Samsung Electronics (SSNLF.PK) announced a record Q4 2012 on Jan. 24, seeing its net profits rise to a high of 7.04 trillion won on the back of strong smartphone sales as well as a recovery in chipset margins. Operating profits for the quarter grew to a record 8.84 trillion won ($8.3 billion), about 90% higher than the year-ago quarter and more than 10% better than its previous record posted last quarter.
Most of the company's profits were driven by the telecom division, which had sales of over 31 trillion won ($29.4 billion) -- a growth of over 50% year over year -- driven by the immense popularity of the Galaxy S III as well as the newly launched Galaxy Note II smartphones. The high demand for mobile devices helped drive profitability in the company’s semiconductor and display panel businesses as well, both of which reported their highest respective margins for the year as panel prices stabilized and supply-demand balance improved in the favor of chipset manufacturers.
Samsung's High-End Smartphones
The past year has seen Samsung gain a lot of smartphone market share. The release of Galaxy SIII last year helped Samsung take a decisive lead in the smartphone market, selling almost twice as many smartphones as Apple (AAPL) in both Q2 and Q3. As a result, its smartphone market share doubled to more than 36% in Q2 2012, from about 18% during the same period in 2011. We believe that the big market share gains that Samsung has achieved is for the most part a result of the number of low-end Android smartphones it has flooded the markets with, both in emerging as well as developed markets.
However, Samsung's superiority in low-end smartphone market was long foreseen considering the company’s scale and the market flooding strategy it has used right from the start. What is relatively new is that it has managed to leverage the huge following garnered with the wide array of Android choices to start challenging Apple in the high end of the smartphone market.
Samsung recently announced the sale of its 40 millionth Galaxy SIII smartphone, just two months after hitting the 30 million mark. If we look at sales immediately after launch, almost 20 million SIII units were sold in only 100 days of its launch. This may be less than half of what Apple managed last quarter after the iPhone 5 launch, but it should be kept in mind that a portion of Apple's sales included the older versions of the iPhone (whose prices were discounted after the launch) as well. Also, the Galaxy S series is only in the third-generation compared to the iPhone 5, which is a sixth-generation product, meaning that Samsung had a comparatively smaller base of Galaxy owners to upgrade than Apple had with the 5.
The incredible success that Samsung has had with the new flagship Galaxy S, points not only to the rapid pace of growth in smartphone sales worldwide, but also the company's growing presence in high-end smartphone market -- a segment that has long been Apple's hegemony. Along with the S3's popularity, Samsung also benefited from the sales of Galaxy Note II, which was launched in the midst of the holiday season. With Samsung's next-generation Galaxy S4 scheduled to be launched later this year, we expect Samsung to carry the momentum into 2013 as well. High-end market share gains may be tougher though as Nokia and RIM ready their ships for a Lumia- and BB10-backed turnaround and winning share at the expense of Apple could be tough.
Chipsets Stage Recovery
Samsung's chipset business, which was severely hampered by falling prices owing to oversupply, showed signs of recovering in the latter half of 2012 with Q4 marking a high of 14.8% in operating margins. At the same time, the mobile market is growing in leaps and implying high future demand for Samsung's chipsets. The smartphone market showed significant growth in 2011, and given the 42% year-over-year growth rates seen so far, 2012 final results will likely show that it was a strong year. Despite some remaining macroeconomic uncertainty, the consumer shift toward smartphones continues to be strong. At the same time, tablet growth is picking up serious momentum. Gartner estimates that tablets grew by over 250% in 2011, and will continue to grow rapidly for the next few years, to reach about 370 million unit sales by 2016.
Apart from rival mobile manufacturers, Samsung's chipset business is also exposed to demand from its mobile division for Samsung is increasingly using its own chipsets in its smartphones. For example, the highly popular Galaxy SIII and Note II use its Exynos line of chipsets, which the company is looking to use in its forthcoming Galaxy S4 as well. However, Apple's decision to gradually move its component orders away from Samsung could have an adverse impact if Samsung doesn't manage to make up for that loss with sales to its own smartphone division.
Disclosure: No positions.