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Samsung is still the only phonemaker to approach Apple in terms of profitability

Apple, Inc. (AAPL) set perhaps too high a bar with years of gaudy growth, new products and record products.  Now, even as it earns an epic $13.1B USD, it saw shares hammered as a result of shrinking margins and questions of legacy.

For Apple's arch-rival Samsung Electronics Comp., Ltd. (KSC:005930), which just posted its earnings last night, the story was a bit of the same.  Samsung recorded a record profit of $6.54B USD (7.04T won), or almost precisely half of the profit Apple made for the quarter.  That profit marks a rise of 76 percent from a year ago, and narrowly bests analyst predictions of $6.39B USD (6.87T won).

It mustered record profitability, despite some bad news.  Margins "fell to 17.4% in the fourth quarter, down from the 18.8% marked in the previous quarter".  Additionally, Samsung saw cell-phone sales grow 58 percent, which might seem impressive were that not a fall from last year's eye-popping 82 percent growth.

Samsung raked in $51.12B USD (56.06T won) in total revenue, up 18 percent from a year before.  Revenue was roughly in line with the analyst prediction of 56.22T won.  The profit-driving telecom business accounted for 62 percent of the company's operating profit.

Samsung Galaxy S III
Samsung moved an estimated 60 million smartphones and set a profit record in Q4 2012.
[Image Source: Funny Tweek]

Analysts estimate that Samsung moved around 60 million smartphones worldwide for the quarter, up from 36.5 million smartphones a year ago.  The surge comes thanks to strong continued growth of the Galaxy brand of smartphones and mini-tablets.  Samsung maintained a narrow lead over Apple in sales (Apple moved 47.8m iPhones), despite the strong relief of pent-up demand brought by the release of the iPhone 5.

The most troubling news for Samsung was how a strengthening South Korean won might hurt Samsung's profitability in 2013.  Samsung estimates that up to 3T won ($2.79B USD) could be trimmed of its profits in 2013.  Exactly how much that hurts Samsung depends a lot on how much it continues to grow.

Korean Won
A strengthening won is bad news for Samsung. [Image Source: 
SeongJoon Cho/Bloomberg]

Shares fell to a two-month low on news of the dipping margins and currency issues.  But ultimately, traders may be spooked not only by these numbers, but also by the performance of Samsung's archrival Apple.  Comments Standard Chartered Plc analyst Sean Kim to Bloomberg, "The stronger won will obviously have a negative impact on profit, but that isn’t Samsung’s only concern.  Apple’s unimpressive earnings also indicate that the overall market situation is becoming more difficult."

In short, investors fear a weakening phone market and as a results are scrutinizing the market's top players (Samsung and Apple) more carefully.  Interestingly, the most positivity appears to be channeled towards Nokia Oyj. (HEX:NOK1V) who achieved profitability after 6 quarters of losses.  While Nokia moved only 4.4m Windows Phones -- or about 1/14th of Samsung's unit sales -- the small, lean company is attracting attention in the troubled market.

Still, it might be unwise to overlook Samsung.  The company has a very diverse business base, and finds ways to achieve profitability even in the most adverse of circumstances.  For example, in Q4 its semiconductor division leveraged higher prices on component DRAM for smartphones and servers to offset weak pricing on the PC front due to overproduction.

Sources: Samsung [PDF], FT [analyst estimates]

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RE: of mice and men
By Tony Swash on 1/25/2013 2:11:25 PM , Rating: 0
This article contains a very informative graph about the current state of the phone market. Spoiler - it's a two horse race.

To me it looks like we are heading towards a mobile device market dominated by Samsung and Apple and both will be huge and profitable, and both can be huge and profitable at the same time.

On the one hand you will have an iOS space of perhaps a billion users in a year or so using premium hardware tied to a highly vertically integrated value stack, this will be a high use platform. On the other hand a Samsung space using Android (or it's own fork of Android) to sell less expensive hardware at lower margins to more end users but with a significantly less integrated value stack and much lower platform usage. The Samsung space will have the bigger user base but lower overall revenues, not only for Samsung but for all those feeding on the Android food chain.

The unknowns in making projections like this are many, not least:

Will Google remain happy to underwrite Samsung's dominance of the Android space or will it seek to vertically integrate and really punt the Nexus line? If so how would Samsung respond?

China. Apple is clearly working on make a serious inroad into the Chinese market but for Google China is far more problematic. Almost all the Android devices currently sold in China do not use Google services which is hardly the result Google was looking for with Android. What will be Samsung's strategy in China and how would that affect Google?

China again: Can any of the Chinese companies currently building their businesses using Android but not Google services in their vast domestic market break out and threaten Samsung's markets, or indeed Apple's?

The most interesting relationship in the tech world is currently that between Samsung and Google. Can't wait to watch it play out.

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