Samsung Electronics’ operating profit from its semiconductor business in the third quarter of this year stood at 3.86 trillion won ($2.8 billion), falling short of the 4 trillion won expected by analysts.
The company attributed its weakened profitability to one-off costs in its chip-making Device Solutions (DS) division. However, the market believes that the division’s non-memory segment played a larger role in the incurred losses, which amounted to trillions of won and negatively affected overall profitability.
Despite the disappointing numbers, the company provided a rosy outlook on its AI-specific high-bandwidth memory (HBM) chip businesses, implying that the company’s advanced HBM3e chips are now at the final stage of passing Nvidia’s quality tests.
Samsung Electronics' operating profit
Samsung Electronics' operating profit
During an earnings call on Thursday, Samsung Electronics reported sales of 79.1 trillion won and an operating profit of 9.18 trillion won during the July-to-September period, aligning closely with its guidance from earlier this month.
Revenue grew 17.35 percent year-on-year to set a new high, but the operating profit fell below the 10 trillion won mark just three months after the company posted 10.44 trillion won for the second quarter.
The weaker-than-expected performance was due largely to sluggish growth in the DS division, which reported 29.27 trillion won in revenue and an operating profit of 3.86 trillion won. While these figures marked improvements from last year, when the global chip industry faced a downturn, they still fell short of analysts’ expectations during the earnings guidance, which had projected an operating profit of at least 4 trillion won for the division.
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Samsung explained that profits of its memory chip business declined due to “one-off factors such as reduced inventory valuation gains, provisions for incentives and foreign exchange rates.” The company did not provide detailed numbers for the costs, but analysts assume that this amounts to approximately 1 trillion won.
Adding another blow was its non-memory businesses including chip designing and foundry. The company briefly noted that the performances of those businesses have declined due to one-off costs, but the market assumes that they have incurred a loss between 1 trillion won and 2 trillion won.
This at the same time means that the company’s memory chip business remained intact during the third quarter.
During the earnings call, the company explained that one-off costs incurred during the period were greater than the discrepancy between the 10.4 trillion won market consensus for the company’s total operating profit and the actual profit of 9.18 trillion won. Given the one-off costs and the losses from non-memory businesses, the profit from the memory business alone is estimated to have almost reached 7 trillion won.
The company noted that its memory business showed a steady growth in the sales of high-value products including HBM.
“Compared to the previous quarter, the revenue from HBM grew by 70 percent, and we are now mass-producing and selling 8-layer and 12-layer HBM3e chips,” said Kim Jae-joon, executive vice president of Samsung’s DS division. HBM3e is the fifth-generation HBM, and 12-layer HBM3e chips are expected to be the mainstream for AI processors that will hit the market next year.
Samsung Electronics' 12-layer HBM3e / Courtesy of Samsung Electronics
Samsung Electronics' 12-layer HBM3e / Courtesy of Samsung Electronics
Rebound in HBM
During the call, Kim noted that the company achieved “significant progress by completing a key stage in quality testing with a major client,” and it expects “an expansion in sales in the fourth quarter of this year.”
So far, Samsung has been struggling to expand its HBM3e supply to Nvidia, with reports alleging setbacks in passing quality tests for Nvidia’s AI processors. This raised market concerns about Samsung's HBM competitiveness, as the testing timeline extended beyond the company’s original plan.
“HBM3e accounted for low 10 percent level in the company’s overall HBM sales, and this will likely climb up to 50 percent in the fourth quarter,” Kim said.
The company also noted that it will be able to develop and mass-produce the sixth-generation HBM4 by the second half of next year, while dropping hints at cooperating with outside foundries to supply custom HBM chips.
Regarding its foundry business, Samsung noted that it will concentrate its investments on HBM and other advanced memory chips, and scale down investments toward its foundry business.
Meanwhile, the company’s Device Experience (DX) division, which covers mobile phones and consumer electronics, posted 44.99 trillion won in sales and 3.37 trillion won in operating profit in the third quarter. Stable sales of flagship products including the Galaxy S24 smartphone contributed to the solid numbers, Samsung said.