Reading Into Samsung’s Preliminary Q4’15 Numbers

Samsung Electronics (PINK:SSNLF) published a mixed set of preliminary results for Q4 2015 on Friday, indicating that its operating profits likely grew by about 15% to 6.1 trillion won ($5 billion) with sales remaining almost flat at about 53 trillion won ($44 billion). ^[1] Although Samsung did not provide specific details of what drove the numbers, it’s likely that it benefited from higher shipments of mid-range smartphones as well as better semiconductor foundry sales. In this note, we review some of the possible drivers of the earnings and also look at what lies ahead for the company going into 2016.

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Trefis has a $1,220 price estimate for Samsung, which is about 20% ahead of the current market price.

Mid-Range Models. Price Cuts Likely Drove Smartphone Sales

Samsung’s smartphone profits are likely to have edged higher, driven by higher shipments of mid-range smartphone models. Shipments are likely to have risen by at least 10% year-over-year for the quarter. Samsung operates in a crowded Android smartphone market (80%+ OS share), where product differentiation is very weak. The company has been facing intense competition from Chinese value vendors, which are making headway in the low end of the market, as well as Apple, which has been cornering the top end. However, Samsung has shown a willingness to compete on price, trading off ASPs and margins in favor of higher volumes. For instance, in mid-2015 the company cut prices on its flagship Galaxy S6 devices, while promoting its cheaper, well-specified Galaxy A and J series smartphones. During Q3 Samsung said that average selling prices for its devices fell to between $180 and $190, and it’s likely that the number remained at similar levels through Q4 as well (related: How Samsung’s Smartphone Business Could Get Back On Track). Overall, we see 2016 as being a tough year for the smartphone business amid economic headwinds in China and slowing smartphone sales growth (projected at single digit levels).

Foundry Operations Possibly Helped Semiconductor Business

Samsung’s semiconductor business likely performed better compared to last year on account of stronger foundry sales and higher shipments of value-added memory products. Samsung has ramped up production of its 14-nm process, which has helped it win business from Apple (for the iPhone 6S) as well as other fabless semiconductor players. According to analysts surveyed by Bloomberg, semiconductor operating profits and sales likely rose by roughly 20% each to 3.3 trillion won and 12.7 trillion won, respectively. ^[2] However, the outlook could be more challenging going into 2016, amid slowing global smartphone growth, which is likely to hamper sales of components including displays, logic chips and memory. Even Apple, the largest smartphone manufacturer by revenue, is reported to be trimming orders with suppliers, after nearly eight straight years of growth. Separately, the memory business is also likely to face headwinds amid increasing supply and plummeting prices. While Samsung should be able to weather a downturn better compared to other memory players, on account of its process technology advantages and scale, earnings could take a hit as memory accounts for 70%+ of its semiconductor revenues.

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1. Samsung Electronics Press Release [↩]
2. Samsung’s Earnings Miss Underlines Sputtering Global Demand, Bloomberg, January 2016 [↩]