After six-straight quarters of revenue drops the South Korean OEM shows signs of recovery

Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) expects to live up to its own hype, beating analyst estimates with a modest Q1 2015 profit, according to a forecast [press release] the gadgetmaker released Tuesday.  Last year was a rocky one which saw Samsung's high end smartphone sales collapse and its profit with it.  The year closed with a holiday quarter that saw Samsung being bumped to second place in global smartphone sales behind perennial rival Apple, Inc. (AAPL).

I. Earnings Surprise Offers Silver Lining to 6th-Straight Quarter of Revenue Decline

Q1 2015 won't necessarily mark Samsung's return to the lead in smartphone volume, but it did see signs of life for the South Korean OEM.  Analyst surveys by Bloomberg and Thomson Reuters I/B/E/S had forecast a profit of KRW¥5.5T and KRW¥5.3T ($5.05B and $4.86B USD), respectively.  Instead Samsung managed to pull off the surprise, earning an estimated KRW¥5.9T ($5.41B USD).  Interestingly it achieved that success in spite of posting a revenue of only an estimated KRW¥47T (~$43.1B USD) -- well short of the Bloomberg analyst consensus forecast of KRW¥50.1T (~$46B USD).

It should be noted that Samsung's reported numbers are an earnings guidance based on the Korean version of the International Financial Reporting Standards (IFRS), commonly referred to as K-IFRS.  Samsung said its final numbers should fall on the range KRW¥46-48T for revenue and KRW¥5.7T-6.1T for profit.

Samsung memory
Strong sales of memory chips helped drive Samsung to a better-than-expected profit.

Samsung's figures don't reveal the earnings by division, but analysts have some idea on how Samsung bested their numbers.  Greg Roh, an analyst with South Korea's HMC Investment Securities Comp. (KRX:001500) told Bloomberg Tuesday:

Robust sales of memory chips for mobile devices and servers contributed to the stronger-than-expected profit.  Tighter marketing spending at mobile also contributed to the higher result and second-quarter results will be a lot higher, largely helped by S6 smartphones.

Samsung's profit actually managed to beat the KRW¥5.3T it posted in Q4 2014.  As one might expect, it's unusual for a consumer electronics company to see their first quarter beat the holiday quarter in earnings.  The figure is down, however, from the KRW¥7.57T ($6.95B USD) in net profit posted a year ago in Q1 2014.  And the quarter also marks the sixth straight quarter of declining revenue for Samsung.

From a big picture perspective, Samsung's diversity is allowing it to find ways to stay profitable by leverage strong performers in its multi-component business.  But a key disappointment continues to be the smartphonce unit.

Samsung Electronics
A Samsung semiconductor plant, located in Yongin, South Korea, is pictured. [Image Source: Bloomberg]

Samsung doesn't release exact unit sales figures, but South Korean investment firm Daewoo Securities Comp., Ltd. (KRX:006800)(KRX:006805) estimates Samsung moved 81 million smartphones in the quarter.  That's up modestly from the 74.5 million units Samsung sold over the holiday quarter, but down 10 percent from Q1 2014, when Samsung is estimated to have sold 90 million smartphones.

By comparison, Apple sold 74.5 million iPhone units in Q4 2014 and is expected to be narrowly ahead of Samsung in Q1 2015 unit sales (and well ahead of it in profit).  Apple whose Q1 calendar quarter is Q2 FY2015, will report its numbers on Monday, April 27.

II. High End Hurt

Samsung's total volume has been significantly damaged by the rise of low-cost Chinese smartphone OEMs like Xiaomi Inc., who represent one of the fastest growing components of the market.  (Xiaomi is currently the world's third largest smartphone seller by volume.)

But it's been the erosion of Samsung's high end sales -- largely attributable to Apple -- that have hurt Samsung's devices division the worst.  The devices division was once a far more lucrative cash cow for Samsung.

At its peak in Q3 2013, Samsung's smartphone unit sales weren't much higher than they are now -- 85-89 million by most estimates -- but the devices division pulled in a whopping KRW¥6.7T ($6.15B USD) thanks to higher volume of more expensive smartphones.  That's nearly near a billion dollars more than Samsung's entire profit today.  The division in Q3 2013 was earning roughly two-thirds of Samsung's entire profit, driving Samsung as a whole to a total net profit of KRW¥10.2T ($9.35B USD).

Samsung devices
Despite holding several distinct technological advantages over other Android OEMs, Samsung's devices unit is no longer the cash cow it once was.

Analysts expect Samsung's Q1 2015 device revenue and profit will be around KRW¥27.1T ($24.9B USD) and KRW¥2.3T ($2.11B USD), respectively, according to a survey of 5 analysts by Bloomberg.  That's roughly a third of what the devices unit earned in a year and a half ago.

Thanks to high demand for DRAM memory, Samsung's semiconductor division is actually expected to eclipse the devices division in profit for the first time in years, earning KRW¥2.7T ($2.48B USD) on a revenue of ¥11T ($10.1B USD).  The division is believed to have won key contracts for Apple's next generation iPhone on the merits of its fresh 14 nanometer process, most notably scoring the majority of orders for the next generation Apple A9 system-on-a-chip (SoC).  NVIDIA Corp. (NVDA) also reportedly enlisted with Samsung for part of its Tegra SoCs and graphics processing unit (GPU) orders, snubbing traditional supply partner Taiwan Semiconductor Manufacturing Comp., Ltd. (TPE:2330) (TSMC).

Tegra X1
NVIDIA is reportedly transferring SoC and GPU orders from TSMC to Samsung.

Outside of Samsung's device and semiconductors units, Samsung's other units have seen much success, but only yield margins that are weak at best and razor thin at worst.  The consumer electronics division which sells TVs and appliances, for example, has posted steady growth over the past several years, but only produced an estimated ¥80B ($73M USD) in Q1 2015.

Samsung's display division, which sells displays on a unit basis to smartphone, tablet, laptop, and television manufacturers i expected to post a slightly stronger net profit of around ¥450B ($410M USD) on account of strong demand for Samsung's amorphous organic light emitting diode (AMOLED) display technology.

III. An Answer?

Overall, the biggest factor looming over earnings -- and creating hope -- is the Galaxy S6. Delivering on long-standing fan demand for a metal-body flagship device, the new GS6 marked the first time in generations that Samsung fully scrapped its prior flagship model's design.

The new device was built from the ground up under the codename "Project Zero", according to Reuters.  The resulting metal and glass body design marked a revolutionary leap over Samsung's demure, defiantly-plastic designs of past Galaxy S series devices.

Samsung GS6 Edge
The GS6 Edge and the baseline flagship model, the GS6 are expected to be hot sellers this spring.

The GS6 and its curved display companion, the GS6 Edge have received strong reviews and are expected to be the hottest sellers of the Spring.  Their launch begins this Friday when it rolls out in 20 nations, including the U.S.  Reuters reported last month that on account of higher than expected demand Samsung had bumped production nearly 15 percent to 8 million units in April.  That's up 1 million units from the original target of 7 million units.  Samsung is estimated to have produced 5 million units in March.

Samsung Mobil
Samsung Mobile chief JK Shin shows off his company's prized new design at MWC 2015.
[Image Source:]

Analysts say the Galaxy S6 and S6 Edge could set sales records.  They're predicting sales of around 50 million units in 2015.  That's up at least a quarter from the volume of GS5 devices moved in Q1 2015 (estimated at 7-9 million units).  Better still, some analysts believe the GS6 and GS6 Edge could provided a synergistic boost to the GS5 sales, pushing volume to 38 million units for 2015 [source].

If these provisions hold true, Samsung's devices devision could restore part of its lost revenue, even if it's unlikely to immediately realize a return to its 2013 peak.

Sources: Samsung Electronics [press release], Bloomberg Businessweek, Reuters

“And I don't know why [Apple is] acting like it’s superior. I don't even get it. What are they trying to say?” -- Bill Gates on the Mac ads

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