Samsung Q2 Preview: Are S6 Sales Being Hampered By Logistical Issues Or Just Weak Demand?

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (PINK:SSNLF) is expected to publish its Q2 2015 earnings on July 30, reporting on a crucial quarter that saw the company launch the flagship Galaxy S6 devices that it is banking on to turnaround its struggling smartphone unit. [1] We already have a sense of what to expect – the electronics behemoth recently projected that operating profits were expected to fall by 4.2% year-over-year to about 6.9 trillion won ($6.1 billion), with its top line expected to decline 8% to 48 trillion won ($42 billion). Although Samsung didn’t provide much color on the numbers, it’s safe to assume that it hasn’t been able to fully cash in on the initial launch momentum for the S6.

The precise reasons for the sluggish results will be more important. There have been multiple reports over the last two months indicating that Samsung was facing supply constraints for the curved screen version of the S6, which was more popular than anticipated. Such logistical issues can be addressed with time. However, there is also a possibility that the base S6, which was expected to bring in the volumes, is seeing slower than expected demand due to competition from the iPhone 6 as well as weakness in key markets such as Europe and China.

Trefis has a $1,334 price estimate for Samsung, which about 20% ahead of the current market price.

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See Our Complete Analysis For Samsung Here

A Lot Rides On The S6 For Samsung

Samsung’s smartphone division remains its most valuable segment, accounting for over 40% of its value and 70% of its current EBITDA, by our estimates. The key drivers of its valuation include huge volumes, reasonably high margins and relatively low capital intensity. However, the business has been struggling over the last year, due to intense competition from Apple’s (NASDAQ:AAPL) new big-screen iPhones at the high end and Chinese value vendors such as Xiaomi at the low end. The company’s smartphone market share fell by about 6% year-over-year to 24.6% during Q1 2015, according to IDC. [2]

While Samsung has several smartphone product lines at various price points, the flagship S6 is perhaps its most important smartphone launch in years, and its success is imperative for Samsung. The smartphone market is very dynamic and perception-driven, and a flagship product that can excite customers while bringing in volumes and profits could help to reverse the company’s recent fortunes. If the S6 is a hit, it could help Samsung shake off its recent troubles, potentially sprucing up its brand cachet.

Competition In The High End Could Be Hurting S6 Demand

The Galaxy S6 and S6 Edge were released to critical acclaim in April, and early interest in the devices appeared to be strong. Research firm Counterpoint estimated that Samsung shipped 6 million units as of the end of April, less than a month after the launch. The sales were better than the Galaxy S5 in the same period in 2014 and made the S6 the world’s second best-selling smartphone, behind Apple’s iPhone 6 series. However, sales are likely to have moderated following the initial launch euphoria, particularly for the base S6 model, given the strong momentum that Apple has been seeing in the large-screen smartphone space. Apple lacked a large-screen offering during the same period last year. Moreover, competition in the top end of the smartphone market is only expected to heat up in the coming months, with Apple prepping to launch the next iteration of the iPhone as early as September. The world’s most valuable company is reportedly very bullish on its upcoming device, planning an initial production run that is roughly 15% higher than for the iPhone 6. ((Apple’s Early iPhone Call, WSJ, July, 2015))

Poor Production Planning For The S6 Edge

Samsung has apparently been facing production constraints on the higher-margin S6 Edge model. Although the S6 Edge is similar to the base S6 in terms of features, its premium design and novel dual curved screen have made it popular with high-end smartphone buyers. Samsung had to open a new manufacturing facility for curved OLED screens about two months ahead of schedule in order to increase S6 Edge production, according to Bloomberg.  While having demand outstrip supply may seem like a nice problem to have, it could take a few more months for Samsung to fully ramp up production from its new facilities, and it’s likely that Apple’s new iPhones will find their way into the market by this time, limiting the potential upside for Samsung.

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Notes:
  1. Notice of 2015 Q2 Earnings Release Schedule, Samsung []
  2. Smartphone Vendor Market Share, Q1 2015, IDC []