Samsung surprised investors on Tuesday when the South Korean electronics firm issued its earnings guidance for the company's fiscal fourth quarter of 2018. For the three-month period ended December 31, 2018, Samsung expects its consolidated sales to be 59 trillion Korean won (~$52.48 billion) and its operating profit to be 10.8 trillion won (~$9.6 billion).
Those both represent double-digit percentage drops over the same quarter a year ago—an 11 percent drop in consolidated sales and a staggering 29 percent drop in operating profit. The figures also fell short of what analysts had previously predicted. So, why the steep decline compared to a year ago? There are two main reasons.
One is memory sales. Samsung said it experienced weaker-than-expected demand for memory chips, particularly from its data center clients, which in turn led to a drop in shipments and a decline in memory prices. We've seen the latter play out even in the consumer memory market—DDR4 memory pricing has come down over the past several weeks and months.
Mark Newman, managing director at Sanford C. Bernstein, told CNBC that "memory demand has really fallen off a cliff," and that's having a negative impact on Samsung's bottom line. The timing is bad, too. Data center customers have reduced their memory orders after "about 24 months of very, very aggressive growth," Newman added.
A decline in smartphone demand is also to blame. Samsung isn't as dependent on smartphone sales as its rival Apple, but it's still a major player in the smartphone sector. Unfortunately for Samsung (and all smartphone makers, really), the market has weakened.
Back in November, International Data Corporation said Samsung had a "challenging" quarter due to a decline in smartphone shipments. IDC also said it was indicative of a broader trend, with smartphone vendors combining to ship 355.2 million units in the third quarter of last year, resulting in a 6 percent year-over-year drop.
The good news for Samsung is that it operates in many different product categories, including displays, home appliances, and so forth, which allows it to weather these types of storms.