Samsung Group Chairman Lee Kun-hee can't be happy with Samsung Electronics' struggles.  (Source: AP)
Android's top OEM is still a force to be reckoned with, but looks lost in terms of the market

Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) like would be happy to wash its hands of its holiday quarter.  The South Korean electronics giant saw bad go to worse, with a string of product disappointments for the quarter, capped with Wednesday evening's embarassing earnings release.

I. Less Money, Mo' Problems

For its Q4 FY2014 (calendar Q4), Samsung made little progress on the financial front with profit plunging to KRW¥5.29T ($4.87B USD) on a revenue of KRW¥52.73T ($48.6B USD).  That's down more than 36 percent and 11 percent, respectively, from the profit of KRW¥8.31T ($7.65B USD) Samsung posted during the 2013 holiday quarter on a revenue of KRW¥59.28T ($54.6B USD).

Samsung profitability
[Image Source: Techpinions]

After creeping close to Apple in quarterly profit back in 2013, Samsung has backslid ever since on the financial front.  It now is making a little over a fourth what Apple made for the quarter (Apple's profit was $18B USD).

Korean Won
Samsung earned roughly a quarter what Apple did in Q4 2014. [Image Source: Bloomberg]

Bear in mind the 2013 holiday quarter was hardly cause for celebration,  with Samsung announced last January its first profit drop in two years.  But if Q4 FY2013 was bad, Q4 FY2014 was worse.

Perhaps most troubling is the fact that Samsung sold only 95 million total feature phones and smartphones. To put that number in comparison, Microsoft Corp. (MSFT) sold 50.2 million total phones for the quarter.  You read that right -- with feature phones included Samsung could not even outsell good old Nokia Oyj.'s (HEL:NOK1V) veteran unit 2-to-1.

Back in 2013 a surging Samsung Electronics looked poised to leave a plummeting Nokia Devices in the distant dust.  Now the former Nokia unit -- under Microsoft's lead -- is surging, and Samsung is the one dropping in units sales.  As a result the pair are locked in a very real battle for unit sales in the low end space.

II. Samsung Loses Smartphone Unit Sales Lead to Apple

On the smartphone side things aren't looking much better.  Samsung doesn't reveal its breakdown of smartphone sales versus feature phone sales, but it did say that smartphones accounted for a 
"high 70 percent" of total phone unit volume, indicating sales of between 71 and 75 million units.

For more precise numbers you have to look at analyst estimates.  A quartet of analysts at Strategy Analytics, a mobile research director at Strategic Analytics puts forth the first numbers, based on both distributor data and usage tre.  Strategy Analytics, who basis its figures partially on usage trends, was the most optimistic, predicting Samsung moved 74.5 million smartphone units for the quarter.
Strategic Analytics

A second estimate from Neil Shah of Counterpoint Research, indicates Samsung sold 73.8 million smartphones.  Traditionally Counterpoint's numbers have been highly accurate as it bases its research on distributor analytics.

smartphone sales by quarter -- Q4
But just to shake things up a third estimate from Creative Strategies analyst Ben Bajarin put forth an even gloomier prediction, at around 71.0 million units. Bajarin argues that his methodology is the soundest as he claims to have access to a lot of end sales data (e.g. presumably internal figures from major retailers.  He writes:

I prefer to base my models attempting to track sell through. I have access to live device data which helps me put parts of this puzzle together. From all the sources I have, and trying to get closer to sell through by the vendors, this is where I landed. 

Whether he's wrong or right, there's a bigger picture here: two out of three analysts predicted Apple to have passed Samsung in smartphone unit sales.  And even Strategy Analytics, who claims the two are tied, titles its analysis "Apple Becomes World's Largest Smartphone Vendor in Q4 2014".

Apple and Samsung are clearly in a dead heat in global smartphone shipments, although Apple appears likely to have had a narrow sales lead and technically to have seized the top spot in smartphone unit shipments for the quarter.

iPhone 6 sales

That's a stunning fall for Samsung, who during the 2013 holiday quarter controlled roughly 30 percent of smartphone sales.  Apple in Q4 2013 had been outsold 2-to-1 by Samsung, in spite of the launch of the iPhone 5S.  It had been three years since Apple had last topped smartphone unit sales charts globally.   The last time was in Q4 2011.  Now the comeback is complete, and Apple once more has ridden to the top, at the expense of Samsung.

III. Chinese OEMs See Hot Growth, Samsung is as Cold as Ice

At the root of the problem is the fact that the market is growing, but Samsung's sales base isn't.  Of the seven biggest smartphone manufactuers by unit sales, Samsung was the only one not grow in the calendar quarter.  Instead it shrunk by ~15 percent in smartphone unit shipments, according to the various analysts, while Apple grew 50 percent.

But this isn't solely an issue of Apple tapping some secret formula.  Apple's growth is matched by, or in some cases exceded by, Chinese OEMS.

Privately held Xiaomi -- the world's third largest phonemaker, actually massively surpassed Apple's growth (~46 percent) with incredible growth of 167 percent on a year-on-year basis.  Elsewhere in China, the Lenovo Group, Ltd. (HKG:0992) grew ~44 percent, Huawei grew ~42, and relatively unknown TCL Communication Tech Holdings Ltd. (HKG:2618) (who sells products under the ALCATEL brand).  Even Samsung's fellow South Korean OEM LG Electronics Inc. (KRX:066570)(KRX:066575) managed modest growth of 21 percent.
Xiaomi gave buyers what they wanted -- metal-body smartphones with a high-end hardware spec at a relatively affordable price (Xiaomi Mi4 is pictured).  The Chinese OEM is the fastest growing smartphone maker in the world today.

Samsung was the only loser in unit sales, and as result it failed to execute on a golden opportunity.  Global smartphone shipments crossed the 350 million mark for the first time and total phone shipments passed the half-billion mark, quarterly for the first time.  But while Microsoft, Apple, Chinese OEMs, and even LG Electronics revelled in these gains, Samsung was left wondering what went wrong.

Full year results weren't quite as bad.  For the year Samsung managed to narrowly outsell Apple, roughly 3-to-2 in smartphone unit shipments, with Samsung's annual production flat at just over 316 million units.

Samsung always seems some lull at the year's end as Apple releases its smartphone in the summer or -- lately -- in the fall.  Chinese OEMs also often launch flagship product later in the year.  Samsung typically refreshes its Galaxy Note line in the fall -- traditionally its second-highest selling high-end model -- so some drop off is expected.

But both unit sales and financials show that Samsung is stuttering even in terms of its historic sales cycle and has stopped growing in sales.  If this continues we may see Xiaomi and Apple pass Samsung in annual unit sales by 2017, if not sooner.

IV. Failure by Design

Samsung's biggest failures have been on the high end, but it's also facing increased pressure on the low end by Chinese OEMs and Microsoft's Devices unit.  On the high end its Galaxy S5 received general positive reviews, but failed to spark sales growth.  The Galaxy Note 4 was overshadowed badly by the launch of iPhone 6/6+ and has failed to achieve Samsung's sales expectations.

The worst failure was the mid-range Galaxy Alpha which flopped in sales.  Samsung made the rare move of publicly axing the device, turning its focus to the more competitive Galaxy A-Series, including the recently announced Galaxy A7.
Galaxy Alpha
Samsung finally gave a metal-body model a go with Galaxy Alpha, but the device was priced too high for its spec and flopped.

Overall, Samsung's problems appear to boil down to failure to execute decisively on its vision and in some cases failure to add sufficient appeal to its devices.  Bendgate, aside, the iPhone 6 has been tremendously popular among Apple's existing userbase and has won many first-time buyers as well.  By contrast, the GS5 received dampened praise from Samsung loyalists, and relatively unenthused reactions from brand-agnostic Android users.

One key problem facing Samsung is it phone designs, which critics have attacked as uninspired.  Design was, of course, a key factor in compelling Apple to the top of the sales chart, but other Android OEMs have tapped that "magic" as well, including Xiaomi.  Xiaomi's recent metal-body phone designs have earned strong reviews; by contrast reviewers were lukewarm-at-best on Samsung's "defiantly-plastic" strategy.

Samsung Galaxy S5
The Samsung Galaxy S5 was "defiantly plastic".

While plastic body design may confer certain cost and impact-resistance advantages over metal-frame designs, the market is clearly demanding high-end metal-body devices and Samsung isn't delivering that.

V. Looking Ahead

On the design front, a long awaited answer to Samsung's struggles may lie in the company's new global design chief, Lee Don-tae, who Samsung wooed from the same design firm that Apple's head designer, Jony Ive, hailed from.  The move was somewhat bold in that in speeches in Korea, Lee Don-tae had called out South Korean electronics OEMs (seemingly LG and Samsung) for "uninspired" designs, complaining that design was often an afterthought in his home country.

Looking ahead the biggest barometer of Samsung's 2015 outlook will be the announcement of the Galaxy S6 flagship smartphone.  Sales of the GS6 and reception --both public and media -- will have to be closely watched, given the struggles of the GS4 and GS5 and there role in putting Samsung in its current precarious position.

Samsung GS6
The Galaxy S6 is expected to launch in the next couple months. [Image Source: Business Korea]

Samsung has reportedly opted to drop the Qualcomm, Inc. (QCOM) Snapdragon chips it has relied on in past generations for the majority of its unit shipments, in favor of exclusively using its in-house Exynos 5 Series system-on-a-chip (SoC) application processors (APs).

This is a bold move.

If it works, Samsung will pocket more of the profit on the device and will be able to better differentiate its product.  But if it fails, Samsung's premiere device will be at a decided disadvantage over competitors' devices which are powered by the latest-and-greatest Snapdragon 810 chip from Qualcomm.

Past generations of Exynos chips have struggled with design defects and were more battery-hungry than Qualcomm's chips.  Samsung appears confident in its decision, but we'll have to wait and see whether than confidence is warranted.  Samsung has made progress on the AP front, finally getting an on-die LTE baseband modem in the Exynos chips.  In its earnings report, it says 20 nm AP production is also going well.
Samsung Exynos

Semiconductors were actually a bright spot of the earnings report, with a profit of KRW¥2.7T ($2.49B USD) on a revenue of KRW¥10.66T ($9.83B USD), up modestly from the KRW¥1.99T/KRW¥10.44T profit/revenue that the unit report a year earlier.  Samsung's sales of DDR4/LPDDR4 memory were strong, as were sales of NAND flas memory.  Together profits from these sales helped to offset a 67 percent drop in the mobile division's profit.

It perhaps makes sense to tap this well-performing unit to play a bigger supporting role for the troubled Galaxy S line.  But perplexingly, for all its semiconductor expertise, Samsung's AP design efforts have been a mixed bag at best.  It will have to pull off an impressive feat in order to best the Snapdragon 810 in processing and battery life.

Thus in more ways than one, the Galaxy S6 and the chips inside will be pivotal to Samsung in terms of profit and image.  If the company continues to slip, it will quickly fall to the wolves in the brutally competitive smartphone market.

Sources: Samsung Electronics [press release], Techpinions, Strategy Analytics on PR Newswire, Counterpoint Research

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