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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, 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 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
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.

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.

"We shipped it on Saturday. Then on Sunday, we rested." -- Steve Jobs on the iPad launch

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