Namely, its guidance included a one-time gain of about KRW800 mln related to the sale of display panels to core customer Apple (AAPL).
Furthermore, on an absolute basis, its expected Q2 results look quite grim, with operating profit down 56% yr/yr. That follows a plunge of about 60% in Q1.
SSNLF's discouraging outlook may also be dragging other chip stocks lower this morning such as Micron (MU), Qualcomm (QCOM), and Intel (INTC).
The headwinds facing SSNLF and its peers are familiar.
Demand and pricing for DRAM and NAND memory chips have experienced substantial erosion due to a deep supply/demand imbalance. Prior to this current slowdown in the Chinese smartphone market, the memory market was hot as chip OEMs launched new, more efficient semiconductors to power emerging technologies like Internet of Things, AI, smart devices, etc.
To keep pace with demand, memory chip makers ramped up production, creating an inventory build-up. When the economy in China softened, demand for smartphones weakened, leaving a glut of supply that would send prices spiraling lower.
At the beginning of the year, SSNLF and other chip makers commented that they expected the memory market to recover in 2H19.
However, this past earnings season, Broadcom (AVGO) and MU changed their tune. During its Q2 earnings call on June 13, AVGO's CEO stated that 2H19 will remain like 1H19, instead of improving.
MU commented that more capex cuts will be required this year in order to re-balance supply and demand.
While there's not much to be excited about in the memory space right now, SSNLF does have a major growth catalyst ahead as 5G infrastructure rolls out. In fact, SSNLF launched its first 5G enabled smartphone earlier this year.
However, it will take some time before that technology is widely available, making 5G a 2020 catalyst.
Key Takeaways: The headlines stating that SSNLF's guidance was better than expected is somewhat misleading in our opinion. A significant one-time gain in its display business pushed operating profit above analysts' expectations. On an actual operating basis, its results illustrate that demand for memory remains very soft.
Its weak guidance comes on the heels of MU and AVGO downplaying the prospects of a recovery in memory this year.
Looking further out, SSNLF does have a key catalyst ahead as 5G rolls out. But until then, it may be a bumpy ride for the company and other chip makers.