By Joyce Lee and Hyunjoo Jin

SEOUL (Reuters) -Samsung Electronics on Friday warned of sluggish sales of its artificial intelligence chips in the current quarter due to U.S. export restrictions to China, and as it worked towards launching an improved version of its high-end chips.

Advanced chips used for AI have been the bright spot in the weak memory chip market, but rival SK Hynix is Nvidia's main supplier of high-bandwidth memory (HBM) chips used in AI graphics processing units (GPUs), whereas Samsung has struggled to meet Nvidia's requirements.

The U.S. in December also launched a fresh crackdown on China's semiconductor industry, including restricting HBM chip sales. Samsung, which relied on Chinese customers for about 20% of HBM sales, according to analysts, was expected to be hit much harder than its peers.

"There will be some temporary restrictions in our HBM chip sales in the first quarter," said Kim Jae-june, executive vice president of Samsung's memory business, during an earnings call on Friday.

"We expect some impact on our HBM demand from not just U.S. restrictions on exports of high-end chips but also a shift in demand for improved chips by major clients," he said.

Samsung, which started sales of 8-layer and 12-layer HBM3E products in the third quarter, said it planned to launch the improved HBM3E products in March.

Nvidia CEO Jensen Huang said this month that Samsung has to "engineer a new design" to supply HBM chips to his company, Korea JoongAng Daily reported.

Samsung said in October that it was making progress in supplying HBM chips to Nvidia, but has not released any public updates since then.

Kim said supply constraints for GPUs had also been leading to delays in projects from some customers, weighing on demand for memory chips used in servers used in data centres.

The GPU chips made by Nvidia are in short supply due to solid demand and engineering challenges in making them.

EARNINGS GROWTH LIMITED

Samsung confirmed its operating profit was 6.5 trillion won ($4.48 billion) in the fourth quarter, down 29% from the third quarter.

The South Korean firm said it expected limited first-quarter earnings growth due to weak memory chip business conditions, including lacklustre demand for smartphones and personal computers.

Samsung forecast mobile phone market growth would slow this year, as U.S. President Donald Trump's policy changes and "inflation are expected to create a range of uncertainties and weigh on consumer sentiment."

Samsung, which unveiled its latest flagship Galaxy phone with artificial intelligence features last week, aimed to revive mobile margins to above 10% this quarter, after the business suffered a profit decline due to competition with Apple and Chinese rivals.

But Samsung used Qualcomm's application processors for the entire Galaxy S25 lineup, ditching its own mobile chip Exynos, a setback that Samsung said would lead to continued weakness in its business of designing logic chips in the current quarter.

Shares in Samsung were down 2.8% after a four-day holiday break, versus a 0.75% drop in the wider market. SK Hynix shares were trading 9.6% lower on concerns about the impact of low-cost Chinese AI model DeepSeek.

DEMAND RECOVERY

Samsung, the world's largest memory chip maker, expected overall memory market demand to recover from the second quarter.

Analysts said Samsung's 2025 results and stock price will depend on whether it can supply volumes of advanced 12-layer HBM3E chips to Nvidia.

SK Hynix and the world's largest contract chipmaker, Taiwan's TSMC, both reported record quarterly profit figures this month due to the AI boom, with SK Hynix topping Samsung's numbers for the first time.

Samsung's fourth-quarter operating profit was up 130% from a low base a year earlier when the memory chip industry was still struggling with its worst downturn in decades and in line with preliminary figures it reported earlier this month.

Operating profit in Samsung's mobile phone business fell 22% to 2.1 trillion won in the fourth quarter from a year earlier.

Its chip division swung to an operating profit of 2.9 trillion won, but that was less than half the 8.08 trillion won profit smaller peer SK Hynix reported during the same period.

Samsung said detailed investment plans for 2025 have not been finalised, but memory chip capital spending would be similar to last year's investment.

($1 = 1,447.5200 won)

(Reporting by Joyce Lee and Hyunjoo Jin; Additional reporting by Stephen Nellis in San Francisco; Editing by Miyoung Kim and Jamie Freed)