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Phonemaker looks to Galaxy S5, Gear 2, and Note 4 to boost sales in Q2-Q4

Founded in 1969, the Samsung Electronics Comp., Ltd. (KRX:005935) (KRX:005930) is by far the largest company in South Korea with a market cap of $176.8B USD.  It also happens to be the world's top smartphone producer and second place in tablet sales.  So when it shows signs of trouble, it's a major concern for investors.

I. Weak Won, Bonus Play Role in Profit Slump

Such was the case early this month when Samsung delivered its earnings forecast, predicting the first dip in profit in two years.  (Samsung delivers its earnings report relatively late, so it offers an early unaudited estimation to give analysts a jump on their work.)

On Thursday Samsung put Q4 2013 officially in the books, and left more optimistic analysts cursing.  A survey by Thomson Reuters I/B/E/S of analysts taken earlier in January following Samsung's guidance release predicted a W10.3T (~$9.53B USD) operating profit, which would have set a record.  Dow Jones Newswires' analyst survey came in just slightly lower at W9.65T ($8.93B USD).

Korean Won stack
Korea's strengthening Won hurt Samsung's profit. [Image Source: Bloomberg]

Instead Samsung posted operating profit of just W8.31T ($7.69B USD), a substantial miss, even in the wake of the gloomy forecast.  Net profit (profit after taxes) was down roughly one trillion Won from the previous quarter, at W7.24T ($6.7B USD).  Revenue was up slightly, at a record W59.28T ($54.87B USD).

A strengthening South Korean Won (KRW) was partly to blame.  Low inflation pushed the value of the currency, meaning Samsung was getting less Won when it pulled in revenue from Europe and the U.S.

A display of gratitude and generosity towards the company's employees also impacted profit.  In honor of the twentieth anniversary of Chairman Lee Kun Hee unveiling a new vision for the company -- a vision that has driven it to unbelievable new heights -- Samsung gave a W800B ($741M USD) bonus to employees.

Samsung Group Chairman
Samsung Group chairman Lee Kun-Hee announced a new vision for the company 20 years ago.  To honor the transformative effects, Samsung gave employees a bonus this quarter.
[Image Source: AP]

For Samsung it was a mixed year: the company saw misses in Q2 2013 (and now Q4), but outperformed expectations in Q1 2013 and Q3 2013.

II. Some Gains

One traditionally weak unit -- the consumer electronics (CE) unit -- was actually a success story for the Korean OEM.  The category, which includes appliances such as refrigerators, dishwashers, and ranges, plus televisions soared.  Samsung reported a 90 percent increase in quarter-on-quarter (QoQ) TV revenue, which help drive profits for the unit up 88 percent.  The growth in the appliance market wasn't quite as explosive, but was respectable, as well.
Samsung Washing machine
Samsung's smart appliances may drive profits in years to come.

Samsung hopes to by the end of next year reach the top spot in the appliances market, which it currently has a 10.5 percent market share.  Samsung pulled in an estimated $12B USD in appliance revenue last year, compared to Whirlpool Corp.'s (WHR) $18B USD haul in 2012.  Samsung is currently the fastest growing appliance maker, and its leaning on that steady progress and higher-margin "smart" appliances to help steady the up-and-down television component of its CE business.  It wants CE to eventually be a key third pillar of profitability, similar to what semiconductors and mobile devices are today.

Samsung's IM (IT and Mobile) unit is where the mixed results start to pop up.

In the tablets space Samsung gained ground, selling nearly 12 million, units, up roughly 50 percent from the 7.9 million it moved in Q4 2012.  The results pushed Samsung's yearly tablet sales to 40 million, good enough for second-place behind arch-rival Apple, Inc. (AAPL).

The company plans to test the waters with a pair of 12.2 inch tablets, the NotePro (which includes a stylus) and the TabPro (which doesn't).  These tablets were unveiled a couple of weeks ago at the 2014 Consumer Electronics Show.

From there, though, most of the news was bad, mobile-wise.  Samsung indicates it overspent on mobile advertising, cutting into profit.  Major campaigns included a promotion with the world's top soccer stars in the wind up to the World Cup, plus a pricey sponsorship of the 2014 Winter Olympic Games in Sochi, Russia.

Senior Vice President Kim Hyunjoon is quoted by Reuters as saying:

We'll actively leverage global sports events such as the Sochi (Winter) Olympics and our retail channels... but we will try to raise the efficiency of our marketing spend and lower our overall mobile marketing budget to revenue this year compared with last year.

Samsung has been criticized for overspending on advertising.

III. Customers No Longer View GS4 as "The Next Big Thing"

Smartphone shipments did rise 4 percent in the fourth quarter, with 91 million devices shipped, according to KB Investment & Securities Comp. (KRX:105560).  But Samsung moved only 9 million of its top-margin flagship Galaxy S4 devices.  By contrast in Q4 2012 Samsung -- which does not release unit sales figures -- is estimated to have only sold 60 million smartphones, but still managed to move an estimated 15.2 million units of its then-flagship Galaxy S3 device.

Samsung Galaxy S IV

As Samsung tends to release its flagship phone earlier in the year it tends to see its sales peek during the summer and fall, only fall slightly in Sept.-Dec. window when Apple's new flagship device hits the market. 

The Galaxy S3 and Galaxy S4 followed very different sales arcs, despite similar announcement dates.  The Galaxy S4 was very fast out the gate and sold an average of 20 million units per quarter in Q2 and Q3.  But this quarter sales fell roughly in half, dropping well below the Galaxy S3 monthly sales rate at that point in the device's lifecycle.  Still the Galaxy S4 did ship more units during its launch year.  By the end of 2012 Samsung had sold roughly 39.9 million Galaxy S3s, by the end of 2013, Samsung had sold roughly 49.0 million Galaxy S4s.

Part of this difference in sales pace is likely due to Samsung rolling out devices faster in top sales regions like the U.S. and Europe, which used to trail the South Korean launch by healthy margins.  Overall, if there's one conclusion that can be drawn, it's that the Galaxy S4 has been a steady seller for Samsung, if a bit disappointing in growth and longevity.

Arch-rival Apple shipped 33.8 million iPhones, of which an estimated 20 million were iPhone 5Ss, the premium flagship variant.  Those numbers indicate that while the Galaxy Note 3 -- Samsung's popular larger-screen phablet device -- is competitive with Apple's iPhone 5C in terms of sales, that Apple's star device is outselling the Galaxy S4 2-to-1.

What makes this trend even more troubling is that Samsung's roughly 75 million sales of older smartphones (not the GS4 or Galaxy Note 3) could also easily erode from a second major competitive threat.  Samsung's budget sales are heavily driven by Chinese smartphone sales, a market in which Samsung has been dominant for some time now.

In China domestic phonemakers Lenovo Group, Ltd.'s (HKG: 0992) and Huawei Technology Comp., Ltd. (SHE:002502) are looking to chip away at Samsung's Chinese sales with models that sell for around $100 USD, unlocked.  Lenovo has been particularly effective, moving into third place in global smartphone sales in Q3 2013, behind Apple and Samsung.

Lee Young Hee, executive vice president of the company’s mobile business, tried to cheerr up analysts announcing that the Galaxy S5 was coming soon and would revive sales.  He commented:

We’ve been announcing our first flagship model in the first half of each year, around March and April, and we are still targeting for release around that time.  When we release our S5 device, you can also expect a Gear successor with more advanced functions, and the bulky design will also be improved.

It's no secret what the highlight of that device may be.  Not content to simply add a fingerprint scanner as Apple and other manufacturers have, Samsung is driving to possibly add a biometric Iris sensor unlock to its new device.  He told Bloomberg:

Many people are fanatical about iris recognition technology.  We are studying the possibility but can’t really say whether we will have it or not on the S5.

Samsung is also rumored to be using its flexible display technology to add a wrap-around three-sided display, which overlaps onto the edges of a smartphone or tablet.  The technology is expected to first appear in the Galxy Note 4.  Samsung has also filed patents that indicate it may launch an Android glasses wearable sometime later this year.

IV. Devices Unit Also Suffers

Locked in a complex technology war with Taiwan Semiconductor Manufacturing Comp., Ltd. (TPE:2330) (TSMC) and Intel Corp. (INTC), Samsung will spend deeply this year, with capital expenditures on pace to match 2013's record spending (W23.8T ($22B USD)).  Samsung plans to tape out 20 nm this year, and hopes to reach volume production next year. 

samsung die shrinks

[Image Source: Samsung]

It's a bit behind Intel, which is already on 14 nm volume production and TSMC, which is on volume production at the 20 nm node.  Thus, you could say Samsung is two years behind Intel and one year behind TSMC process wise.  But It's spending nearly twice as much as these foes, so it may be able to close that gap over the next few years.

In Q4 the Device Solutions (DS) unit saw a small drop in profit from Q3, despite a rise in SoC and DRAM/NAND revenue.  Despite mobile growth fueling more demand, supply eased in Q4 as SK Hynix Inc. (KRX:000660) ramped DRAM/NAND production back up following a major factory fire from earlier in the year.

If the IC (integrated circuit) side of the DS unit was mixed, the display unit was downright bad.  As mentioned, Samsung's sales of packaged TVs was up, but its sales of displays as components -- for everything from smartphones to TVs saw a 20 percent drop in revenue and 89 percent drop in profit from Q3 2013.  Sales of the pricey high end OLED displays slumped slightly, although there was an uptick in new OLED screen model sales.  Sales of LCD screens -- which constitute the bulk of Samsung production -- drove most of the slump.  The key issue there was oversupply.

All of Samsung's units remain profitable, but it looks to be in for a rocky Q1 2014, even by its own forecast.  Thus expect the company to earn a pass for the first quarter, but be keenly launched in Q2 2014 when its critical next-generation Galaxy S-series and next-generation Galaxy Gear debut.

Sources: Samsung, Bloomberg [1], [2], Reuters



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RE: Only?
By Reclaimer77 on 1/26/2014 10:02:30 AM , Rating: 2
The Nexus isn't all that "fast", not sure what he's on about. In pure I/O it gets crushed by the Note 3 and every other benchmark. I'm not sure comparing the Nexus 5 to the S4 would even be fair, given the far newer hardware in the Nexus and all the improvements that goes with that. The Snapdragon 800 and Adreno 330 blow away what's in the old Galaxy S4! Compare apples to apples people.

Bloatware doesn't necessarily impact performance. You don't even need to root or ROM the phone to turn off the bloatware you don't want. Sure it's still there, but it can't run anymore so who cares?

Settings > Apps > DISABLE. It doesn't get easier than that.


RE: Only?
By retrospooty on 1/26/2014 11:29:43 AM , Rating: 2
"Bloatware doesn't necessarily impact performance. You don't even need to root or ROM the phone to turn off the bloatware you don't want. Sure it's still there, but it can't run anymore so who cares? Settings > Apps > DISABLE. It doesn't get easier than that."

I am going to guess you don't have a newer Samsung phone. No, you cant disable most of it unless you root it and yes, all combined, it definitely slows things down. Overall responsiveness suffers intermittently, but consistently. Comparing a brand new stock Note3 to a brand new stock LG G2 (same CPU, same res, so its a good comparison) - the G2 is loads faster and more responsive. Just launchings apps, phone, chrome, anything is noticeably lagged on stock SAmmy ROM's. Most of it is running in the background and cant be disabled as/is on stock ROM's. This is at least true for GS3 and newer Samsung phones, not sure about older ones. Root it and remove the bloat and you are right, it flies - Samsung uses good flash memory and it's pure I/O is alwys at or near the top. Its just the bloat.


RE: Only?
By Reclaimer77 on 1/26/2014 2:46:54 PM , Rating: 2
Retro I know you like your LG, its a nice phone. But I know you know LG has their own UI schemes and customizations. And most reviewers seem to think its even more poorly executed than TouchWiz and less polished.

I don't know how you can honestly compare the Note 3 to the G2 while pretending like LG runs AOSP. It doesn't, not even close. It HAS "bloat"!


RE: Only?
By retrospooty on 1/26/2014 9:45:40 PM , Rating: 2
Sorry dood. You arent speaking from a point of fact, or experience, you are speaking about reviews which can be made to say anything. There is such a thing as Sambloat, it DOES slow phones down and there IS a lag issue on Samsung phones and it launches apps noticeably slower than the same app on the same spec'd G2... Take my word for it as a person that sets up alot of phones on a regular basis and has compared them side by side many times. Sambloat is real, it slows their highest end phones down in a very noticeable way. Like i said , i dont think you have used any recent S3 or newer device, not long enough to go through and really thoroughly test it or you would know what i am saying... LG has bloat too but not as bad and it doesnt cause a bad lag. Samsung has an issue here whether you want to admit it or not. As the highest volume seller of Android phones it gives Android a bad name. It isnt Android at all it is Sambloat, it is real, it is a problem, like it or not.


RE: Only?
By ritualm on 1/26/2014 6:32:14 PM , Rating: 2
quote:
Bloatware doesn't necessarily impact performance.

Tell that to all the mainstream laptop buyers out there.

A laptop with a hard drive inside is going to be not very fast at startup. The bloatware that typically goes on top of the OS almost always run immediately after startup. User logs in and gets inundated with popups, registration forms, the whole nine yards, while the system is nigh unusable for several minutes.

Turning off the bloatware is not the same as removing them. That stuff already takes out a large chunk of onboard storage, and when you have only 8/16GB to work with - where a substantial chunk of it is squared away by the Android system - that's a lot.

I played with the S4 at Best Buy. The entire phone lags, and it made no sense given its hardware. Didn't stop me from buying one factory unlocked, but it meant my digital sledgehammer was on standby.
quote:
Settings > Apps > DISABLE. It doesn't get easier than that.

Negative. All the onboard S-apps on my S4 lasted less than 24 hours.

I killed the stock ROM and installed CM10.1 over it, because I can't stand the debilitating, crushing bloatware load on the phone. 30+ non-Google, non-essential services, all set to run on startup, is a recipe for disaster. Disabling apps is only a short term fix. Long term? Remove 'em all, so they're prevented from even running in the first place!

Your argument is analogous to shooting the limbs off a zombie instead of blowing its head off.


RE: Only?
By troysavary on 1/27/2014 5:21:49 AM , Rating: 2
Exactly. OEM bloatware is the reason so many people think Windows is slow. It isn't as bad as it used to be, but the problem is still there. The next biggest issue is all the crappy toolbars that auto-install on a lot of software downloads if the user misses one check box in the myriad of pop-ups during the install process.


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