Samsung’s Q4 Earnings: Weakness in Smartphones Could Be Tempered By Semiconductor Growth

Samsung Electronics (PINK: SSNLF) is expected to publish its Q4 2014 earnings on January 29, reporting on what is likely to have been another challenging quarter for its flagship smartphone business. The company has provided preliminary earnings guidance numbers, indicating that consolidated sales could dip by roughly 12% year-over-year to about 52 trillion won ($48 billion) while consolidated operating profits are expected to drop 37% year-over-year to 5.2 trillion won ($4.8 billion), marking five straight quarters of profit declines. ^[1] However, the numbers are likely to be better compared to Q3 2014, when the company reported a 60% year-over-year operating profit decline.

Key factors that are likely to influence earnings in the mobile business include the pricing pressure and increased competition from Chinese handset manufacturers and a renewed threat from Apple, which launched the iPhone 6 in growth markets such as China and India earlier in the quarter. However, we believe that the company’s semiconductor and components business could provide some respite, amid strong demand and stabilized pricing for memory and possibly higher prices for display panels. In this note, we take a look at what to expect from Samsung this quarter.

See our full analysis for Samsung Electronics

Trefis has a $1,170 price estimate for Samsung, which is slightly below the current market price

Expect A Tough Quarter For Smartphone Business

Samsung’s smartphone business had proven to be a cash cow for the company over the last few years, owing to its large scale, high margins and low capital expenditures. Samsung’s mobile strategy has been underlined by a broad portfolio of handsets, larger screens and the company’s strong marketing and distribution. However, the business model has come under significant threat over the last year in both the high end and the low end of the market. For example, Chinese players like Xiaomi have been increasing their presence in the sub-$300 segment by offering products with high-end specifications at value prices, backed up by a clever go-to-market strategy that eschews traditional advertising and retail channels, in favor of social media and online sales. Samsung lost its top spot in the Chinese market to Xiaomi during Q2 and has also been steadily been ceding share to local rivals in India.

The company also faces a renewed threat in the lucrative high end of the market, with the introduction of Apple’s big screen iPhones. The launch deprives Samsung of one of its key distinguishing characteristics since large displays were something of a unique selling point for Samsung. Now, customers in the market for a premium smartphone may veer towards the software differentiation, ecosystem and user experience of Apple’s new devices. While Samsung’s latest premium phablet, the Galaxy Note 4, has received largely positive reviews, it seems unlikely to bring in big volumes. Although global handset market share data is not available yet for Q4, early reports indicate that Apple has gained significant traction in the high-end space. For instance, according to Counterpoint Research, in South Korea, an important market for premium phones, Apple’s market share soared to 33% in November from less than 15% before the iPhone 6 and iPhone 6 Plus were introduced, while Samsung saw its market share fall to about 46% from around 60%. ^[2]

Components Businesses Will Do Well On Demand, Pricing Improvements

Samsung’s semiconductor and components businesses should help to soften the decline in the company’s handset business. The semiconductor division is likely to benefit from tight supply and stabilizing prices in the memory markets. During Q3, the company had reported seeing robust demand for DRAM for mobile applications as well as a strong uptake for NAND memory in areas such as mobile storage and high-density PC and enterprise SSD products. During Q3, profits from Samsung’s semiconductor division exceeded its smartphone profits for the first time since 2011. The device solutions business (which manufactures semiconductor products and displays) accounted for about 57% of total operating profits during Q3, up from about 30% in the year ago quarter. We believe that Samsung could be refocusing its long-term growth strategy towards semiconductors and components, which are areas where it has competitive advantages owing to its technology and scale. The company had indicated that it would invest about $14.5 billion to build a new semiconductor facility in the Gyeonggi province in South Korea. The investment marks Samsung’s largest initial investment in a semiconductor facility. The company is also looking to establish itself as a key player in the logic chips business and is tipped to use its own 64-bit Exynos processor to power its next flagship smartphone.

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1. Samsung Electronics Preliminary Earnings Guidance (2014.4Q), Samsung [↩]
2. Apple’s Smartphone Sales in Asian Markets Soar – Counterpoint, WSJ, January 2015 [↩]