What’s Driving Samsung’s Projected Earnings Rebound?
Samsung Electronics (PINK:SSNLF) published preliminary Q3 2015 earnings last week, indicating that quarterly revenues likely rose 7.5% year-over-year to to 51 trillion won ($44.6 billion), while operating profits likely jumped 80% to about 7.3 trillion won ($6.3 billion), ending the company’s two-year streak of declining profits. [1] Although the company didn’t break out segment results or provide additional color on the numbers, it’s possible that a meaningful part of the improvement was driven by stronger components sales and currency tailwinds. Samsung’s components contracts are mostly done in U.S. dollars and the dollar has appreciated by about 12% against the won over the past year, helping Samsung’s won-denominated earnings. Additionally, Samsung could have seen better costs relating to the restructuring of its beleaguered smartphone unit.
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Apple, Chinese Vendors Drive Component Sales
Samsung is banking on its device solutions (semiconductor and display products) business to drive its turnaround, and it’s possible that the division accounted for much of the revenue growth on a currency-neutral basis. The business accounted for about 55% of Samsung’s operating profits during the first half of the year. [2] The logic-chip unit, which manufactures microprocessors for third parties and for Samsung’s own mobile unit, is likely to have been the biggest growth lever on a year-over-year basis. The division took a hit in 2014, as Apple (NASDAQ:AAPL) apparently shifted orders for its custom A-series chip used on the iPhone from Samsung to TSMC. This is likely to have changed this year, as Samsung won contracts to partially supply the new A9 processors for the iPhone 6S, leveraging its much touted 14-nm FinFET process technology. Apart from this, Samsung could have also seen better sales of display products, driven by demand from fast growing Chinese handset vendors. There’s also a possibility that the memory business benefited from stronger server demand as well as the launches of new smartphones with higher NAND and DRAM densities.
Smartphone Business Could See Cost Improvements
Although it’s unlikely that the smartphone business saw a meaningful rebound in revenues this quarter, amid slowing growth in global demand and competition from Apple’s new launches, margins are likely to have benefited from lower costs as well as an incremental upside from two new high-end launches – the Note 5 and the S6 Edge+. Samsung could see its marketing and promotional costs decline sequentially as it scales down the massive campaign relating to the launch of the Galaxy S6 handsets during Q2. The company has also been streamlining its smartphone portfolio, indicating that it would nix between 25% to 30% of its smartphone models in 2015. The move is likely to help the company reduce procurement and manufacturing costs, while making inventory management easier. Samsung has also being using in-house applications processors for some of its high-end devices including the Galaxy S and Note series and this could also improve margins.
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