Samsung Q3 Preview: Weak Smartphone Business Will Overshadow Memory Gains

October 27th, 2014 by Trefis Team
SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung (PINK: SSNLF) has scheduled its Q3 2014 earnings call for Thursday, October 30. The company provided a snapshot of its earnings earlier this month, indicating that it expects results to decline significantly, impacted largely by a weaker market for its smartphones and the cascading impact that it has had on the OLED and System LSI businesses. The company expects consolidated sales to fall by 20% year-over-year to around 47 trillion Korean won ($44.65 billion) , while operating profits are expected to fall by 60% to 4.1 trillion won ($3.90 billion). [1] Here is a brief overview of what to expect when the company reports earnings.

Trefis has a $1,160 price estimate for Samsung, which is about 10% ahead of the current market price.

See Our Complete Analysis For Samsung Here

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Smartphone Business Will Continue To Decline

Samsung’s smartphone business, which has been its cash cow in recent years, has been witnessing significant headwinds.  The company’s low and mid-range models have been contending with intense competition from low-cost manufacturers in emerging markets. In China, for instance, Xiaomi and Lenovo have been eating into the company’s market share in the sub-$200 segment by offering products with high-end specifications at low prices. Samsung shipped 15% fewer smartphones in China during Q2, and lost its top spot to Xiaomi. [2] The introduction of Google’s Android One platform for low-end phones could further add to the company’s woes. Things don’t look good in the high end of the market either. Apple recently launched its new large-screen handsets – the iPhone 6 and 6 Plus. The launch deprives Samsung of one of its key distinguishing characteristics, since large screen sizes have been something of a selling point for Samsung’s high-end phones. While Samsung has responded with the launch of its Galaxy Note 4 Phablet, which has garnered very positive reviews, many customers could still veer towards the software differentiation, coherent ecosystem and user experience of the large-screen iPhone.

In its pre-earnings guidance, the company said that smartphone shipments rose marginally during Q3, although earnings were impacted by higher sales promotions. This drove up marketing expenses and lower average selling prices, which were brought about by a greater mix of low-end mobile devices. The company’s vertically integrated model has meant that its OLED and System LSI product segments also saw profitability decline due to weaker performance from the mobile division. [1]

Memory Business Should Do Well

Samsung expects the earnings for its memory business to improve sequentially, aided by strong seasonal demand from the PC and server market, improved pricing and a tighter supply-demand balance. Samsung could also benefit from process improvements and new technologies. For instance, the company has been manufacturing more 20 nm-class DRAM chips, which offer lower power consumption while still being very production-efficient. The NAND memory market is also expected to have transitioned from a period of oversupply during the first half of the year to a more balanced supply environment, owing to stronger demand from OEM customers, and this could bode well for Samsung in the near term. [3] Considering its current woes in the smartphone business, we believe that Samsung could be refocusing its growth strategy towards semiconductors and components, which are areas where it has competitive advantages owing to its technology and scale. Earlier this month, the company said that it would invest 15.6 trillion won ($14.5 billion) to build semiconductor manufacturing facilities in the Gyeonggi province in South Korea. The investment marks Samsung’s largest initial investment in a semiconductor facility.

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Notes:
  1. Samsung Electronics Pre-Earnings Guidance (2014.3Q), Samsung, October 2014 [↩] [↩]
  2. Xiaomi Overtakes Samsung in China Smartphone Market, WSJ, August 2014 [↩]
  3. Expect Tight Supply for Commodity DRAM, EPS, July 2014 [↩]