Smartphone Weekly Notes: Apple Makes AI Acquisitions; Samsung Projects Earnings Rebound


The smartphone industry had an interesting week, headlined by Samsung (PINK:SSNLF) publishing a strong set of preliminary earnings, indicating that operating profits likely rose by 80% year-over-year and BlackBerry (NASDAQ:BBRY) indicating that it could exit the handset business, unless it sells about 5 million phones a year. In other news, Apple (NASDAQ:AAPL) reportedly acquired two artificial intelligence-related start-ups. Here’s a quick analysis of the news that mattered in the smartphone industry last  week.

Samsung’s Projects Stronger Q3 Earnings

Samsung Electronics published preliminary Q3 earnings, indicating that revenues likely rose 7.5% to to 51 trillion won ($44.6 billion), while operating profits likely jumped to 80% to about 7.3 trillion won ($6.3 billion). ((Samsung Electronics Pre-Earnings Guidance)) This marks the company’s first year-over-year profit increase since Q3 2013. While Samsung did not outline specific reasons for the improved results, it’s likely that the components business had a big role to play, driven by demand from Apple and Chinese smartphone vendors. Apple is apparently using Samsung’s 14-nm logic chips on a bulk of its new iPhone 6S devices that launched last month. Additionally, the company is likely to have benefited from currency tailwinds, since most of its components contracts are denominated in the U.S. dollar, which has appreciated by about 12% against the won in the past year. Samsung’s smartphone business could have also seen a slight improvement in the last quarter. The company has been streamlining its device portfolio to cut costs, while also launching well reviewed high-end devices such as the Note 5 and Galaxy S6 Edge+.

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Trefis has a $1255 price estimate for Samsung stock, which represents a 25% upside to the current market price. We are modelling revenues of about $195 billion for CY’15.

BlackBerry Targets 5 million Smartphone Shipments

Blackberry CEO John Chen recently said that he has set a goal of selling about five million smartphones this year, a minimum number he believes will be required to make the business profitable. He hinted that the company could exit the the handset business altogether if these targets are not met. ((BlackBerry CEO wants to sell 5 million phones a year, The Verge, October 2015)) The comments aren’t surprising, as BlackBerry has been struggling to turn around the smartphone unit as its high-end BB10-based devices such as the Passport and Classic failed to find favor with customers. Handset sales fell to just 800,000 units in fiscal Q2, down by about 60% year-over-year, and its share of the smartphone market fell to about to about 0.2%. BlackBerry is betting the future of its smartphone business on a new Android device dubbed the Priv. The company is counting on the handset, which combines BlackBerry’s robust security features and Android’s massive software ecosystem, to appeal to a broader audience.

Trefis has a $8 price estimate for BlackBerry’s stock, roughly in line with the current market price. We are modelling revenues of about $2.35 billion for CY’15. We estimate the company’s FY’16 loss at $0.39/share.

Apple’s Artificial Intelligence Acquisitions

Apple made two AI-related acquisitions in recent weeks, buying VocalIQ – a company that is working on enhancing a computer’s ability to understand human speech, and Perceptio, a company known for its image-recognition software that can run within a smartphone without having to offload data onto the cloud for processing. Artificial intelligence has become a hot area in the smartphone industry, as companies look to make devices smarter and more proactive, carrying out tasks from recognizing objects in photos or videos to providing to conversational search capabilities. Apple’s acquisition strategy has generally focused on small companies with niche technologies that can be incorporated into its products and these deals seem to be no different. It’s likely that some of these technologies will be incorporated into the Siri intelligent assistant and imaging applications on Apple’s popular iDevices.

Trefis has a $142 price estimate for Apple, which implies a 25% premium over the current market price. We are modelling revenues of about $237 billion for CY’15. We estimate the company’s FY’15 EPS at $9.45.

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