Samsung’s Q1 Profit Up On Strong S7 Demand, But Component Business Faces Tougher Outlook

Samsung Electronics (OTC:SSNLF) posted a relatively strong set of first quarter numbers, benefiting from strong demand for its recently launched flagship Galaxy S7 smartphones. While total sales rose by 6% year-over-year (in KRW), operating profits rose by roughly 12%. However, Samsung’s semiconductor division – which has been a recent source of growth for the company – had a mixed quarter, with profits declining amid stronger supply and lower pricing in the global memory markets. Below, we provide some of the key takeaways from Samsung’s earnings.

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Galaxy S7 Drives Mobile Performance

Samsung’s mobile division performed well, with operating profits rising by about 30% year-over-year driven by the early launch and strong uptake of the Galaxy S7 devices. Samsung launched the S7 in March, a full month ahead of its typical flagship refresh, allowing it to take advantage of weakness at key rival Apple, which saw iPhone sales drop sharply during Q1. Samsung is estimated to have sold 10 to 11 million units of the S7, with the more expensive curved-screen S7 Edge proving more popular among customers (estimated to account for 50%+ of the S7 sales mix). While supply of the Edge remains tight, Samsung appears to be better equipped to manage demand this time around after facing a severe supply crunch for the S6 Edge.

Samsung also saw improved profitability for low-end and mid-range handsets by streamlining its product portfolio and focusing resources on better-selling models. While IDC estimates that Samsung’s smartphone shipments declined by close to 1% year-over-year, operating margins jumped by 350 bps to about 14%, amid better cost management and a favorable sales mix. That said, the near-term outlook for the division remains mixed. Gartner estimates that smartphone sales are only projected to grow by about 7% this year, ending several years of double-digit growth. ((Gartner Says Global Smartphone Sales to Only Grow 7 Per Cent in 2016, Gartner, March 2016)) However, Samsung is looking to counter the market headwinds by expanding sales of high-end products such as the Galaxy S7 and the Note series, besides improving profitability of its lower-end line-up.

Components Division Faces Headwinds

Samsung’s semiconductor unit had a relatively tough quarter amid a weaker performance from its memory division, which is contending with strong supply and weaker pricing for DRAM and a weaker shipment outlook for computing devices. While semiconductor margins contracted by close to 500 bps year-over-year, revenues remained almost flat in dollar terms. Given the market headwinds, Samsung is focusing on expanding sales of high value-added products such as V-NAND SSD and high-density server/mobile DRAM, in addition to improving its cost structure via technology improvements. Samsung’s logic chip division (included in “Other Semiconductor” revenues) saw revenue grow amid increasing 14-nm chip shipments, although it declined sequentially as customers consumed from their inventory, reducing Samsung’s shipments.

Samsung’s display business swung to an operating loss, as the LCD business faced a supply-demand imbalance besides contending with a yield issue in adopting new TV panel production technology. Samsung has also been losing share in the global large-sized (9 inch+) LCD market, as its Chinese and Taiwanese rivals ramped up production of low-end and mid-range displays. However, the OLED business benefited from the launch of high-end products and higher panel shipments. The outlook for the OLED business remains strong, as an increasing number of vendors transition to these screens, owing to their lower power consumption, improving performance and falling prices.  This should be beneficial for Samsung, as it practically dominates the mobile OLED panel market, with a market share of about 95%. ^[1]

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1. In Displays, Samsung Galaxy S7’s OLED Is Killing It, Apple is Lagging: Researcher, Forbes, February 2016 [↩]