Memory boom fuels Samsung's record quarter — but squeezes its smartphone business

Samsung Electronics hoped to dispel market fears over a chip peak-out, posting another record-high quarterly operating profit of 89.49 trillion won ($62 billion) for the second quarter on Thursday. Its semiconductor division accounted for nearly all of that profit, posting 89.2 trillion won, the company said Thursday.

However, the memory crunch cut both ways for Samsung, as the sharp rise in chip costs drove its smartphone division to its first quarterly operating loss in company history.

The figure, a 19-fold surge on year, is in line with preliminary estimates released by the Suwon, Gyeonggi-based chipmaker earlier this month and beats the 84.84 trillion won consensus compiled by market tracker FnGuide.

Revenue for the April-to-June quarter rose 130 percent on year to 171.5 trillion won, but came below market expectations of 174.53 trillion won. Net profit reached 71.62 trillion won, soaring 1,299.9 percent on year and beating the 70.02 trillion won estimate.

Memory booms as smartphone unit logs first loss

Bit shipments for Samsung’s conventional memories — dynamic random access memory (DRAM) and NAND flash — were the highest ever as agentic AI applications spread along with AI-driven demand from U.S. hyperscalers.

Despite Korean chipmakers, including domestic rival SK hynix, logging record profits the previous day, chip stocks have been on a downward spiral as market sentiment soured sharply on concerns that AI-related investment may fail to generate returns, as well as fears that the highly cyclical chip business has already peaked, following the successful listing debut of Chinese memory maker Changxin Memory Technologies.

Samsung tried to calm those concerns on Thursday, saying that even as the industry expands capital expenditure to build more factories, the long lead time involved — more than three and a half years from new fab construction to wafer production — means that a meaningful chip supply increase won’t happen before 2028.

Still, Samsung’s shares slipped 0.72 percent compared to the previous trading day to close at 207,000 won on Thursday.

Samsung also gave specific details on long-term agreements (LTAs), which have drawn market attention as a potential determinant in shifting the chip industry from a cyclical business to a more stable one.

Demand for these LTAs has been strong this year, with "nearly all" of Samsung's customers requesting this form of contract as chip prices continue to rise and they seek to secure their share of chips amid the memory crunch. The company has already completed such contracts with five major global data center customers and is under final negotiation with five additional large customers.

“We are negotiating contracts centered on customers who can accept a high degree of mutual binding commitment to contract fulfillment, based on firm future demand,” said Kim Jae-june, executive vice president and head of Samsung’s memory business at a conference call.

The LTAs are expected to cover between 60 and 70 percent of the chipmaker’s total planned capacity. The base term for the contract is five years, with an additional year added annually through future negotiations. Samsung is also accepting a considerable advance payment as a deposit to make the contracts more binding than before.

“We have already received about a quarter of that amount, and the total advance payment amount is expected to grow further as additional contracts proceed,” Kim added.

Samsung's third-quarter HBM4 revenue is projected to more than triple the previous quarter's number, with HBM4 accounting for more than 60 percent of total HBM revenue in the second half of the year. The company also disclosed its goal of raising its HBM market share to match its DRAM market share by the second half.

On the chip manufacturing business, Samsung projected that orders for leading-edge process nodes this year will more than double from a year earlier, with the revenue share from AI and high-performance computing (HPC) applications expanding from the high-teens percent range last year to over 30 percent this year.

“We secured 2-nanometer projects from major cloud service providers and AI and HPC customers, and those customers have begun product design,” said Kang Suk-chae, executive vice president and head of foundry business. “We are also continuing to expand new leading-edge process orders on various projects with major customers, including Broadcom.”

The company expects leading-edge process nodes to account for more than half of foundry revenue in the second half, and said a return to profitability is "achievable in the near term."

The mobile and network division, with smartphone business at its core, logged an operating loss of 700 billion won as price spikes in core components such as DRAM and NAND flash added to cost burdens. The loss shows how much the memory crunch is affecting smartphone vendors, as the unit had always managed to stay profitable through past difficulties such as the Covid-19 pandemic and the Galaxy Note 7 recall.

The consumer electronics division, which includes TVs and home appliances, also logged a quarterly loss of 10 billion won due to weak demand and a rise in component costs due to the Iran war.

Samsung Display reported operating profit of 700 billion won, a surge of 40 percent on year. The improvement was attributed to solid demand for mobile displays and growth in the gaming monitor market.

Harmon, Samsung’s automotive electronics unit, logged 400 billion won in operating profit, down 20 percent on year.

What about ADR? Capacity expansion?

Capital expenditure for the quarter was heavily allocated to the semiconductor business. Nearly 92 percent, or 15.4 trillion won, was spent on chip capacity expansion. Along with memory, Samsung specifically noted that the pace of foundry capacity expansion “is not keeping up with demand.”

Regarding its chip cluster in Taylor, Texas, Samsung said the site's first fab is preparing to begin mass production by next year as planned, with 2-nanometer capacity to expand in stages.

Samsung is planning to break ground on its second fab at the Taylor complex this year, targeting mass production in 2030.

“We are also reviewing plans to secure more fabs in response to growing customer inquiries regarding the 1.4-nanometer process,” Kang added.

The company again denied the possibility of a U.S. listing, an idea floated by some media reports earlier this month after SK hynix made its New York debut via an American Depositary Receipt (ADR) listing.

"We maintain stable cash-generating capacity based on a diverse business portfolio, so the need for an ADR to raise new capital is not high at this time," said Park Soon-cheol, executive vice president and chief financial officer. "We are not currently reviewing an ADR issuance […] but we view it as one of several options from a longer-term standpoint of enhancing shareholder value."

BY LEE JAE-LIM [[email protected]]