics and other global semiconductor companies, this figure significantly undershot market expectations. Inflation, economic recession, and the Russia-Ukraine war have combined as multiple adverse factors, leading to a diagnosis that the semiconductor market has entered a full-fledged down cycle this year. Especially, as the memory semiconductor sector, which is highly sensitive to economic conditions, deteriorated, predictions emerged that the related industry's performance decline would intensify in the third quarter.

In fact, U.S. memory semiconductor company Micron and Samsung Electronics also posted poor third-quarter results. Micron recorded revenue of $6.64 billion (approximately 9.4288 trillion KRW) in its fiscal fourth quarter of 2022 (June to August), corresponding to Korea's third quarter, down 19.7% year-on-year. Samsung Electronics, with semiconductors accounting for the majority of its business, saw its third-quarter preliminary operating profit fall 31.73% year-on-year. Semiconductor operating profit is expected to decrease by about 30-40%.

The outlook for fourth-quarter results is also bleak. Securities firms forecast that, like other memory players, SK Hynix's production in the second half will exceed demand, leading to historically high inventory levels by year-end. Even with semiconductor price cuts, customers are unlikely to increase purchase volumes, so fourth-quarter shipments are expected to be similar to those in the third quarter.

SK Hynix also expects fourth-quarter shipments to be similar to the previous quarter. It noted that demand could be affected not only by consumer product demand such as PCs and smartphones but also by servers, due to corporate investment cuts and inventory adjustments amid macroeconomic uncertainties.

Memory Industry Responds to Market with Investment Cuts and Production Reductions

The memory semiconductor market outlook for next year is also grim. The World Semiconductor Trade Statistics (WSTS) has downgraded its growth forecast for the memory semiconductor market next year, effectively predicting zero growth. Even the relatively robust server DRAM segment is expected to slow down. Market research firm TrendForce forecasts a 7% growth rate for the server DRAM market next year, marking the first time since 2016 that growth falls below 10%.

The market expects the performance deterioration of memory semiconductor companies, including SK Hynix, to continue next year. In response, memory players have recently announced investment cuts and production reductions to balance supply and demand. Representative cases include Micron and Japanese NAND flash company Kioxia. SK Hynix has also joined this trend, announcing plans to reduce next year's investment by more than 50% compared to this year?a scale of adjustment comparable to the 2008 financial crisis. Additionally, production cuts focusing on low-profit products are planned for next year.

From the second half of next year, there is a positive outlook that the industry's conditions may improve with active market responses from these players and a semiconductor cycle recovery. U.S. investment bank Morgan Stanley also expects a rebound around the same time. KB Securities researcher Kim Dongwon said, "From the second half of next year, a gradual recovery trend is expected due to limited supply increases in the global memory industry and memory inventory accumulation demand centered on servers."

Meanwhile, attention is also on whether Samsung Electronics, which will announce confirmed results on the 27th, will follow the industry's production cut trend. Samsung Electronics has previously stated that it has no plans for artificial production cuts.

This content was produced with the assistance of AI translation services.