Samsung’s Strong Preliminary Q2 Results Point To A Resurgent Smartphone Unit

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (OTC:SSNLF) published its preliminary Q2 2016 numbers, indicating that its operating profit grew by about 17% year-over-year to 8.1 trillion won ($7 billion) – the highest level in about two years – while revenues likely rose by about 3% to about 50 trillion won ($43.31 billion). [1] Below we take a look at the factors that likely drove the results.

We have a $1,285 price estimate for Samsung, which is roughly in line with the current market price.

See our complete analysis for Samsung

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Demand And Pricing Power For S7 Series Likely Drove Top Line Growth

Samsung’s latest flagship smartphones – the Galaxy S7 and S7 Edge – were likely the biggest driver of the earnings increase. Both devices have garnered critical praise, and demand has been strong, with IBK Securities estimating that Samsung sold roughly 16 million units over the quarter. Handset average selling prices could also see an increase, given that demand is likely skewed towards the more expensive S7 Edge device. The curved screen Edge offers meaningful differentiation over other flagship handsets in the market, which has allowed Samsung to hold steady on its relatively steep $750+ price point close to four months post-launch. In comparison, Samsung’s key rival Apple has somewhat uncharacteristically resorted to promotions for some of its handsets, including the iPhone 6S. [2]

ASP Increase, Marketing Cost Reduction Likely Helped Margins

Based on the preliminary results, Samsung’s operating margins appear to have increased by about 200 basis points year-over-year to about 16.2%. This comes despite the fact that its high-margin semiconductor unit currently faces some headwinds (which we address below). While higher smartphone ASPs are certainly a factor driving margin expansion, there could be some cost improvements as well. Strong demand for the new flagships and relative weakness at Apple could be allowing Samsung to cut its marketing and promotional costs. There could be some manufacturing-related improvements as well; when Samsung first debuted its dual-curved screen phones in 2015, the firm struggled to meet demand amid potential yield issues. However, the manufacturing issues have been resolved this year, potentially aiding margins.

Memory and Display May Be Facing Headwinds

It is possible that Samsung’s components businesses had a more mixed quarter, on account of falling prices and a weaker global shipments outlook for computing devices. Gartner projects that the PC market (including ultra-mobiles) will decline by about 2% this year, while smartphone sales are only projected to grow by about 7%, ending several years of double-digit growth. [3] Samsung’s DRAM revenues could remain under pressure amid strong supply in the market, while its LCD display unit also faces mounting competition from Chinese and Taiwanese rivals. However, this could be partially offset by stronger sales of OLED displays – which Samsung is increasingly supplying to OEMs outside its mobile business – and value-added memory products such as V-NAND SSD.

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Notes:
  1. Press Release []
  2. Apple Summer Beats Promotion []
  3. Gartner Says Global Smartphone Sales to Only Grow 7 Per Cent in 2016, Gartner, March 2016 []