November 26, 2024

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Samsung Electronics' office building in Seoul (Yonhap)

Samsung Electronics, which posted its worst quarterly earnings in 14 years amid weak demand and falling chip prices, said it expects a gradual recovery in the second half of the year as the effects of production cuts kick in from the following quarter.

In response, the world's largest memory chip and smartphone maker plans to increase the proportion of advanced processes and high-value-added products and continue to invest in securing future technologies.

“We are in the process of reducing our memory production volume,” Kim Jae-june, executive vice president in charge of memory marketing strategy said in the first-quarter earnings call on Thursday. “We expect the size of the reduction to be far more meaningful.”

Earlier this month, Samsung said it was cutting memory production to a “meaningful level," in a sharp departure from its previous position that it would not seek an artificial cut in production, bucking the trend of global rivals that had announced reductions both in production and spending to cope with the worsening business conditions.

It was the first time in 25 years since 1998 that Samsung has publicized production cuts.

Regarding the chip production cut effort, the chip division chief said the company had already secured a sufficient amount of legacy products to meet customers’ mid- to long-term demand. The decision came on top of the factory line optimization that began earlier this year, he added.

Market watchers believe that the production cuts are taking place mainly at the tech giant’s plant in Hwaseong, Gyeonggi Province, which manufactures general-purpose products such as double data rate-4 modules where inventory has accumulated.

In a regulatory filing on the day, Samsung posted its worst quarterly operating profit in 14 years for the first three months of this year.

Operating profit nosedived 95.5 percent on-year to 640.2 billion won ($478.5 million), posting the first quarterly operating income below the level of 1 trillion won, since the first quarter of 2009 when it logged 590 billion won in profit.

Sales fell 18.1 percent to 63.75 trillion won during the three months, while net income marked 1.57 trillion won, dipping 86.1 percent from a year ago.

Samsung’s Device Solutions unit, in charge of the chip business, recorded a deficit of 4.58 trillion won amid the global chip downturn.

The tech giant blamed the poor results on "weak demand," "a decline in utilization rates in the foundry business" and "inventory adjustments from customers." The inventory valuation loss also started to impact DRAM this year, the company explained.

Samsung forecast the global chip market will shrink 6 percent on-year to $563 billion this year and said the difficult conditions will likely continue throughout the year.

To respond to the circumstances, the company plans to focus on advancing its technological competitiveness through continuing investments in facilities, as well as research and development.

In the first quarter alone, the company’s total capital expenditure came to 10.7 trillion won, up 36 percent from a year earlier, which was the largest amount on record for any first quarter for the company.

Of this figure, semiconductors accounted for 9.8 trillion won and displays for around 300 billion won. R&D expenses were 6.58 trillion won, a new all-time high following the previous quarter.

Regarding growing concerns over the adverse impact of the US Chips Act on Korean chipmakers, Samsung said it is reviewing various possibilities and scenarios and trying to minimize geopolitical risks as much as possible.

"The US government has announced that it will collect opinions from the industry and materialize them through negotiations with individual companies. ... We're also planning to join in this process," Suh Byung-hoon, vice president and head of the investor relations division at Samsung, said during Thursday's earnings call.

Meanwhile, Samsung shares ended trading at 64,600 won on the same day, up 0.78 percent from the previous session’s close.

Shortly after the opening bell, the stock price shed 1.25 percent, but gradually pared its losses and returned to a bullish trend since the quarterly result was not significantly different from expectations.

By Jie Ye-eun (yeeun@heraldcorp.com)