Samsung Has a Silver Lining in the Tech Slowdown

(Bloomberg Opinion) -- Samsung Electronics Co.’s fourth-quarter earnings tell a tale of falling demand for technology products and components.

Revenue dropped 10 percent – the most in almost four years – with operating profit down 29 percent, the worst decline since 2016.

Chips were the major reason for the weakness, the South Korean company told investors Thursday:

Fourth quarter earnings were affected by a drop in demand for memory chips used in data centers and smartphones. The System LSI and Foundry businesses also saw profits decline due to weak seasonality.

System LSI is the unit that makes processors and image sensors, while its foundry business manufactures chips for external clients. Samsung joins the growing list of global technology companies reporting trouble in the hardware sector – Taiwan Semiconductor Manufacturing Co., Apple Inc. and Nvidia Corp. among them.

But if investors look away from the profit-and-loss account and take a wander through the company’s two other financial reports – the balance sheet and the cash flow statement – they may be pleasantly surprised. Samsung’s cash holdings continue to rise and cash flow from operations looks solid.

Add to this Samsung’s announcement in October that it will be more careful with capex, and you start to see an alternative narrative playing out.

Free cash flow, for example, climbed 47 percent from a year earlier to hit a record in the December quarter despite that huge dip in operating income. FCF is a measure of how much cash a business is throwing off, and is calculated as cash flow from operations less capital expenditure. For the full year, that figure jumped 93 percent.

Samsung Has a Silver Lining in the Tech Slowdown

While growth in operating cash flow was relatively muted (up 3 percent for the quarter, and 8 percent for the year), Samsung’s fiscal discipline has lowered its spending drastically. 

With revenue set to decline this year, it’s likely that operating cash flow will also take a hit. Yet if Samsung maintains that conservative approach to spending, it could well preserve its ability to generate cash amid the downturn.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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