Strong Component Demand Drives Samsung’s Q2 Results

Samsung Electronics (OTC:SSNLF) recently published its Q2 2017 results, posting its strongest-ever operating profits, driven by strong demand and pricing for memory products and a resurgent smartphone business. While revenues rose by about 20% year-over-year to 61 trillion won ($54.8 billion), operating profits grew by about 72% to 14.07 trillion won ($12.6 billion). Below we take a look at some of the factors that drove Samsung’s results and what lies ahead for the company.

We have a $1,812 price estimate for Samsung Electronics, which is around 10% below the current market price.

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Components Business Remains Strong

Samsung’s components business (which includes its semiconductor and display operations) had a solid quarter, with revenues rising by 37% year-over-year to 25.25 trillion won ($22.7 billion) and operating margins growing by 22% to around 38%. The memory business remained the biggest driver, with revenues rising by around 46% year-over-year. The DRAM market has been seeing demand growth due to higher DRAM content in mobile devices. Supply has also temporarily slowed, as major producers transition their fabs to ≤20nm process technologies this year. While Samsung benefited from the broader market tailwinds, it has also been focusing on more lucrative segments of the market, such as high-density server DRAM and low-power LPDDR4x.

NAND demand has also been robust, as mobile device vendors have been increasing memory density on their devices, while cloud computing companies have also been boosting SSD capacity on their servers and data centers. On the supply side, some major manufacturers have been transitioning from 2D planar NAND to 3D NAND, creating some constraints. Samsung appears to be ahead of the curve with this transition, as 3D NAND already accounts for a bulk of its output, with the firm intending to shift over half of its production mix to its next generation 64-Layer 3D NAND by the end of this year. This could put Samsung at an advantage in the near term.

Samsung’s display unit also fared well, driven by demand for small-size OLED panels that are used in high-end smartphones. While the demand is likely to remain strong in the near term, with Samsung tipped to be the sole supplier of OLED displays for Apple’s 10th anniversary iPhone, there could be some margin pressures as the firm indicated that it could see increased costs stemming from the ramp-up of some new capacity.

Galaxy S8 Drives Telecom Business, But Margins Shrink 

Samsung’s telecom revenues rose by 13% year-over-year to 30 trillion won ($27 billion), driven primarily by the Galaxy S8, its first high-end device after the fire-prone Note 7. The company noted that sales of the device were stronger compared to its predecessor, the Galaxy S7. However, margins for the telecom division faced some pressure, falling by about 250 bps year-over-year to 13.5%, likely driven by higher marketing expenses for the new devices and some discounting in markets such as the U.S. While Samsung’s smartphone sales could benefit from the launch of the new Galaxy Note model (likely due in August), the firm is likely to face more intense competition with the launch of Apple’s 10th anniversary iPhone and a next generation Pixel device from Google.