“The Next Big Thing” Stopped Fueling Samsung Electronics – A Look at Samsung’s Guidance and a Revisitation of Previous Quarters

Quick context: Samsung announced Calendar Q4 2014 Financial Guidance. News link is here. http://www.bloomberg.com/news/2015-01-07/samsung-profit-beats-estimates-on-buoyant-chip-demand.html

A Slightly Long-Winded, Yet Quick, Background

Samsung Electronics has always been bigger than Apple – no real surprise, considering its parent chaebol began corporate life around 75 years ago, and given that Samsung had sold around 150M mobile phones (source: Gartner) the same year Apple was starting from…well…zero.

But then Samsung rode the smartphone wave – plus arguably doing a bit more than riding Apple’s coattails – and along the way, something massively profitable happened. To oversimplify, not only had Samsung bumped up mobile phone unit sales to an estimated 281M in 2010 according to Gartner (with the added bonus of huge conquest sales opportunity from a company known as Nokia, which reportedly sold 460M units that year) – Samsung was also mix-shifting all of those handsets to smartphones. With only about 67M total Android smartphone sales in 2010 according to Gartner, there was plenty of mix to the shifted, provided consumers could be convinced to upgrade to something smarter.

Upgrade they did, sparking a tech gold rush like no other.

And so, fully embracing both the handset growth trend and enriching its handset mix in favor of higher-ASP smartphones, things were going just swimmingly for Samsung, or so it seemed (Screenshots taken from Samsung’s 2011 and 2013 Annual Reports):

samsung-snippet-2013-annual-report

samsung-snippet-2011-annual-report

Never mind those silly Apple lawsuits, right? But then that pesky Shakespearean worm – really more like Jack’s beanstalk – turned with a vengeance. Despite what a cynic might call Samsung’s best efforts, Apple still had a great deal of addressable space (countries and carriers) left to grow its iPhone and iPad business. Even mighty Samsung could only gain so much ground at a time, even with ready access to product inspiration (so maybe that was a little opinion there). In any case, mix-shifting that many mostly basic-level phones to mostly smartphones is no small feat.

Fending off various competitive pressures while pressing its case versus Samsung through the typical legal channels, Apple continued to grow from a $65B company (fiscal 2010) to $156B (fiscal 2012) mostly on the continued strength of iPhone. So even as it seemed like Apple was losing Steve Jobs’ momentum/legacy…losing the narrative to Samsung…losing the cool factor…it was in actuality more than prepared, more than strong enough to weather its inevitable growth plateau and gross margin adjustment phase.

And when the iPhone 5S and 5C met with strong initial consumer approval – and finally, the hands of China Mobile subscribers – you got a sense that the narrative was beginning to shift once more in Apple’s favor. Sure, Samsung’s not the top competitor, it’s Google, but…we all know there’s no love lost here.

Of course, it’s not just Apple vs. Samsung or Apple vs. Everyone Else. Everyone from Alcatel to ZTE wanted a piece of the #1 smartphone/handset OEM too. Which placed Samsung, as an all-things-to-all-people-type of company, in an uncomfortable position of facing multi-front battles, with many of the competitors being market segment specialists (such as low-end would-be disruptors).

Yes, Samsung still turned in roughly $228B in revenues for 2013, up a solid 13.7% from the prior year. But trouble was brewing beyond the sight of the casual observer (which included me at the time).


Update on Samsung’s Summary Financials, Including Today’s Guidance

In retrospect, Samsung’s first “obvious” trouble signals showed up in the second half of calendar 2013. Things went decidedly south from there. A quick recap of the summary financials, which you may find familiar if you read my post from late July:

Notes: Revenues and operating profit (which both the financial press and Samsung use), in trillions of won.

“IM” is Samsung’s IT & Mobile Communications division, which includes smartphones and tablets.

(Historical data source: Samsung Investor Relations website; IM data from quarterly PDF presentation files, Samsung IR Calendar.)

Calendar Q2 2013:

Revs: 57.5T won (+20.7% year-over-year)
Operating Profit: 9.5T won (+46.2% YOY)
IM Revs: 35.5T won (+47.8% YOY)
IM operating profit: 6.28T won (+49.9% YOY)

Calendar Q3 2013:

Revs: 59.1T won (+13.2% YOY)
Operating Profit: 10.2T won (+25.9% YOY)
IM Revs: 36.57T won (+22.2% YOY)
IM operating profit: 6.7T won (+19% YOY)

Calendar Q4 2013:

Revs: 59.3T won (+5.7% YOY)
Operating Profit: 8.3T won (-5.7% YOY)
IM Revs: 33.89T won (+8.2% YOY)
IM operating profit: 5.47T won (+0.6% YOY)

Calendar Q1 2014:

Revs: 53.7T won (+1.5% YOY)
Operating Profit: 8.5T won (-3.4% YOY)
IM Revs: 32.44T won (+2.1% YOY)
IM operating profit: 6.43T (-1.2% YOY)

Calendar Q2 2014:

Revs: 52.35T won (-9.0% YOY)
Operating Profit: 7.19T won (-24.3% YOY)
IM Revs: 28.45T won (-19.9% YOY)
IM operating profit: 4.42T won (-30.0% YOY)

Calendar Q3 2014:

Revs: 47.45T won (-19.7% YOY)
Operating Profit: 4.06T won (-60% YOY)
IM Revs: 24.58T won (-32.8% YOY)
IM operating profit: 1.75T won (-73.9% YOY)


As for Calendar Q4? Well, the headlines vary, but the guidance obviously doesn’t. Samsung is guiding to revenues of about 52T won, and operating profits of about 5.2T won. (Note that the won has weakened vs. the dollar, it now being about 90% as strong as it was in late July.) In KRW terms, Samsung’s experienced a -12.3% year-over-year revenue decline and a -37.3% YOY reduction in operating profit. Better than calendar Q3 2014’s results on a negative growth trend basis, but that’s not exactly saying much. That’s three consecutive quarters of negative YOY growth, and a major profitability slump.

What’s left unsaid for now (full results aren’t due for a few weeks yet) is that the IM division (mostly smartphones and tablets, which brings more revenue than any other division) will almost certainly turn in negative growth results significantly worse than the corporate average for the third consecutive quarter. It’s really pretty simple – Semiconductor is Samsung’s strongest business line right now, and second-largest by revenue. Samsung has been rather bullish on the memory market recently, and Apple needs a lot of application processors these days. The better Samsung’s NAND/RAM chip business and System LSI division (read: application processors including the Apple A8) do, the more likely it’s “propping up” poor results elsewhere.


Comparative Financial Slumps

Given that I’m no expert on Samsung, which isn’t usually part of this humble blog’s orbit, I have no clue as to how or whether Samsung will find a way to deal with its new negative growth trend. (I’m guessing it’ll find a way to stabilize within a year or two, but that’s as far as I’ll go.) I’ll leave the expert analysis to those following the company much more closely than I do.

As far as the big numbers are concerned, though? From 2013 to estimated 2014 year-end, Samsung’s revenues declined from 228.7T to ~205.5T KRW revs, meaning -10.1% growth if guidance is accurate. Operating profit, declining from 36.8T to ~24.95T KRW year-to-year, suffered -32.2% growth.

By way of comparison, Apple’s “worst growth year” in recent memory (fiscal 2012 to 2013) saw revenues increase 9.2% YOY, although given the margin transition, operating profit declined about 11.3% YOY (it’s since increased about 7.2% in fiscal 2014).

Not that it’s optimally comparable, but the prior undisputed #1 handset OEM, Nokia, didn’t do so well when the competition caught up with it. In 2008, revenue growth suddenly stalled (essentially flat YOY at 50.7B euro, vs. 24.2% growth in 2007), and operating profit slumped 37.8% from 2007 (about 8B euro) to 2008 (about 5B euro). 2009 was much worse – a 19.2% drop in revenue and a 75.8% drop in operating profit.

Samsung’s bigger, stronger, and better-integrated than Nokia ever was. But as with Nokia, its handset division is now a significant liability to be dealt with, somehow.

“Samsung beating Apple” has been a common refrain, sometimes narrowly applied, sometimes not. More accurately, Apple has been the relative upstart the entire time. And, while it’s a function of product seasonality and ForEx to a lesser extent, I home-game project Apple to outrevenue Samsung on a USD basis by well over 30% in calendar Q4 2014.¹ Considering that Apple has never out-revenued Samsung in any quarter as far as I know, this is surprising to say the least.

It’ll be interesting to see how Samsung weathers 2015.


1 Based on Apple’s top-end revenue guidance of $66.5B, and Samsung’s 52T KRW revenue guidance. I’ve “accounted” for the KRW being relatively stronger in October vs. November and December.

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One thought on ““The Next Big Thing” Stopped Fueling Samsung Electronics – A Look at Samsung’s Guidance and a Revisitation of Previous Quarters

  1. Pingback: Apple will set even bigger App Store records in 2015 – Computerworld | Everyday News Update

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