(Source: Android Scissor)
Samsung beats Apple in U.S. sales, grows global sales

In Q3 2013, smartphone maker Samsung Electronics Comp., Ltd. (KSC:005930) showed some signs of weakness, but also posted strong financials defying claims of a major slump in its high-end smartphone sales.

I. Samsung Remains King of Smartphone Sales

For the quarter, Samsung -- which does not release sales numbers -- moved an estimated 85 to 89 million smartphones globally, according to analysts surveyed by The Wall Street Journal.  That's up roughly 20 percent versus Q2, when Samsung sold an estimated 71 million smartphones.  Samsung now looks much better positioned to potentially meeting its ambitious goal of selling 300 million smartphones globally (an average of 75 million per quarter) that it set for itself late last year.

After moving a reported 22 million units of its flagship Galaxy S4 in Q2, Samsung CEO JK Shin told reporters [translated] on Wednesday that sales had cracked the 40 million unit mark by the end of the quarter, indicating sales of about 18 millions GS4s in Q3.  Mr. Shin is quoted elsewhere as saying, "S4 sales are solid. It's just that some analysts had higher expectations and then they lowered them."

Samsung Galaxy S4 wide
The Galaxy S IV

Assuming nothing was lost in translation and GS4 unit shipments declined by 4 million units on a quarter-to-quarter basis, that's a decline of nearly 20 percent, which appears troubling.  But that number is also somewhat deceptive as Samsung also picked up a burst of Galaxy Note III sales following the device's Sept. 25 launch.

Samsung Galaxy Note 3

In its earnings report [PDF] Samsung writes, "high-end model shipments stayed at similar" while "total shipments [were] up QoQ [quarter to quarter, e.g. Q2 2013 v. Q3 2013] led by increased sales of mass-market models."

It's unclear how the shift from high-end to "mass market" (i.e. mid-to-budget range) smartphones will effect Samsung's bottom line, particularly given that sales are also growing, further complicating matters.  Nokia Oyj. (HEX:NOK1V) -- a veteran phonemaker whose devices division is now a Microsoft Corp. (MSFTsubsidiary has long asserted that it makes more money off feature phones than smartphones.  But other firms like Samsung and its archrival Apple, Inc. (AAPL) have seemingly suggested high-end models are where the greatest profits lie.

This discrepancy is likely because Samsung and Apple have traditionally charged more for their premium models.  For example an iPhone 5S with 16 GB of storage retailed for $649 USD overseas -- the same price as the 16 GB Galaxy "Nexus" S4 at launch.  By contrast Nokia's 2012 flagship device -- the Lumia 920 -- retailed for as little as $450 USD off contract at launch (although that's changing -- the industry-leading camera smartphone, the Nokia Lumia 1020 launched at $699 USD off contract).

Overall Samsung's smartphone unit cashed in with an operating profit of 6.28 trillion won ($6.3B USD) on sales of 35.2 trillion won ($33.1B USD).  This represents a 7 percent rise in profit and 3 percent rise in total sales revenue over Q2, indicating that the growth of low-end sales has more than offset the stall in high-end sales growth.

II. U.S. Outlook -- Apple v. Samsung, Still a Two-Horse Race

The smartphone battle in the U.S. market is still very much a two company race with Samsung and Apple trading blows in Q3.  Samsung ranked second, behind only Apple in a recent JD Power and Associates study examining customer satisfaction with their smartphones (Nokia notably beat all other Android OEMs, coming in third place). 

JD Power
Data collected by Counterpoint Research showed that in September Apple seized a commanding 39 percent lead in new device sales in the lucrative U.S. market, with Samsung in second place at 29 percent.  

Smartphone sales

But not so fast -- the same study shows Samsung winning by double digits in July and August as Apple fans waited for the iPhone 5C/5S.

Consumer Intelligence Research Partners (CIRP) reports that after falling behind Apple in U.S. sales in Q2, Samsung's strong July-August performance managed to trump Apple's powerful September showing, allowing it to regain the top spot in sales.  
Q3 2013
CIRP estimates that Samsung smartphones accounted for 38 percent of U.S. sales, while Apple devices took 34 percent of the market.  Together the two firms accounted for nearly 3 out of every 4 smartphones sold in the U.S.

III. Overseas Samsung Tramples Apple

But when looking at global sales, the picture Samsung's slow growth and maintenance of high-end sales looks remarkably better than the outlook for Apple.  While Apple has not released its sales numbers, Argus Insights has combined a number of analyst estimates along with its own data to compile a series of estimates of how many iPhones were sold globally in Q3 2013 (Apple's fiscal Q4 2013).  Its estimate pegs iPhone sales at 27 to 31 million units.

Argus Smartphone sales

In other words, Samsung outsold Apple roughly 3 to 1 globally in device units.

Argus says this is due to the fact that while the iPhone 5S was moderately well received, customers were very critical of the iPhone 5C which appeared to parrot Nokia's colorful body designs.  Argus writes:

This was the softest launch for Apple in years.  The 5C was a a global bust.  We recently started bringing in some data from Chinese consumers and was surprised to find that the buzz around the 5S was over 35 times higher than the 5C.  Surprisingly we did not see the iPhone 5 demand jump the way the iPhone 4S did after the iPhone 5 launch.  Overall buzz for Apple is falling everywhere but China.  This does not bode well for the next year and opens Apple to disruption by other competitors

The iPhone 5C was poorly received by customers
Indeed the buzz around the iPhone 5C seemed to be tepid at best. Apple has a tendency to surprise pessimistic analyses, but most of that trend was set in the Steve Jobs era -- under Tim Cook's leadership Apple has seen a disappointing stall in smartphone sales growth.

IV. Samsung's Other Products Showed Mixed Results

While all of Samsung's major units remained profitable, revenue from the display unit sagged 12 percent continue a trend from Q2.  Samsung currently owns a dominant market share in the industry's cutting edge technology OLED displays.  The display division's strong sales to smartphone manufacturers has somewhat insulated it from the TV market's decline, but the overall weakness is bad enough that it's dragging Samsung down with the rest of them.

Writes Bloomberg:

TV makers are reeling from sluggish demand, especially from China, while tougher competition is accelerating price reductions. Global shipments for liquid-crystal display TVs may fall 0.7 percent to 205.1 million units for this year, market researcher TrendForce said Aug. 22. The final figure may be as low as 202 million units, it said.

This revelation also adversely impacted Samsung's Consumer Electronics division, which sells both appliances and complete LCD TV sets.  That division dropped 18 percent.

On the other hand, booming sales of PC, tablet, and smartphone DRAM coupled with a lucrative contract to manufacture the Apple A7 aboard the iPhone 5S, saw Samsung's semiconductor unit to snag 2.06 trillion won ($1.94B USD) on sales of 9.74 trillion won ($9.17B USD) -- a 12 percent rise in revenue and 17 percent rise in profit.  DRAM and NAND flash storage (collectively referred to as "memory" by Samsung) accounted for 6.37 trillion won ($5.99B USD), or roughly two-thirds of Samsung's semiconductor revenue.

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

Aside from semiconductors, Samsung's strongest growth was in tablets -- which together with smartphones and enterprise products comprise Samsung's IT & Mobile Communications (IM) unit.  Samsung reports:

Shipments sharply increased due to enhanced product line-ups with Tab 3 expansion.

Samsung Galaxy Tab 3 10.1 in "Gold Brown"
The Galaxy Tab 3 7.0"/8.0"/10.1" debuted in June priced at $199/$299/$399 USD respectively.  Android in Q2 passed Apple in tablet market share on a platform basis, but Samsung -- the top Android tablet maker -- still trailed Apple in unit sales.  It is unclear how much that changed in Q3.

tablet market share
[Image Source: IDC via DazeInfo]

Apple introduced a refresh of its iPad Mini/iPad this week.  The 7.9"/9.7" iPad variants retail for $399/$499 USD, respectively.

A final note on the device side -- the Galaxy Gear, despite rampant advertising -- was a virtual nonfactor in Q3 earnings.  Samsung -- who reportedly is planning a Google Glass Explorer challenger -- has a lot of work to do to grow wearables into a high volume market.

V. Outlook -- Smartphones, Tablets, Intellectual Property

Samsung's smartphone growth continues to slow, but not as badly as Apple.  Microsoft's Nokia Devices, South Korea's  LG Electronics Inc. (KSC:066570) and a variety of Chinese OEMs -- including The Lenovo Group, Ltd. (HKG:0992), ZTE Corp. (SHE:000063), and Huawei Technologies Comp. (SHE:002502) -- are all slowly robbing Samsung of market share.

On the tablet front Samsung has the most growth potential.  With Apple's decision to price its 7-nch tablet $200 USD higher than Samsung's most recent model, it's essentially giving Samsung the majority of sales at this form factor.  Given its aggressive price, the only major concern for Samsung's tablet sales remains intellectual property concerns.

Apple has given Samsung the 7-inch market with its pricing decisions.
Recent patent decisions in the U.S. indicate a high likelihood that the majority of Samsung's product line is in violation of Apple's patent portfolio on multi-touch and other technologies.  Questionable nature of these patents aside, Samsung has hope yet of staving off Apple, though, in that it can release so-called workarounds that delay bans.

Apple patentSwipingApple Patent
Apple claims to "own" exclusive writes to "scroll", "swipe", and type with reliable accuracy on multi-touch displays.

Thus thanks to a combination of the inherently slow U.S. court system (two Apple v. Samsung lawsuits remain pending in federal court -- the GS4 one won't be tried until late 2014, at the earliest) and its workaround strategy, Samsung remains relatively safe in the U.S. -- for now.

VI. Outlook -- Semiconductor, R&D, and Report Card

Expect Q4 to be a key test as Samsung faces a refreshed Apple lineup and new models from HTC, Nokia, LG, and other players.  The Galaxy Round is Samsung first effort tipped to try to ward off those rising stars in Q4 2013.  It features a slightly rounded OLED screen, which gimmicks aside supposedly "hugs" the outline of your leg better when in your pocket.

But while smartphone and tablet market performance remains a key test in Q4, Samsung seems sure to post more record profits thanks to its semiconductor sales.

Basically Samsung is selling as much DRAM as it can manufacturer, but demand is still outpacing growth.  Thus in Q4 expect yet higher profits.  Of Samsung's 6 trillion won ($5.64B USD) in Q3 capital spending, roughly half ($2.5B USD) went to the semiconductor unit, with the chief goal of pumping up DRAM production.
Samsung DRAM
Samsung is cashing in, in the wake of a DRAM supply shortage [Source: regmedia]
From whence does this demand come?  The demand surge comes thanks to supply shortages at SK Hynix Inc. (KRX:000660), a top DRAM supplier.  A fire broke out last month at SK Hynix's DRAM line in Wuxi, China, a facility that accounts for 10 percent of the world's DRAM supply.  While production is expected to fully resume this month, the shutdown is expected to cut SK Hynix's output by 14 percent, and leave the overall market with a 7 percent deficit in components.  To Samsung, that news is the sweet sound of money.

So expect revenue, profit, and overall financials to rise to new records in Q4 -- even if Samsung was basically handed this golden opportunity via SK Hynix's misfortune.

Samsung's earnings report card for Q3 2013 is:
  • Revenue                                     B+
  • Profit                                          A-
  • Budget Phones:                           A-
  • Mid-to-Premium Smartphones:     B
  • Consumer Electronics                  C
  • Semiconduct/Display                   A
In other words, the world's largest electronics company is still the world's largest electronics company, but it didn't escape the quarter without showing signs of weakness.

Sources: Samsung [PDF], iNews [Google Translated], WSJ, Bloomberg

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