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Samsung's growth appears stalled amid high-end smartphone slump

In Q2 2013, ending in June, Samsung Electronics Comp., Ltd. (KSC:005930) saw net profits soar from 5.19T won ($4.67B USD) in Q2 2012 to 7.77T won ($6.99B USD) or 7.58T won ($6.8B USD) after excluding minority interest -- bringing its net profit to parity with archrival Apple, Inc. (AAPLearnings for this quarter ($6.9B).

I. Bullish Galaxy Growth Slows

But despite rising margins and profit, investors are concerned about the slowdown in smartphone sales growth on the most profitable high-end models.  Samsung's sales of its premium-to-mid-range Galaxy lineup of flagship Android smartphones grew from 19 million to 22 million on a yearly basis, according to analyst estimates, a growth of 15 percent.  By contrast in 2011 Samsung had sold only around 5 million Galaxy S2s, according to Gartner, Inc. (IT).

Overall smartphone sales growth for Samsung (including budget models) follows more of a consistent (in a linear sense) growth track, reaching an estimated 76 million units in Q2 2013.  But analysts' earnings expectations were anchored largely on a more bullish growth of sales of the premium Galaxy units.
Samsung smartphone growth
As a result, Samsung missed by 5.5 percent a consensus profit expectation of 24 analysts gathered by Bloomberg.  A survey of 13 analysts by UK-based Financial Times, a Pearson PLC unit (LON:PSON), had predicted a 7.80T won net profit, just slightly above the delivered result.

Apple saw similar levels of growth in its mix of its premium-priced flagship model and mid-range priced older models.  In fiscal Q3 of last year (calendar Q2 2012) Apple sold 26 million units, and this year sales grew to 31.2 million units, up 29 percent.  However, Apple's unit sales growth in general has been flatter, but steadier over the last two years, where as Samsung's started strong but appears to be decelerating.
Samsung Galaxy S4 wide
Part of the problem might be the disappointment over the Galaxy S IV.  Most expected a more aggressive leap forward, but saw more of a modest spec bump.  As a result, the handset lost out (surprisingly) in many head-to-head review comparisons to HTC Corp.'s (TPE:2498) flagship One smartphone.

II. Samsung's Diversity Saves Its Profit

But again, that only tells half the picture.  While Samsung's growth seems to be showing negative momentum on the premium-to-mid-range end (Galaxy v. iPhone), Samsung's revenue and earnings growth tell a far different picture.  Samsung's profit has been steadily rising on a quarter-to-quarter basis since 2011.  By contrast Apple, despite increasing revenue has slid in profit.
Samsung v. Apple earnings
One secret to Samsung's steady increase in profits is its diversity.  Despite a languishing PC market, Samsung reported surprising rises in profit for its semiconductor and display panel divisions.  The semiconductor division -- which is estimated to do $8B USD+ in business with Apple alone this year (its largest customer) saw only a 0.9 percent rise in total revenue, but managed to squeeze out a 70.8 percent rise in profit to 1.768T won ($1.58B USD).  Similarly the display panel unit saw a 0.5 dip in revenue, but managed a much bigger 57.7 percent boost to profit, which reached 1.120T won ($1.01B USD).

Samsung NAND flash
Samsung is now producing NAND on the 10-19 nm node. [Image Source: Samsung]

Consumer electronics (which includes dishwashers, refrigerators, microwaves, stoves, and other Samsung-branded household electronics products) was down a fair amount (41.1 percent on a year-to-year basis) to dip to a profit to 430B won ($390M USD).

Samsung's other units benefited from a rise in Chromebook sales.  Chromebooks seized 4 to 5 percent of total PC sales, and Samsung's cheapest Chromebook model was the best selling personal computer on Amazon.com, Inc. (AMZN).
Samsung Chromebook

Analysts -- particularly in 2012 -- became fond of deriding Samsung's "unprofitable" units, emphasizing the smartphone unit was the only one driving value.  Thus perhaps the most surprising story in the Q2 earnings is Samsung's chipmaking units showing their merits, picking up the slack for the premium smartphone sales slowdown and driving profit up.  That performance is fortunate as it helped Samsung avoid a far bigger profit miss.

In short Samsung's report card reads something like:
  • Revenue                                     B
  • Profit                                          B-
  • Budget Phones:                          B+
  • Mid-to-Premium Smartphones:   C
  • Consumer Electronics                 D
  • Semiconduct/Display                  A+
This is a surprising storyline to say the least, but the good news is Samsung is diverse and looks to be sustaining strong smartphone growth, at least on the budget end.  The bad news -- as analyst point out -- is that profit growth may slow, as Samsung is unlikely to be able to sustain such large growth percentages in its other units.  That means that the premium smartphones will have to step up in sales, something analysts are concerned they may be unable to do.

Seoul-based CIMB Group Holdings Bhd's analyst explains this pessimism to Bloomberg, remarking, "Samsung is trying to make its profit structure largely balanced.  [But its] smartphone margin may decline in the future but the components businesses, either chips or displays, will become a major profit driver to help it sustain the overall profit."

Sources: Samsung [PDF], Bloomberg



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RE: Missing something
By retrospooty on 7/26/2013 12:14:20 PM , Rating: 2
Its not that Samsung's margins are low , Its that apples are amazingly high.


RE: Missing something
By JasonMick (blog) on 7/26/2013 1:13:57 PM , Rating: 4
quote:
Its not that Samsung's margins are low , Its that apples are amazingly high.
That is true, but a bit misleading.

Samsung's margins on Galaxy smartphones are reportedly quite high. The components aren't cheap, but the plsaticky body uses cheap materials and is easy to make, which combined with the high costs yields a large margin.

Overall Galaxy smartphones may be making as much profit per unit as Apple's iPhones are across the company entire lineup (GS IV v. iPhone 5; GS III v. iPhone 4S; etc.). But Samsung only sold 22 million Galaxy brand smartphones, while Apple sold 31.2 iPhones.

The real issue is Samsung's OTHER smartphones -- which comprised 52 million units, or roughly 5/7ths of its sales, are very low margin product sold much closer to at cost.

Examples would be devices like the Samsung Freeform or Brightside. You might think "*Huh??* I thought Samsung sold mostly Galaxy phones."

This is true, in the U.S., where Apple is the #1 seller...
http://www.kantarworldpanel.com/global/News/Apple-...
(Note Apple has 41.9 percent of sales vs. 52 percent of U.S. unit sales for Samsung, LG, HTC and all others... hence it has the largest share of any individual OEM in the U.S. market.)

Samsung, is in second place in the U.S. market.

Meanwhile in China Samsung is in first place, and Apple is well back, but Chinese consumers are largely buying low end (non-Galaxy) Samsung smartphones, hence where these large numbers come from.

Overall you can think

Apple = I
Samsung = G + O * 0.2


Where I is (profit from) iPhone unit sales, G is Galaxy unit sales, and O is is profit from OTHER Samsung smartphone sales.

If you plug in the #s, you'll get roughly a tie, based on the ratio of Galaxy-to-other sales.

The real issue is that Samsung's non-Galaxy smartphones have very low margins. The Galaxy series is fine margin-wise.


RE: Missing something
By Reclaimer77 on 7/26/2013 8:02:26 PM , Rating: 2
quote:
Samsung's margins on Galaxy smartphones are reportedly quite high. The components aren't cheap, but the plsaticky body uses cheap materials and is easy to make, which combined with the high costs yields a large margin.


You're leaving out that Samsung can manufacturer their own components. That's where the biggest cost savings comes in.

We have GOT to get over this stigma that plastic is "cheap" and aluminum is better. In a perfect world where you never drop your phone, maybe. In my opinion metal bodied phones are currently just inferior, they can't hold up in real-world use. UNLESS you wrap them in a case/Otterbox which kind of defeats the whole point of having a sexy metal phone.


RE: Missing something
By retrospooty on 7/26/2013 9:43:24 PM , Rating: 2
Plastic is ok... Samsungs plastic is cheap. Go to a carrier store and compare an S3 or S4 to droid DNA or some other plastic phone. Compare a note or tab tablet to a Nexus 7 or a nook. Sammy could really stand to raise their game on build quality. That and that alone is why I didn't get an S4. I still have my S3, waiting on verizon to release a descent non samsung high end phone.


RE: Missing something
By Reclaimer77 on 7/27/2013 1:18:13 AM , Rating: 2
Just because something is lightweight and made of plastic, doesn't mean it's "cheap". I've handled plenty of S4's, I don't get what's "cheap" about it.

You're saying Samsung's plastic is "cheap", but other peoples plastic isn't. That makes no sense lol. It's the same stuff!

If there were a constant stream of complaints about Samsung displays falling out, the back covers popping off, the buttons failing, or the batteries and cards not making contact, then I may give those comments some merit. But I haven't seen such complaints.

What I have seen is TONS of HTC One's that break on the first drop. Usually the speaker grills and the bezel break off the phone, as they're just glued on. So much for aluminum automatically meaning higher build quality.


RE: Missing something
By Tony Swash on 7/27/13, Rating: 0
RE: Missing something
By testerguy on 7/27/2013 8:25:39 AM , Rating: 1
quote:
Just because something is lightweight and made of plastic, doesn't mean it's "cheap"


The light weight isn't the problem. The plastic is. And it being made of plastic, in Samsung's case, does mean that it's cheap. It's factually cheaper to product.

Your attempt to align cheapness with faults is also misinformed. Nobody is saying plastic wont do the job. They are saying that it does the job cheaply . There is a difference between premium and more functional. Premium can include a variety of other factors such as cost, how nice it looks, how nice it feels. It doesn't necessarily have to function better.

And by the way, in drop tests all around the internet the S4 loses out to the iPhone and HTC One. Just look at several videos online. The point I'm making, though - is that even if this weren't true it doesn't matter, plastic is still cheap.


RE: Missing something
By Reclaimer77 on 7/27/2013 9:48:00 AM , Rating: 2
Tester please, we all know if Apple made the S4 you wouldn't have said any of that.


RE: Missing something
By testerguy on 7/29/2013 3:35:37 AM , Rating: 2
If you want an example of an entirely fanboy-based response, look no further than this.

Attempting to address precisely zero of the points, simply making a vacuous and uninformed false claim about what I would or wouldn't do in another scenario.

Completely irrelevant and my point stands.


RE: Missing something
By retrospooty on 7/29/2013 10:54:51 AM , Rating: 2
I have to agree with Reclaimer on this... If this were a discussion about HTC's Aluminum vs. LG's plastic you wouldnt even have responded. It's Apple and a major competitor, so here you are... And guess which side you are on?

Back to point, Plastic can be done well and Aluminum does not always mean high quality. It just happens to be that Samsung's plastic implementations can be considered cheaply done. If you are looking for an example of well done plastic, Samsung is the last place you want to start.


RE: Missing something
By Cheesew1z69 on 7/29/2013 1:14:32 PM , Rating: 2
quote:
If you want an example of an entirely fanboy-based response, look no further than my entire posting history
FTFY...


RE: Missing something
By retrospooty on 7/29/2013 4:18:46 PM , Rating: 2
LOL... I know. The worst fanboy is the one that wont admit it, ever, no matter what. At least Tony will come out and say, yes, I am a huge Apple fan. TG has, for at least a year only posted in Apple articles and only posted in favor of Apple, no matter the issue. Whether its the trial, patents, products, hardware, software, or just the company info/maneuvering... Its 100% apple, all the time, no matter what. Then he gets all pissed off at anyone that dares to disagree and starts insulting their intelligence. But... I am not a fanboy.

Riiiiiiiiiiight. http://i.imgur.com/hfXERxv.png


RE: Missing something
By retrospooty on 7/27/2013 9:58:24 AM , Rating: 2
Plastic can be done well. All I am saying is Samsung can do a better job with quality and plastic. Go to a carrier store and compare an S3 or S4 to droid DNA or some other plastic phone. Compare a note or tab tablet to a Nexus 7 or a nook. Sammy could really stand to raise their game on build quality.


RE: Missing something
By Tony Swash on 7/28/2013 6:05:23 AM , Rating: 1
In interpreting these results one needs to take tax in to account and and then to get an understanding of the state of competition between Apple and Samsung one needs to compare like to like.

Apple in its 10Q filing reported $9.2 billion in total operating income. After $2.5 billion set aside for taxes, that leaves $6.9 billion in net income.

Samsung Electronics reported (PDF) $9.53 trillion Korean Republic Won ($8.56 billion) in total operating income. After $2.05 T KRW ($1.84 billion) set aside for taxes, that leaves $7.77 T KRW ($6.98 billion) in net income.

Apple is earning greater operating profits than all of Samsung Electronics, despite the fact that Samsung operates across a lot of other businesses. Apple sets aside more for taxes, so its reported net profit is slightly but not significantly lower, at least in the current currency exchange.

Samsung further breaks its overall earnings into three market segments: Consumer Electronics (TVs and appliances), IT & Mobile communications (which includes handsets, smartphones, tablets, PCs and network equipment) and Device Solutions (which includes LCD and OLED screens, memory, and System LSI, the fab that builds Apple's A-series chips for iOS devices).

If you only compare the IM segment of Samsung that directly compares to Apple's business (iPhones, iPads, iPods and Macs), you get $6.28 T KRW ($5.64 billion) in operating profit (Samsung doesn't detail its taxes or net income for IM). That amounts to just 61 percent of Apple's total earnings.


RE: Missing something
By Scannall on 7/26/2013 3:18:04 PM , Rating: 2
Apple's *net* margins are a sliver under Google and Microsoft. How is that 'too high'? When you aren't racing to the bottom your customers for example can actually get decent service. Something Samsung has never provided.

Further, Apple has more overhead per device with cloud services, Siri etc than Samsung does.


RE: Missing something
By w8gaming on 7/27/2013 1:13:41 AM , Rating: 2
If every tech company is pricing their hardware to earn the same margin as Apple does, we will all be poorer now. It is good that there are companies like Samsung which will not ignore the low margin market segment, unlike company such as Apple.


RE: Missing something
By testerguy on 7/27/2013 8:29:11 AM , Rating: 3
Except as Jason mentioned in the comments, Samsung has every bit as high a margin as Apple does on its high end phones.

In fact, in terms of cost of production, Samsung probably has a higher mark-up than Apple. The materials are cheaper, the components are less specialised and less well engineered (same performance in 37% larger volume) and much of the cost which Samsung reports is actually in their massive advertising budget. Yet despite such high marketing costs, their margin on Galaxy S4's for example is as high as Apples - indicating that their production costs are lower.

The only thing Samsung does different is it also sells masses of really poor, cheap products at really low profit margins and that all inflates their claims of how many phones they have sold. Apple is less interested in these low end markets (whether that's a good or bad thing or not is another question).


RE: Missing something
By Piiman on 7/27/2013 10:59:02 AM , Rating: 2
" the components are less specialised and less well engineered "

Examples or it isn't true. I'm willing to bet you don't know anything about how either phone is engineered. If Samsungs components are "less specialized " why does Apple use so many of them? and what is "more Specialized" about Apples components?


RE: Missing something
By Cheesew1z69 on 7/27/13, Rating: -1
RE: Missing something
By Reclaimer77 on 7/27/2013 1:17:26 PM , Rating: 1
Gotta love his logic. Samsung who has made components for Apple since like day one, makes cheap "less specified" stuff. Ummm lets think about that for a minute...


RE: Missing something
By Cheesew1z69 on 7/27/13, Rating: -1
RE: Missing something
By testerguy on 7/29/2013 3:50:04 AM , Rating: 2
quote:
Gotta love his logic. Samsung who has made components for Apple since like day one, makes cheap "less specified" stuff.


I wish one day there could be a thread involving you where you don't demonstrate your absolute inability to read.

I said that the components in the S4 are not specialised. Not that everything Samsung produces is not specialised (you somehow read specified, also).

When Samsung manufacturers a components to Apple's design, it's making something specialised but it's not something which goes into the S4. It's not complicated.


RE: Missing something
By testerguy on 7/29/2013 3:46:04 AM , Rating: 2
Examples of less specialized - the processor.

The S4 in many countries uses a Snapdragon 600 SoC, which is developed by Qualcomm, not Samsung. Contrast to Apple's iPhone which utilises their own designed CPU (Apple A6) for all countries.

For example of less well engineered - look no further than the example we've already discussed - the material. And in case you don't know what 'engineering' is - it includes the design and material choices.

quote:
If Samsungs components are "less specialized " why does Apple use so many of them? and what is "more Specialized" about Apples components?


Sorry, which ones does it use? Are you referring to the flash memory chips which are a very small part of the phone? Or are you referring to the fact that Apple selected Samsung to manufacture Apple's own CPU (making it not at all a Samsung component).

Or are you confused about the concept of suppliers? Take a car company like Ferrari. They will design specific parts and ask several manufacturers to bid on that specification. The final company who wins the contract does not own the parts or the design , they are simply a low level manufacturer who cannot claim any kind of ownership. That's all Apple uses Samsung for - the majority of the components in an iPhone are now nothing whatsoever to do with Samsung.

Finally - in engineering terms when you look at the CPU/GPU performance and battery life of the iPhone 5 - and then factor in that it's a 37% smaller device volumetrically, and also 8 months older - it's simply staggering that they haven't been surpassed by the heavier, wider, taller and fatter S4 which came out 8 months afterwards.

That is the result of a whole combination of very specialised engineering decisions and it's something Samsung tried (and failed) to match with the S3 and S4 Mini variations. Those are what Samsung can do when they are restricted to not building bricks.


RE: Missing something
By web2dot0 on 7/28/2013 5:04:17 AM , Rating: 2
People compare you to your competitors, they don't care about whether you believe the margins are good or not.

It's kinda like saying that running 9.7s for 100m is great .... but you are not Usain Bolt, hence you aren't the best like Samsung is trying to say ....

That's the bottom line. Performance compared to your peers. On that end, they came up short. Bottom line.


"And boy have we patented it!" -- Steve Jobs, Macworld 2007














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