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One in every four phones (of any kind) sold is now a Samsung; company earns $4.45B USD

When it comes to smartphones it's a tale of haves and have-nots.  Last year Apple, Inc. (AAPL) and Samsung Electronics Comp., Ltd. (KS:005930) (the top Android phonemaker) accounted for 90 percent of the sales of high-end handsets.  The rest of the pack was left behind, trying to peddle lower-end hardware (often lower margin), or compete for the remaining 10 percent in the high-end, high-margin market.

I. Samsung Outsells Apple in Smartphones

For companies like HTC Corp. (TPE:2498) who have watched in dismay as Apple and Samsung gobbled up their market share, Q1 2012 sadly brought little relief.  Just a week after Apple posted a record profit of $11.6B USD on a $39.2B USD revenue, Samsung responded [PDF], posting a record $4.45B USD (5.05T Won) in profit on a $39.88B USD (45.27T Won) revenue.

In Q1 Samsung was on top of the smartphone industry, beating out Apple in unit sales.

Samsung girls
Samsung's attractive models beat out Apple in unit sales. [Image Source: Shootspeak]

Of its operating profit ($5.15B USD; 5.85T Won), $3.76B USD (4.27T Won) -- roughly three quarters -- came from the company's mobile (phones, tablets) unit.  Reuters is citing experts as stating that Samsung sold 44m smartphones for the quarter.  That would put it ahead of its more-profitable rival Apple on a sales basis.  Apple sold 35.1m iPhones for the quarter, placing it roughly 25 percent behind Samsung in sales.

The numbers are particularly impressive, given that a year ago Apple was estimated to outsell Samsung nearly 2-to-1 [source].  The Samsung triumph came to incredible growth.  While Apple managed to double its smartphone sales on a year-to-year basis, Samsung more than quadrupled its sales -- a superhuman feat.

Samsung building
Samsung more than quadrupled its phone sales on a yearly basis. [Image Source: Flickr]

The strong performance by Samsung's rival wasn't altogether bad for the electronics company either.  It raked in a profit of $669.6M USD (0.76T) Won -- or half of the remaining non-smartphone profit -- from its semiconductor division.  With DRAM prices plunging to new lows, much of that profit likely comes from Samsung's lucrative contract to produce Apple's CPUs.  Nearly every iPhone and iPad sold today carries a CPU produced at Samsung's Texas plant, which is just miles away from one of Apple's largest U.S. call centers.

Despite a legal war and an ocean between them, the pair remains closely tied even as they compete fiercely on the smartphone market.

II. Samsung Takes the Crown of the World's Top Phonemaker

Samsung reached an important milestone in the first quarter, with total phone sales (including feature phones) of over 90 million units (93.5 million by Strategy Analytics’ accounting).  With Nokia Oyj.'s (HEX:NOK1V) sales plunging to 82.7m units (11.9m smartphones; including feature phones).  Samsung is outselling Nokia's smartphones nearly 4-to-1, but it's also punishing the Finnish phonemaker in the budget market.

Nokia has tried to revitalize its budget phone lineup adding smartphone-like features, as seen in its new Asha models.  But the carrier features a big problem in that feature phones -- a market it long dominated -- are a dying market.

In Q1 2011 Nokia sold an estimated 84.3m feature phones.  In Q1 2012 it sold approximately 70.8m feature phones, a drop of over 16 percent.  By contrast Samsung sold an estimated 58.1m features phones in Q1 2011, and only 49.5m in Q1 2012 -- a drop of roughly 15 percent.

Aragorn king
It's official: Samsung is king of the phone market. [Image: Peter Jackson/Newline Cinema]

In other words, Nokia and Samsung's feature phone sales are vanishing at almost the same rate, but the key difference is that Samsung more than quadrupled its smartphone sales, while Nokia saw its smartphone sales actually fall to half their Q1 2011 values.

In other words, smartphones are what won Samsung the lead, or on the flip side of the coin, what lost Nokia the lead.  

The key factor that's dragged Nokia down is the fact that it's allowed Symbian to linger around far too long.  The majority of Nokia's top 20 smartphones still run Symbian.  And yet the company has announced that the platform will be dead soon.  Consumers don't want to buy a product that's on death row, so many are opting simply to abandon Nokia.  By contrast, Samsung offers consumers one consistent option -- Android -- with the promise of long-term support.

With Samsung's highly anticipated Galaxy S3 about to drop, Samsung looks unlikely to fade in smartphone sales.

Sources: Samsung [PDF], Supply Analytics



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RE: Hindsight will be 20/20
By Mint on 4/29/2012 12:28:18 AM , Rating: 2
You go ahead and believe that Apple can keep this up for 5-10 years (necessary to justify the current price), or that having over 3x the market cap of Samsung doesn't matter.

Apple's fat iPad profit margin will last only 1-2 years more. Same with the iPhone. After that, they will be profitable, but not enough to justify their current price. Hence the use of the term 'bubble'.


RE: Hindsight will be 20/20
By michael2k on 4/29/2012 12:58:26 AM , Rating: 2
You really don't think they can keep this up by quadrupling the volume by halving the margin? Selling 4x as many iPhones for $400 instead of $600, and pushing the lowest end model from $375 to $249?


RE: Hindsight will be 20/20
By Mint on 4/29/2012 11:41:08 AM , Rating: 2
In what universe does any market-leading product quadruple its sales with a mere 33% price cut? That would have be one insanely elastic product.

Samsung was able to quadruple through better products because it had a much smaller market share then than it does now.


RE: Hindsight will be 20/20
By michael2k on 4/30/2012 9:29:15 AM , Rating: 2
The original model went from $600 to $400 after two months, and then selling a subsidized version a year later for $199. Sales went up 6 fold each time. China is a huge market, but a large portion of its population cannot afford $600 phones and Apple is likely to drop the 4 to $399 this year and the 4S next year.


RE: Hindsight will be 20/20
By Tony Swash on 4/29/12, Rating: -1
RE: Hindsight will be 20/20
By Mint on 4/29/2012 11:46:27 AM , Rating: 2
I shouldn't be surprised at your comprehension problem.

Houses are still worth way more than their construction cost. Just because the bubble burst doesn't mean houses are worthless. It just means that people who bought at the peak lost a lot. Apple isn't going anywhere. It will remain profitable for decades unless it royally screws up. However, stockholders will lose money when its profits come back down to earth.


RE: Hindsight will be 20/20
By Tony Swash on 4/29/12, Rating: 0
RE: Hindsight will be 20/20
By Mint on 4/29/2012 7:23:14 PM , Rating: 2
We've never seen this kind of sustainable gross margin from a company that doesn't have any truly inimitable IP or production ability (like Intel, NVidia before competition from RV770, etc). That's why Apple is suing everyone like crazy, because it's too easy to make a product that does the same thing. RIM is another company whose advantage (BES) was very frail.

Their App store was a huge advantage, but Android has effectively caught up, and once Windows 8 tablets come out then it will be dwarfed by the already existing x86 software selection. It won't be able to command a premium price anymore, and x86 will have "good enough" battery life.

Samsung has an even better supply chain advantage than Apple, as they're virtually the only maker of the superior AMOLED displays and fab their own chips, too.

All these factors - impending x86 tablets (and probably smartphones), Samsung taking over Sony as the premier overall CE brand, Android catching up - point to reduced margins.

I don't think Apple will collapse like Sony did, but they won't keep up the insane margins. Also working against them is the fact that their biggest cash cows are in markets that amplify cost differences: a $500 phone vs a $600 phone is advertised as $100 vs $200 with contract.

So no, Apple can't keep up these margins in the long term.


RE: Hindsight will be 20/20
By Tony Swash on 4/30/12, Rating: 0
RE: Hindsight will be 20/20
By michael2k on 4/30/2012 6:13:37 PM , Rating: 2
You sound as if you know that Apple's IP is going to be "imitated/replicated" within the next 5 years.

I accept/concede that there are many competitors with enough pieces that they can in fact start imitating Apple, but I challenge the assertion because I can't name a single competitor with enough skill to actually assemble those pieces into a coherent whole. Of all their competitors I think Amazon is the closest with their online retail presence, low priced Kindle, Amazon App Store, Amazon Music Store, Kindle Book Store, and Amazon Cloud Drive, but they are still missing crucial pieces such as a smartphone, key software such as iBooks Author, XCode, GarageBand, iMovie, iPhoto, and the high end HW/SoC to actually compete.

Sony has the HW, content, retail presence, PSN, and games, but have shown absolutely no capability in the last decade of integrating them in any capacity. They will undoubtedly get better, but right now they are starting from just about scratch with their phones, PSP, PS3, and Vaios.

Microsoft has the content, SW, and OS, but lack HW and retail; their partnership with Nokia can fill in the gaps wrt to HW and retail, but again they are starting from scratch right now.

Samsung is the strongest competitor HW wise, and like Microsoft/Nokia, rely on Google to provide the SW, but they still lack the content (meaning movies, music, books, and games), the high profile boutique apps (especially since Amazon's App Store appears to be poaching all the dollars that would otherwise entice developers!) and there is no indication that Google has the strength to actually fill in the gaps. Google's goal is to be good enough, not to actually create something worth hundreds of dollars to the end user.

The Android App Store may have in fact caught up as you say, but only with regards to breadth and not quality; that same difference is what explains, today, the fact that Apple's Mac lineup can earn several hundred dollars more than most PCs, and there's no reason to expect that won't be true in the smartphone market until Google or a partner does the same for Android Apps. Windows already has SW, as you mention, but has never been able to command the premium Apple has despite that.

Samsung actually doesn't have a better supply chain advantage as they don't move enough volume, by themselves, to sustain a decent volume margin. In other words they sell 30m Galaxy phones a year where Apple sells 35m iPhones a quarter. You tell me who has the cost advantage with regards to volume.


RE: Hindsight will be 20/20
By Tony Swash on 4/29/2012 7:59:42 AM , Rating: 1
quote:
Apple's fat iPad profit margin will last only 1-2 years more.


That's what was said about the iPhone profit margins when the iPhone was launched five years ago and look at how that turned out. In the new mobile computing device age Apple will become as big relatively as Microsoft and Intel were combined back in the PC age. They have a way to go yet. My prediction is that Apple will grow revenue and profits by 80% in each of the next two years. What's your prediction?


RE: Hindsight will be 20/20
By Mint on 4/29/2012 8:00:29 PM , Rating: 2
My prediction is profits will peak at maybe $17B/qtr before 2014. Stock price will fall before then, however.

I knew this was going to happen to NVidia after the release of the HD4870 (june 2008) forced their margins back to earth, but didn't take action. I won't let that happen again. The question is when to start shorting Apple...


RE: Hindsight will be 20/20
By michael2k on 4/30/2012 2:28:29 PM , Rating: 2
Time to start shorting Apple if they cannot continue to add PC capabilities to iOS, cannot build an iPad4 with more CPU/GPU by next March (even if it means switching to Atom!), cannot sell an iPhone 4 for $400, cannot sell an iPhone for $300, cannot sell an iPad for $300, and cannot sell a MacBook of some sort for under $800.

The biggest growth markets for the next decade are much lower income than the US; if they can target the above pricepoints then they will in fact continue to grow.

The problem is that the iPad3 costs $300 to make so cannot be sold under $300; the old iPad2 is being sold at $399 and realistically needs to hit the $299 price point to continue growth in China, India, and Brazil. If they figure out how to make an iPad for $180 then they should be fine. The same is true of the iPhone for the same reason; it costs them $190 to make the 4S and probably $130 to $150 to make the 3GS, but they have to be able to push the 3GS to $120 if they plan on selling it for $299.

As with iOS 6, if they do not keep growing it's capabilities and features then they will be left behind by Android and Windows.


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