Samsung Electronics' Operating Profit Falls Below 1 Trillion Won for the First Time in 14 Years... First Official Announcement of Production Cuts (Comprehensive)

Provisional Results Announced on the 7th
Q1 Sales of 63 Trillion Won and Operating Profit of 600 Billion Won
"Memory Production Reduced to a Meaningful Level"
Semiconductor Outlook for Q2 Also 'Cloudy'

As the semiconductor downturn prolongs, Samsung Electronics recorded an 'earnings shock' with its operating profit for the first quarter of this year shrinking by about 96%. In particular, it posted its worst quarterly operating profit, falling short of even 1 trillion won.

Samsung Electronics, which had maintained the stance of 'no artificial production cuts,' finally officially acknowledged production cuts for the first time, stating that it is "meaningfully reducing memory production volumes."

Samsung Electronics Seocho Building.
Photo by Yonhap News

Operating Profit Drops to Around 600 Billion Won... Semiconductor Losses Expected Around 4 Trillion Won

Samsung Electronics announced on the 7th that its consolidated operating profit for the first quarter of this year was preliminarily estimated at 600 billion won, a 95.75% decrease compared to the same period last year. This is the first time in 14 years since the first quarter of 2009 (590 billion won) that Samsung's quarterly operating profit has fallen below the 1 trillion won mark. During the same period, sales dropped 19% year-on-year to 63 trillion won.

The slowdown in semiconductor demand dealt a direct blow to earnings. Although detailed segment results were not disclosed on the day, it is believed that the DS (Device Solutions) division, responsible for semiconductors, posted losses around 4 trillion won, marking the worst performance in history. In particular, memory semiconductors, which had already turned to losses in the fourth quarter of last year, likely expanded their deficit in the first quarter due to increased inventory valuation losses and a decline in average selling prices (ASP).

Accordingly, unlike the usual practice of only disclosing sales and operating profit figures during preliminary earnings announcements, Samsung Electronics released explanatory materials again this time, following the fourth quarter of last year, explaining the background of the earnings decline by stating, "Due to continued weak IT demand, the parts segment mainly deteriorated, causing the overall company performance to drop sharply compared to the previous quarter."

Samsung Electronics explained, "Memory demand decreased due to macroeconomic conditions and weakened customer purchasing sentiment, along with ongoing inventory adjustments by many customers for financial soundness. System semiconductors and displays (SDC) also saw performance declines due to economic downturns and seasonal factors."

In the Device Experience (DX) division, sales of finished products such as home appliances were also not smooth. However, the strong sales of the Galaxy S23, launched last February, appear to have helped reduce the deficit. The Galaxy S23 series shipments in the first quarter of this year reached 11 million units. Samsung Display and Harman, which produces automotive products, are interpreted as playing a key role in defending earnings.

Finally Playing the 'Artificial Production Cut' Card... Will the Industry Rebound Come Sooner?

Samsung Electronics officially confirmed 'artificial production cuts' for the first time on this day.

In the explanatory materials, Samsung Electronics stated, "In addition to the ongoing optimization of line operations for the future and the expansion of engineering runs (trial production), we are meaningfully reducing memory production volumes focusing on products with secured supply." Industry analysts believe that since the semiconductor market conditions have worsened compared to the outlook announced in January when the fourth quarter results were disclosed, Samsung Electronics found it difficult to maintain its previous stance.

In the January conference call, Samsung Electronics hinted at 'technical production cuts' due to maintenance and equipment relocation, but as memory semiconductor prices continued to fall, it is understood that this did not have a significant impact on the market.

In fact, the market already considered that about 20% of natural production cuts had occurred. Doh Hyun-woo, a researcher at NH Investment & Securities, said, "According to some test and component companies, orders received from Samsung Electronics in the first quarter decreased by more than 30%," and predicted, "Samsung Electronics currently holds DRAM inventory exceeding 21 weeks, which is high compared to competitors, and to overcome this situation, it is expected to further increase the level of production cuts."

With Samsung Electronics, the world's number one memory company, expressing its intention to join production cuts, the industry expects that the decline in memory semiconductor prices will stabilize and the market rebound will be accelerated. Among the big three in the memory industry, SK Hynix and the US-based Micron are already implementing production cuts.

There is also growing optimism that PC demand may rebound in the second quarter. Market research firm TrendForce forecasts that laptop demand will increase by 13% in the second quarter compared to the first quarter this year. Although this is a 39% decrease year-on-year, it is interpreted as a potential turning point for a quarterly rebound.

Lee Jae-yong, Chairman of Samsung Electronics. [Photo by Samsung Electronics]

Semiconductor Downturn to Persist in the Second Quarter

However, expectations remain strong that the semiconductor downturn will continue into the second quarter.

Due to the global economic recession, consumers are tightening their wallets, reducing demand for memory semiconductors used in IT and home appliances, and companies are also cutting back on orders. The memory semiconductor market slump is expected to persist into the second quarter of this year, making further earnings deterioration inevitable for the time being.

Kim Rok-ho, a researcher at Hana Securities, diagnosed, "Although shipments will seasonally increase in the second quarter, the increase must be significant to expect inventory reduction. In the first half of the year, customer inventory levels are not low, and server demand is not strong, so the possibility of inventory reduction is low."

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