Samsung Posts Mixed Q4 Results, Braces Itself For A Tough Year Ahead

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (PINK:SSNLF) published a relatively mixed set of Q4 2015 numbers, with net profits declining 40% year-over-year amid weaker semiconductor margins, lower smartphone revenues and FX headwinds in emerging markets such as China. The consumer electronics behemoth also provided a challenging outlook for 2016, as the global smartphone and IT markets are likely to slow, potentially taking a toll on both Samsung’s smartphone business as well as its component sales to other smartphone and IT vendors. Below, we take a brief look at some of the key takeaways from the earnings release and what lies ahead for Samsung.

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

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Smartphone Volume Growth Coming At The Expense Of Pricing

IDC estimates that Samsung shipped a total of 85.6 million smartphones during Q4, marking a 14% increase over the last year. [1] However, much of the growth stems from an easy comparison with Q4 2014, when Samsung faced intense competition and market share losses with the launch of Apple’s first large-screen iPhone. Since then, 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. The weaker ASPs reflected in the results, with smartphone revenues declining by about 5% year-over-year to 25 trillion won ($20.73 billion). However, operating profits increased slightly, likely driven by sales of high-margin products such as the Galaxy Note 5, better cost management as well as the firm’s move to streamline its product portfolio by focusing resources on better-selling models. [2] 2016 could prove to be a challenging year for the smartphone business, amid a slowing smartphone market (single-digit growth expected) and global macro headwinds, although Samsung should benefit from the launch of the Galaxy S7 (expected in March), as well as better cost management.

Foundry Operations Drive Semiconductor Revenue As Memory Lags

Samsung’s semiconductor unit saw revenues rise by about 24% to 13.21 trillion won ($10.95 billion), driven primarily by stronger logic chip sales. Memory sales, on the other hand, remained almost flat, growing by under 2% to 8.34 trillion won ($6.9 billion) due weaker pricing and a stronger global supply of DRAM memory chips. Samsung’s foundry unit, which manufactures logic chips for third parties, has seen business expand amid higher sales to Apple (for the iPhone 6S) as well as other fabless semiconductor players. The company recently said that it had begun mass production of chips using its second generation 14-nm process, which can produce chips that are up to 15% faster and power efficient compared to chips produced on last year’s process. This new technology will be used in Samsung’s new custom-core Exynos 8890 as well as on Qualcomm’s new Snapdragon 820. However, Samsung’s semiconductor and broader components divisions could see more challenging times ahead, amid slowing global smartphone and consumer electronics growth, which is likely to hamper sales of components including displays, logic chips and memory. Even Apple, the largest smartphone manufacturer by revenue, expects to post its first ever year-over-year decline in iPhone sales during the first calendar quarter of this year.

Key Earnings Data

  • Revenues grew by 11% to 53.32 trillion won ($44.21 billion) , slightly ahead of the company’s guidance.
  • Operating profits grew by about 16% year-over-year to about 6.14 trillion won ($5 billion.1), matching guidance.
  • Operating cash flows rose marginally to 12.36 trillion won ($10.24 billion).
  • Cash balance grew to 71.53 trillion won ($59.2 billion).

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Notes:
  1. IDC: Samsung retains leadership in smartphone shipments for both Q4 and 2015, GSM Arena, January 2016 []
  2. Samsung Earnings Supplementary Presentation []