Samsung has issued a guidance warning that revenue and profits for the three months ending December 31st 2018 will be sharply down due to lackluster demand in its memory chip business as well growing competition in the smartphone market.

Samsung predicted operating profit for the three months ended December was approximately 10.8 trillion Korean won ($9.67 billion) — or 28.71 percent down from a year ago.

The two main factors in Samsung’s poor performance are identified as “lackluster demand in the memory business” and “intensifying competition in the smartphone business.” Memory shipments are said to have declined due to unforeseen inventory adjustments from Samsung’s data center customers, while the company says it spent more on smartphone marketing in the face of flat sales and strong seasonality. Results were also apparently affected by an unspecified “non-recurring expense.”

Memory demand 

Samsung provides that demand for memory chips from data center customers like Amazon and Google led to a decline in shipments and a notable drop in memory chip prices.

“What’s happening is that memory demand has really fallen off a cliff in (the fourth quarter),” Mark Newman, managing director at Sanford C. Bernstein, told CNBC. He said that much of the weakness in the predicted numbers is due to “data center demand being pushed down, and also smartphone’s demand pretty weak.”

Ideally, data center companies that buy memory chips from Samsung and other chipmakers, have slowed down their orders in the last few months — the slowdown was a major driver of the magnitude of Samsung’s profit miss.

Samsung said marketing expenses and flat sales volumes led to a decline in profitability in a “stagnant and fiercely competitive market” in the smartphone business. Over the third quarter of 2018, Samsung saw more than 13 percent year-over-year decline in global smartphone shipments, according to International Data Corporation.

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LG, Samsung and Apple are sharing the same predicaments. A few days ago Apple CEO Tim Cook published a letter to investors warning of weaker than expected first-quarter earnings, citing “fewer iPhone upgrades than we had anticipated.” The weakened demand came primarily from China, although Cook notes that “in some developed markets, iPhone upgrades also were not as strong as we thought they would be.”

Samsung is planning to unveil detailed earnings later in the month but added that difficult business conditions for the memory business would likely keep its earnings subdued for the first quarter of 2019. It expects the memory business to improve in the second half of the calendar.

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