Samsung Q4 Earnings Review: What Lies Ahead?

Samsung Electronics (PINK:SSNLF) posted a mixed set of Q4 2014 earnings on January 29. While the company’s device solutions business did well on the back of a better supply-demand balance in the memory markets and higher shipments of premium display panels, the IT and Mobile division continued its decline on a year-over-basis amid falling smartphone shipments.  Quarterly revenues fell by around 11% year-over-year to $48.1 billion, while net profits declined by around 27% to $4.89 billion. Separately, Samsung made good on its promise of increasing shareholder returns by announcing a 40% increase in dividends for 2014, in a move that will help to placate investors who had been pushing the company to return more of its nearly $57 billion cash pile. We believe that 2015 will be a crucial year of transition for the company, as it seeks to stabilize its challenged smartphone business and drive earnings growth through the expansion of its memory and logic chip businesses. Here are some of the key takeaways from Samsung’s earnings release and what to expect going forward.

Trefis has a $1,170 price estimate for Samsung, which is slightly below the current market price. We will be updating our valuation model and price estimate for Samsung to account for the earnings release.

See Our Complete Analysis For Samsung Here

Mobile Results May Bottom Out, Delivering A Hit Product Crucial

Samsung’s smartphone business continued to face headwinds through Q4, with revenues slipping by around 23% year-over-year to about $2.27 billion while operating margins also fell to about 7.5% from around 16% a year ago. Samsung’s smartphones have been challenged by Apple’s hot-selling iPhone 6 and 6 Plus and increasing competition from Chinese manufacturers such as Xiaomi. Samsung has been taking significant market share cuts in most key markets including China and during Q4, Apple actually shared the top spot in the global smartphone market with the company. Apple’s iPhone shipments grew 46% year-over-year to 74.5 million iPhones, while Samsung’s shipments dipped 13% to an estimated 74.5 million units. ^[1] However, there were some indicators that the business could be close to turning the corner.  The division’s revenue decline eased compared to the third quarter, when revenues fell by 34% year-over-year, and the segment’s operating margins also saw a small sequential uptick. Average selling prices for smartphones also rose sequentially, aided by the extended global availability of the high-end Galaxy Note 4. The divisions costs also came under control, driven by lower marketing expenses compared to Q3, when the company ran promotions to clear out excess inventory.

Samsung has been unable to sustain its momentum in the smartphone market over the past year, since its traditional strengths of marketing and manufacturing have been unable to compensate for its lack of product differentiation in crowded smartphone market where over 80% of devices run on Android OS. The company is looking to stabilize the smartphone business by improving its mid-range handset portfolio with products such as the A series, and potentially more offerings with a premium metal casing and design. A lot will also hinge on the company’s new flagship device, which will presumably be called the Galaxy S6. The smartphone market tends to be somewhat perception driven, and it is crucial for a vendor to have a high-end flagship device that can excite customers while bringing in the volumes and profits. A hit flagship product could help Samsung shake off its image of a being something of an also-ran in the high-end smartphone space.

Device Solutions Post Earnings Growth On Memory And Display Gains

Samsung’s device solutions business, which includes its semiconductor and display panels operations, had a solid quarter, with revenues rising by 4% to $16.14 billion and operating profits rising 46% to $2.85 billion. While the display panel business saw higher sales of premium panels (UHD, Curved and 60+ inch panels), the semiconductor business benefited from better supply-demand balance in the memory markets and a favorable product mix. The global DRAM markets have been expanding on the back of demand growth from mobile device and servers, while the NAND markets have been riding on the higher demand for Solid State Drives and mobile devices. Samsung also benefited from the sale of higher value memory products such as DDR4 RAM and higher shipments of memory solutions such as eMCP, which is used in smartphones. EMCP is basically a multi-chip package that combines DRAM and NAND flash memory into a single module. The company was also able to bolster profitability of its NAND memory operations through its 10nm-class migrations, which are likely to have improve production-efficiency.

The outlook for Samsung’s semiconductor business appears to be strong, with the company indicating that it expects to outgrow the broader DRAM and NAND markets this year. The company also provided a strong outlook for its non-memory chips business, indicating that sales could rise on the back of production ramp-up for logic chips manufactured using its new 14-nanometer process. Samsung’s 14-nanometer chips are touted to consume 35% less electricity, while having 20% more processing power and taking up 15% less space compared to 20-nm chips, making them ideal for mobile and wearable applications. ^[2] Samsung notes that these chips could account for about a third of its non-memory chip output by the year end. It seems increasingly evident that Samsung is betting its future on the semiconductor and components space given that these are areas in which it has a competitive advantage owing to its technology and scale. Last October, the company said that it would make its largest ever initial investment in a semiconductor facility, lining up about $14.50 billion to build chip manufacturing facilities in the Gyeonggi province in South Korea.

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1. Apple Becomes World’s Largest Smartphone Vendor in Q4 2014, Strategy Analytics, January 2015 [↩]
2. Samsung begins 14nm contract chip production, ZDNet, December 2014 [↩]