Samsung Q1 Preview: Semiconductors Will Drive Earnings As Smartphone Business Transitions

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (PINK:SSNLF) is slated to publish its Q1 2015 results on April 29, reporting on a quarter that likely saw the company rely on its semiconductor business to drive earnings, with its high-profile smartphone unit focused on stabilizing sales and prepping for the launch of the Galaxy S6 flagship, which hit stores in early April. The company has already issued its preliminary numbers for the quarter, indicating that operating profits likely fell by about 30% year-over-year to 5.9 trillion won (about $5.4 billion), while revenues fell by about 10% to about 47 trillion won (about $43 billion). While this represents the sixth consecutive year-over-year decline in quarterly profit, the numbers were better than expected and could indicate that the profit slide is moderating and things are likely to get better from here on. Here’s a quick look at some of the trends that will drive Samsung’s quarterly numbers (related: Samsung’s Better Than Expected Q1 Guidance Indicates That It Could Be Turning The Corner).

Trefis has a $1,285 price estimate for Samsung Electronics, which is about in line with the current market price. We will be updating our price estimate and valuation model for the company following the earnings release.

See our full analysis for Samsung Electronics

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Smartphones: Stabilization Is Possible On Galaxy A Series, Note 4 Sales

Samsung’s smartphone business has been facing headwinds over the past year, challenged by Apple’s (NASDAQ:AAPL) hot-selling iPhone 6 and 6 Plus and increasing competition from Chinese manufacturers such as Xiaomi. The company saw revenues at its handset division fall by about 20% last year while adjusted EBITDA margins have declined from levels of above 20% to about 15% last year, according to our estimates. However, we do believe that the business is turning the corner. While Q1 is typically a muted quarter from a shipment standpoint for most handset vendors, we believe that Samsung could see some improvement in margins as it has been focusing on cutting costs and revamping its handset portfolio with products such as the metal-bodied Galaxy A series (A3, A5, and A7) which is designed to take on mid-ranged offerings from Chinese players. The company could also benefit from extended global availability of its well-reviewed new phablet, the Galaxy Note 4. We believe that the the next quarter (Q2 2015) will be a significantly stronger quarter for the smartphone division, as the new flagship Galaxy S6 and its its curved-screen version called the S6 Edge hit stores in early April. If the largely positive first reviews of the S6 are any indicator, Samsung may well have a hit device on its hands. We expect the two products to outsell the company’s previous two flagships and ASPs are also likely to be better, given that customer preference is expected to be skewed towards the Edge models (which sell for a $100 premium over the base S6). Samsung has also dropped the Micro SD card slot (for user-expandable memory) on the device, in a move that could steer customers towards higher-margin high-capacity offerings.

Semiconductor: Value Added Memory Products, 14nm FinFET Process Ramp

Samsung’s semiconductor division is likely to be a key driver of earnings this quarter. The memory business, which primarily produces NAND and DRAM chips, accounts for over 70% of the company’s semiconductor sales. During 2014, the memory business saw revenues grow by 24% to about $28 billion, largely driven by strong demand and favorable ASPs for DRAM. The global DRAM markets have been expanding on the back of demand growth from mobile device and servers and Samsung could see a strong uptake for its value-added memory products such as DDR4/LPDDR4 RAM. The NAND memory markets have been riding on higher demand for server and PC solid-state drives (SSD) and high-density mobile storage. The company is also likely to bolster the profitability of its NAND memory operations through its 10nm-class migrations. Samsung’s logic chip business primarily operates as a foundry (contract manufacturing chips for other semiconductor companies), besides developing and manufacturing its own processors and semiconductor products. The division could see a boost this quarter as it began mass production of chips using its new 14nm FinFET process. The 14nm process is among the most advanced logic process technologies in the industry and enables vendors to offer smaller, faster and more energy-efficient products. Intel is the only other company that currently has a 14nm offering. This technology is expected to help Samsung win business from Apple (for the next iteration of its iPhone) as well as other semiconductor companies such as Nvidia and Qualcomm (related: Trends That Will Drive Samsung’s Semiconductor Business In 2015).

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