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Forecasts looks gloomy; may reflect lull in high-end smartphone sales and loss of semiconductor business

Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935), one of the largest semiconductor fabrication firms, the world's largest smartphone maker, and the world's second largest tablet maker released a forecast for its Q3 2014 earnings and the results look relatively dire.

Operating profit is down 60 percent on a year-on-year basis, at KR¥4.1T ($3.85B USD), down from KR¥10.2T ($9.56B USD at previous exchange rates) in Q3 2013.  Samsung expects the final audited result will fall between KR¥3.9T and KR¥4.3T.  Revenue fell substantially as well to KR¥47.0T ($44.09B USD) (with an estimated audited range of KR¥46.0T to KR¥48.0T).

Samsung's troubling slowdown in 2013 appears to have transformed unexpectedly into an alarming free fall.  A couple issues may be to blame.  First, Samsung is facing increased competitive pressure from Chinese OEMs such as Xiaomi on the budget front.  Second, on the premium device front, Samsung faced a far tougher fight this year with HTC Corp. (TPE:2498) and LG Electronics Inc. (KRX:066570)(KRX:066575), despite a relatively impressive showing with the Galaxy S5.

Galaxy Note 4
Samsung is counting on the Galaxy Note 4 to revitalize its profits.

While Samsung should get a boost from the launch of the Galaxy Note 4 in Q4 2014, the flagship phablet release comes too late to salvage the smartphone unit's once impressive profit numbers.  And there's more bad news as reportedly the Note 4 is suffering from production defects relating to a screen gap.

It is also highly likely that the lower forecast reflects the partial loss of the Apple, Inc. (AAPL) AX series system-on-a-chip fabrication contract.  Last year in Q3 2013 the semiconductor unit accounted for roughly $2B USD in profit.  Recent reports indicate this year's profit may be down by more than $1B USD.

iPhone 6 Plus
Samsung reportedly lost nearly two thirds of A8 processor orders to TSMC. [Image Source: iFixit]

In line with early reports, recent news indicate that Taiwan Semiconductor Manufacturing Comp., Ltd.'s (TPE:2330) (TSMC) is fulfilling roughly 60 percent of A8 chip orders for the iPhone 6/6+, with Samsung filling in for the rest.  Samsung is hoping its 14 nm process will win back the majority of orders for next year's A9 SoC.  But the bad news is that the push for 14 nm is requiring increased capital spending, which is expected to further deteriorate the already diminished semiconductor division profit.

Won lost
[Image Source: SeongJoon Cho/Bloomberg]

Next year will be a crucial test of whether Samsung can hold of its Chinese rivals and fab rivals alike.  This could be a brief inflection point as Samsung re-gears, or it could be the start of a long and painful downturn for South Korea's largest technology company.

Source: Samsung [press release]





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