Samsung Electronics announced on Friday that it would cut chip production by a "meaningful" amount after reporting a 96% drop in its quarterly operating profit. This was a much worse than expected decline, due to the sharp contraction of the global semiconductor industry.
In early trading, shares of the world's biggest memory chip and television maker SK Hynix rose 3% while those of its rival SK Hynix soared 5%. Investors welcomed plans to reduce production in order to preserve pricing power.
In a brief preliminary earnings report, Samsung (SSNLF), estimated that its operating profit had fallen to 600 billion won ($455.5m) from 14,12 trillion won one year prior. This was the lowest quarterly profit in 14 years.
In a statement, it stated that 'Memory Demand dropped sharply due to macroeconomic conditions and a slowing of customer purchasing sentiment as many customers continued to adjust their inventory for financial reasons'.
It added: 'We're lowering production of memory chip by a meaningful amount, especially for products that have a supply guaranteed', referring to those who had sufficient stocks.
Samsung has a strong signal of production cuts, despite its previous statements that it would only make minor adjustments such as pauses in production for refurbishing lines and not a complete cut.
The size of the proposed cut was not disclosed.
The first-quarter loss fell short of the 873 billion won Refinitiv SmartEstimate. This is a weighted estimate that favors analysts who are consistently accurate. Multiple estimates have been revised lower this week.
According to data from the company, it was the lowest profit since the first quarter 2009 when 590 billion wons were earned.
As consumer demand for tech products is sluggish because of rising inflation, buyers such as data center operators, smartphone and computer makers and personal computers are reducing their purchases and using up existing inventories.
Analysts estimate that the chip division suffered quarterly losses in excess of 4 trillion won ($3,03 billion), as memory chip costs fell and inventory values were reduced.
It would be the first time the chip business has lost money since the first quarter in 2009. This is a big change for a business that, when times are good, generates half of Samsung’s profits.
Samsung reported that revenue likely dropped 19% compared to the same period last year, to 63 trillion won.
This month, the company will release its detailed earnings report, which includes divisional breakdowns.