Samsung beats earnings estimates on recovery of chips, gadget sales

Samsung Electronics Co. beat earnings estimates and gave a cautiously optimistic outlook, predicting that new smartphones and gaming consoles will boost demand for memory chips in the second half of the year.

Net income increased to 5.5 trillion won ($4.6 billion) in the three months ended June, the company said in a filing on Thursday, compared with the 4.9 trillion won average of estimates compiled by Bloomberg. The South Korean company had reported preliminary numbers earlier this month that showed operating profit rose 23%.

Samsung, which is the world’s largest smartphone maker and also supplies components like memory chips, is navigating the tumult of the coronavirus pandemic, along with the rest of the tech industry. The company warned of a slump in its consumer business in the second quarter. But sales of smartphones, televisions and other gadgets have started to recover, and the company said demand is likely to get a boost from the introduction of new game consoles and phone models, expected from Apple Inc. and Samsung itself.

“Covid-19 continues to cloud the demand outlook but structurally speaking, the demand is there,” Bloomberg Intelligence analyst Anthea Lai said. “We’re getting there to have more 5G smartphones coming from Samsung and the expectation in the second half is to have more demand from consumers.”

Samsung shares rose as much as 1.9% in Seoul trading, pushing gains this week to about 10%. The company said it would not provide annual financial guidance because of the coronavirus uncertainty.

Though it’s best known abroad for its phones, Samsung makes most of its profit from memory chips, used in everything from phones and consoles to servers that help deliver online services like video and music. Samsung said it anticipates the overall DRAM market to be up.

“Looking towards the second half, we do expect mobile demand overall to recover and also graphic demand to grow,” said Jinman Han, senior vice president of semiconductor business. “For servers, memory demand driven by stay-at-home activities seems to continue as Covid-19 and other uncertainties persist.”

The company’s own mobile devices, set to be updated with flagship Galaxy Note and Galaxy Z Fold releases shortly, are expected to improve revenue on a quarterly basis, but the company underlined that uncertainties related to Covid-19 will continue.

“We also think that customers may have increased their inventories during the 1H, so another variable to the second half demand is the direction of our customers’ inventory management,” said Han.

Samsung shares rose earlier in the week on news of Intel Corp.’s delayed 7nm chip production and likely need to outsource some future chipmaking to the likes of Taiwan Semiconductor Manufacturing Co. Samsung is one of the few companies equipped to handle advanced semiconductor manufacturing, and the potential to garner more Intel business boosted market sentiment.

What Bloomberg Intelligence Says

Samsung’s foundry business could benefit from Intel’s chipmaking retreat as industry leader TSMC may have a tight production schedule to fulfill the U.S. company’s demand. Samsung is already a supplier of Intel CPUs based on the 14-nanometer process.

Aside from the impact of Covid-19, geopolitical issues are also likely to reposition the global supply chain in a way that will affect Samsung’s business. Bans on Huawei Technologies Co. in the U.S. and U.K. open more opportunities for Samsung to sell 5G networking gear and smartphones.

The mobile division of the world’s largest smartphone maker posted a 25% increase in operating income to 1.95 trillion won. The Korean giant is expecting smartphone sales to rise in the third quarter with the launch of new Android devices including its foldable phone lineup but warned of intensifying market competition among smartphone makers that will strive to make up for weak performances during the pandemic.

Read more: Samsung Teases New Mobile Gadgets For a Stay-at-Home Generation

“There is a possibility that the Galaxy Fold 2 will become a game changer in the smartphone ecosystem,” said Greg Roh, senior vice president at HMC Securities. “Most of the shortcomings found in the preceding model have been overcome with the ultra thin glass and a larger display.”

Samsung’s display division, which supplies organic light-emitting-diode-screens for Apple’s iPhones, posted operating profit of 300 billion won. Although the display business suffered as the smartphone market slumped due to the virus, the loss was offset by reimbursement from Apple. Analysts have said the amount of payment was about 1.1 trillion won.

The consumer electronics unit, which includes TVs and appliances, posted 730 billion won of profit. Samsung expects a recovery in TVs and digital appliances in the second half of this year thanks to pent-up demand after the virus lockdowns and holiday spending.