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Executives

Robert Yi - Senior Vice President and Head of Investor Relations

Hyun Joon Kim - Vice President of Mobile Planning

Analysts

Nicolas Gaudois - UBS

Matt Evans - CLSA

Jae Lee - Daiwa Securities

Peter Yu - BNP Paribas

Simon Dong-je Woo - Merrill Lynch

Mehdi Hosseini - Susquehanna

Mark Newman - Stanford Bernstein

Samsung Electronics Co., Ltd. (OTC:SSNGY) Q1 2013 Earnings Call April 26, 2013 8:30 AM ET

Operator

Good morning. I would like to thank you for your participation and with that we will begin the First Quarter 2013 SEC's Earnings Release Conference Call. There will first be a presentation from SEC followed by a Q&A session. (Operator instructions) And with that, we would invite SEC to give their speech.

Robert Yi

Good morning. This is Robert Yi, Head of Investor Relations team of Samsung Electronics Company. Thank you for your participation in our first quarter 2013 earnings conference call. As a reminder, we are providing simultaneous translation for today's conference call. We adopted this service to provide local and global investors with the same information and to avoid inconvenience of providing two separate in Korean and English. Given this is our first trial, I would like to ask for your understand of any inconvenience and I would appreciate it, if you would contact us by email to share your suggestions for our improvement.

First, I would like to introduce you to the participating executives from our business units. (Inaudible) VP of Memory Marketing; Mr. Kim Hyun Joon, VP of Mobile Planning; (inaudible) Vice President of Visual Display Marketing; and (inaudible) Vice President of Samsung Display' and [Mr. Kim Yong Un] Vice President of IR team.

For the first quarter our revenue declined by 5.7% QoQ affected by lower overall demand and weak seasonality. As we anticipated at the beginning of the year, our business experienced revenue declined expect the IM division. Our gross profit was similar to the last quarter due to solid sales of high value add set products and improved sales at differentiated memory products. We maintained a similar level of SG&A expense as of the last quarter and delivered a similar level of operating profit as well. While we maintained similar level of SG&A expense in terms of amount, it increased slightly as a portion of overall sales.

While overall operational cost decreased due to seasonally weak market conditions, our R&D and other expenses increased. Our operating profits maintained a similar level as the previous quarter and our OP margin improved slightly driven by increased sales of high value add set products. Our first quarter non-operating income was KRW 300 billion including equity method income of KRW 200 billion, and FX gain of KRW 200 billion.

Now, on our prospects. From a macro perspective, we are concerned of the continued market uncertainty due to European financial crisis and the recent slowdown of global recovery. From a business perspective continued R&D is called for to strengthen our competitiveness and increase in expenditures due to planned new product launches is expected. The component business, while we are cautiously optimistic about market recovery due to increased demand from select markets, we expect increased competition in mobile business due to expansion of the mid to low range smartphone markets.

And as for TV business, market growth continued to slow down and we are particularly concerned over demand decline from developed countries. We will continue to make investment to differentiate our product lines and to strengthen technologic prowess. In particular, we will continue with our significant R&D investments to procure long term competitiveness and core technology. Furthermore, we will continue to develop synergy between our component and set businesses to strengthen the foundation of our future growth. For our set business we are going to focus on offerings, different user experience and convenience through organic integration of hardware and software. And we will focus on announcing our response capabilities for the distribution channel.

For our component business we will continue to make investments to improve our future competitiveness, at the same time we aim to increase profitability by strengthening our leading edge process leadership offering more differentiated solution product and actively responding to market changes. Next, I would like to comment on our capital expenditure for 2013.

We have executed KRW 3.9 trillion CapEx in the first quarter, including KRW 1.5 trillion for semi and 1.5 trillion for our DP. As I commented during our last earnings release conference call in January, IT market is witnessing a structural change in both set and component industries. We are conducting an ongoing review of our investment plan for the second half of 2013 and the future, to meet the demand increase for differentiated solution product and to enhance our technological advantages including leading edge process leaderships.

Nonetheless, we expect the total 2013 CapEx level to be not much different from that of last year. Therefore, considering last year's CapEx plan, we expect our capital expenditure to increase in the second half of 2013. Now, I will turn the conference over to the Executives from business units who will brief you more on our first quarter performance and market outlook.

Unidentified Company Speaker

Yes, good morning. This is (inaudible) Vice President of the Memory Marketing team. In the first quarter, PC set demand remained weak due to seasonality while PC DRAM supply continued to decline led by the product mix adjustment towards mobile and server demands. Mobile DRAM market demand remained stable driven by new smartphone and tablet launches planned for the second quarter. Supply growth was limited while overall demand levels remained stable.

NAND market demand remained at a consistent level from the previous quarter under seasonally weak market conditions driven by increased density for smartphones and tablet devices, coupled with increased adoption of SSD in PC and enterprise equipment. On the supply side growth declined due to the product operations focusing mainly on embedded product mix. For our company in the first quarter, our DRAM continuously improved -- excuse me, our business continuously improved our differentiated mix including mobile and server DRAMs to see profitability and to meet market demands.

Our NAND business focused on securing stable profitability by reducing cost through process migration while also improving solution product offerings through an enhanced product mix. Our product DRAM bit shipments decreased by a mid-single digit percentage from the previous quarter while price remained similar to the last quarter. Our first quarter NAND bit shipments increased by a low 10% range for the last quarter while product price dropped by a mid-single percentage. Next I will comment about the memory market, outlook and our strategy going forward.

Looking at the DRAM market, PC DRAM demand is expected to stay weak as a result of low PC demand coupled with overall market shrinkage. However, mobile DRAM demand is expected to grow. We expect that the supply and demand balance for mobile DRAM market is likely to remain stable due to demand for high density and high performance mobile DRAM for new flagship model launches by key players and also due to an increased demand from Chinese set makers for new product lines.

Looking at the NAND market, we expect that the overall market demand is likely to increase driven by new mobile product launches and increased SSD adoption by datacenters. On the supply side, we expect that as more suppliers -- or they will transition more to embedded products such as eMMC and SSD solution. Moving on to our company strategy for the second quarter. For DRAM, we plan to improve our differentiated product lines by actively responding to market change and to changing consumer needs by strengthening our cost competiveness led by increasing our 20 nanometer class processes.

For mobile DRAM, we will focus on improving our profit margins by increasing the proportion of differentiated solution products such as LP DDR3 and eMCP while also increasing high density server DRAM sales. For NAND, we will continuously reinforce our competitive advantage by accelerating our 10-nanometer class migration for greater cost competitiveness, while expanding the proportion of the embedded solution offerings such eMMC, eMCP, as well as SSD.

During the second quarter, SSD DRAM bit shipments are expected to increase by single-digit percentage quarter-over-quarter, while annual bit shipments are expected to increase by low 20% range year-over-year. We expect our bit growth to be at a similar level to the market. The second quarter NAND market bit shipments are expected to see a double-digit growth from the last quarter while annual bit shipments are expected to increase by mid-40% range. We expect our bit growth to be at a similar level to the market.

Lastly, I will briefly comment on the system LSI business. During the first quarter our revenue declined from the previous quarter due to seasonally weak set product demand. Going forward, we expect to see continued growth in the mobile market focusing on smartphone and tablet devices and for our company we intend to increase sales of 28-nanometer products and also high resolution CMOS image sensors to continue to strengthen our growth momentum. In particular, in the interest of preparing for our future leading edge advances, we will continue our development on leading edge processors, such as the 20-nanometer and 14-nanometers processes to strengthen our future competitiveness. And we will be fully prepared to sustain stable growth momentum by enhancing new product portfolio including mobile connectivity. Thank you.

Unidentified Company Speaker

Good morning. I am (inaudible) Vice President of Business Planning in Samsung Display Company. Today I will present the first quarter's earnings and the future outlook for display business. During the first quarter, while our OLED panel maintained solid performance driven by increased shipments of the premium smartphones, large LCD panel performance declined due to overall market slowdown coupled with price decline.

Overall panel demand declined due to weaker consumer sentiment impacted by slowdown of global economy recovery as well as seasonally weak demand for the set products. For TV panels, while set product sales was relatively solid driven by energy subsidy program in China and Super bowl promotion in North America, overall TV panel demand declined under weak seasonality and set makers reducing their inventory stock. For IT panels, notebook and monitors continued their weak demand and declining sales of tablet devices under weak seasonality were offset by increased demand from new products. Under this downward trend for demand, our large LCD panel shipment and average selling price of LCD panels declined by high single-digit percent from the previous quarter.

In small and medium sized panel market, while LCD panel sales declined, OLED panel sales for premium smartphones continued its growth momentum. Next, I will present the future market outlook. During the second half, we anticipate panel demand to recover driven by seasonal effect and new product launches, while overall panel demand during the second quarter to improve slightly from the previous quarter with continued inventory adjustment by set makers.

For TV panels, we expect the inventory reduction of the current TV product models by May due to promotions related to Chinese Labor Day and the end of subsidy programs. Therefore, we anticipate panel demand to improve from the second quarter on the back of seasonality and new product launches planned during the second half of 2013. For IT panels, we expect tablet device demand to increase led by mass market products in the second quarter and by planned new product launches during the second half of 2013. The outlook for notebook, PC and monitor demand remained cautious while we expect slight market growth during the second quarter.

And during the second quarter, SEC plans to enhance our premium product competiveness by expanding high end product line ups including 60-inch and above large screen panels, and we will also work hard to increase sales for major customers. To meet the anticipated IT panel demands, we plan to strengthen high-value added product lineups including tablet devices, notebook and monitors, while preparing new mass market product lines. To drive OLED business, we plan to achieve growth in high-end smartphone market while continuing R&D activities to improve our future competitiveness and to maintain our current position.

In summary, we are committed to put our best efforts to continuously deliver solid business performances in both LCD and OLED business through differentiated competitiveness. Thank you for your attention.

Hyun Joon Kim

Good morning. This is Hyun Joon Kim, Vice President of Mobile Planning. Today I would like to present our 2013 first quarter business results and also future outlook for the IT and mobile communications business. In the first quarter our business earnings grew from the previous quarter driven by an increase in smartphone sales and decreased marketing expenses. For smartphones, we ended the quarter with increased shipments to smartphone devices compared to the previous quarter led by continued sales momentum in our Galaxy S3 and increased sales of Note 2.

Looking at our tablet devices, tablet shipments were fairly consistent with the last quarter driven by continued sales momentum of current models such as the Tab2 series. Our PC shipments decreased from the previous quarter impacted by a decrease in market demand, while our network business performance improved driven by an increased supply of LTE network equipment. Looking forward, in the second quarter, smartphone market demand is forecasted to stay flat and this will be coupled with increasingly intense market competition. Under these challenging market circumstances, our company plans to focus on increasing smartphone shipments with the launch of our new flagship smartphone, the Galaxy S4.

The Galaxy S4, this was first unveiled in New York earlier in March. It has been very well received by carriers and the press around the world. Galaxy S4 is scheduled to launch around the world at end of April and we are working hard to make the Galaxy S4 an even greater success than the Galaxy S3. Now let's look at the LTE device markets. We plan to strengthen our competitiveness by capturing opportunity in key emerging markets undergoing LTE expansion leveraging our proven competencies and experience. Turning to tablet devices.

While we do expect the market demand to continue its growth momentum, we have also seen that competition is likely to increase. We hope to continue to improve our competitiveness by discovering and accommodating various customer needs through our product lineup. In particular, we expect that the recently launched Galaxy Note 8.0 will be very well received in the market. Looking at the second half of 2013, we anticipate market demand for smartphones and tablet devices to increase entering the seasonally strong market conditions. However, as a result we expect the competition will further intensify as the mid to low end device market will expand around the world, a few products will be rolled out by key players.

We will continue to work on enhancing our competiveness amidst these circumstances. For tablet devices, we will continue to strengthen or differentiated capabilities and improve our tablet product line up to actively respond to changes in the market. Now I will briefly cover our PC and network businesses. For our PC business, while we are facing continuous challenges from the market including a decline in demands, we are working to improve our product mix by increasing sales of our mid to high end products. For our network business, we believe that there are both challenges and opportunities. Challenges include price competition as a result of the economic slowdown, while we also see opportunities from the global LTE service expansion.

In summary, we are working hard with global LTE service providers to tap into the global LTE network opportunities by leveraging our differentiated network technologies. Thank you.

Unidentified Company Speaker

Good morning. I am (inaudible) VP of the Visual Display Sales and Marketing team. During the first quarter, our consumer electronics division sales declined to Q-on-Q due to seasonally lower demand for TV and consumer electronic goods. I would now go over the major business lines. Overall demand for Flat TV declined Q-on-Q under weak seasonality. But the continued emerging markets growth helped to slightly improve demand compared to the same quarter last year.

We continued expand sales of premium product lines and we actively managed market demand in emerging markets through offering LED products customized for regional settings. In particular, we greatly enhanced our brand value in the emerging markets led by increased sales of 7-8000 series. Our digital appliance business continued to expand the mass market product lines in major markets despite the overall demand decline due to the global economic slowdown.

Now moving on to the future outlook. Low season will continue in the second half for flat TV in market. But we expect the overall flat panel TV market sales to recover slightly in the second quarter driven by growing demand for LED TV and Smart TV products. Furthermore, since the global key players will began phasing out old model lineups, we expect intensified competitions arising from old model promotions and aggressive new product launches.

During the second half, we expect flat panel TV demand to increase under strong seasonality. We anticipate overall market conditions to recover over the previous year as sales decline in developed markets will slow down and emerging markets will continue their growth momentum. In addition, we expect competitions for new markets among global players to intensify with the entrance of new premium model lineups including UHDTV and TV over 60 inches.

In response, we are prepared to increase the sale of differentiated smart TV product lines as a leading player of this premium TV market. More specifically, we have added special features in our new smart TVs such as natural language based search, which will deliver new smart TV experiences by providing broad range of content in an easier and faster manner. Furthermore, we will strengthen our premium product lineup by launching improved premium UHD TV featuring high picture quality and differentiated design. In emerging markets, we will strengthen competitiveness of customized LED models that meet regional customers need. Like enhanced sound quality and satellite reception. And we would actively meet new demands from the market by increasing product lineup of 7-8000 series.

As for digital appliance business, we expect a continued low growth momentum in advanced markets and curbed growth in emerging markets due to the global economic slowdown. In response to such market conditions, we plan to enhance product competitiveness by expanding lineups for both mass market and premium products and secure profitability by improving operational efficiency. Thank you.

Robert Yi

Thank you, very much. So we have made all of our prepared presentations and I think we are ready to move on to the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from (inaudible).

Unidentified Analyst

Thank you for the presentation. I have a question on the semiconductor side and then two questions for the [IM] business. Regarding -- well, I think (inaudible) talked about smartphones last year's launches, how supply and demand might become a little bit tight. PC DRAM, I think there is a transitional wave towards mobile DRAM in terms of capacity. Because there is great interest toward mobile DRAM. So supply and demand for mobile DRAM, it's likely to be quite tight in the second quarter. So is it enough to drive off these sales prices or will it actually just stop sort of minimizing the drop in ASP. So I am interested in how tight you think the supply demand dynamics will be for both our DRAM in the second quarter.

Unidentified Company Speaker

Mobile DRAM actually in terms of supply and price, it's based on stable projections. So sliding down or stepping down model was applied. In terms of the bit principal there is no change, but the interface, as it changes to DDR3, there is a premium that is generated. So overall, the average price we think is likely to go up. However, depending on the different makers, there are different types of new products that are launched for high end new product launches. We think that for DDR3, they will use the new interface whereas the greater Chinese makers use DDR2. So there may be a gap in the price range but overall prices we think will move in a slightly positive direction. Thank you very much.

Unidentified Analyst

Regarding IM or telecommunications, I have two questions. I think during your presentation you mentioned earlier, I think it was Mr. Kim, LTE, you said that you are talking -- actually you emphasized differentiated competitiveness of your LTE technology. So compared to other companies, as far as LTE is concerned, what kind of differentiated competitiveness do you have if you could provide us with further details it will be appreciated. And we understand that from China, they are ready to start mass production of commoditized LTE chip. So do you think that you will be able to sustain your competitiveness even amidst that development?

Unidentified Company Speaker

Well, as you are well aware, LTE network chipset and handset, we have all of those technologies. So in terms of next generation LTE network we think we can lead the technology and we can actually respond to various LTE frequency bands of different carriers through just one handset. We plan on strengthening our relationship with the various carriers and extending our handset portfolio so that we can lead the LTE market. And also for markets who will newly rollout LTE services, we intend to use the competitiveness of our company and our experience so that we can try to lead the market.

Regarding your second question about commoditized LTE chips, entering that production from China, we have cost competitiveness and quality. So we will continue to secure these types of mass LTE solutions, and we will also adopt differentiated services of LTE based carriers early on so that we can continue to lead the market. Thank you very much. Moving on the next question.

Operator

Next question is from JPMorgan. Please go ahead.

Unidentified Analyst

Yes, thank you. I have three questions. In the first quarter, did have an one-off charge concerning provisions and for cell phones. Well, a certain company is set to introduce a flexible display in the fourth quarter and what are your plans to introduce flexible display based smartphones and now a question concerning semiconductors.

Unidentified Company Speaker

Well, for the one off provision, in this quarter we have reflected some amount in provision and it was reflected in our books. You had asked for flexible display, it's difficult for us to give you the details for our future technology roadmap, but we will do our best for customer satisfaction going forward.

Unidentified Analyst

And now my second question on semiconductors. Recently mobile DRAM I believe is quite tight in supply and demand and SSD I believe as seen an increase in demand. And NAND Flash fab in China I believe will be complete by 2014. And DRAM capacity increase and China NAND fab earlier ramp up plans, do you have any? Could you please elaborate?

Unidentified Company Speaker

You have asked for our China fab. We are working hard to stay with our plans and we have plans to commercially produce in the earlier part of next year.

Unidentified Analyst

And now back to provisions. Could you disclose the amount that you have provisioned?

Unidentified Company Speaker

Yes, we cannot disclose the numbers, I regret to say. Thank you. We will move on to the next question.

Operator

The next question is by Mr. Nicolas Gaudois from UBS. Please go ahead.

Nicolas Gaudois - UBS

I've got two on mobile and one very quick on memory. On mobile first, there has been reports of slight delays at operators for variability Galaxy S4 and before this maybe some changes to ramp up high pixel [NTTA MOLED]. And the new Exynos microarchitecture as well on the new process 28-nanometer high-K metal gate. Can you comment on how you are addressing those (inaudible). And the second question on mobile would be that we've noticed actually that Samsung is increasing its presence in points of sale. So for instance, representatives in carriers or retail outlets in Europe, of course the agreement to disclose with Best Buy for shop-in-shop. So we're trying to see if the intent is to drive sales in demoing, for instance, your software features versus sundry devices. And how important this effort is in driving sales of new products including the GS4. Thank you.

Unidentified Company Speaker

Well, first regarding the supply issue. The Galaxy S4 in terms of supply availability, there are no problems at the moment. In terms of core components, we have entered into early contracts for components. Regarding various issues that can come up in the process of mass production, we have already made the preparations. That said, global orders actually have been higher than we had anticipated, so in certain markets we have experienced slight delays of supply early on but we believe that this will be addressed very shortly. Regarding the Best Buy shop-in-shop question, we will continue to strengthen our existing relationships with various carriers but in order to reach out to more customers, to give them experience or a chance to experience our products, we intend to expand our cooperation with Best Buy as well. So we can market more directly towards the end-users and also we can consolidate and strengthen our relationships with retailers like Best Buy. We think that this can actually help drive sales in the future.

Nicolas Gaudois - UBS

Great. Thank you. And a follow up question on memory. You said, you will grow in line with mid-40s bit growth year-over-year in 2013, in line with your industry forecast. Yet in Q1 you grew 10%, in Q2 you expect to grow effectively double-digits Q over Q. So 45% bit growth would imply basically no growth H2 in a Q over Q basis and even a decline. How do we think about that? I mean I would expect that with all the demand trends and seasonality, I actually would see a shipment growth in Q3 and Q4 and therefore your bit growth will be higher than 50%. Thank you.

Unidentified Company Speaker

Well, if you look at the contents of the Q1 results, NAND flash suppliers, there is a lot of variance in bit growth depending on who the supplier is. So the figures that we provided is an average. So the trend for our company maybe different from the trends of other suppliers. At the [most] in the mid-40% range but SSD or embedded solutions, the more of these types of products there are there might be more constriction on bit growth. So the mid-40% range, we do think is still valid.

Operator

Now from (inaudible).

Unidentified Analyst

I have a question concerning smart phones. What's your split between high and mid, low end smartphones? And as for high end, I guess it's centering around Galaxy S4 but do you have a strategic model for the mid to low end? And my second question. Recently Apple's shipment I believe have decreased and there are concerns in the market that there may be a dampened demand for high-end smart phones. So now S4 has been introduced in earnest and what is your feel on the demand for high-end cell phones?

Unidentified Company Speaker

Now, on our high, low end split in the first quarter, I believe that there has been a slight increase for the high-end and with the introduction of S4 in the second quarter, well, I believe that the product mix will improve in the second quarter, and on an annualized basis there will be a balanced growth. We will strive to achieve a balanced growth in all segments. And I believe that we will try hard to have a better mix than the market in the high-end. And you asked about our strategic model. Galaxy A and Y series competitiveness will be strengthened on a continuous basis to meet the needs for the mid to low end market.

And if I may address your question, now on the demand decrease in the first quarter, you have to consider seasonality. So it's a typical low season and according to market research institutes, the smartphone market demand in the second quarter will be similar to that of first quarter but there will be a rebound in the second half. So on an annual base the market demand, I believe, will grow by about 30% compared to the previous year. And in the case of Galaxy S4, the demand is strong so I believe that the sales for S4 for the first quarter of its introduction will be better than that for S4.

Unidentified Analyst

Now, I have a question regarding semiconductors.

Unidentified Company Speaker

Could you please repeat the question?

Unidentified Analyst

My question is concerning (inaudible) and yield. And do you expect to see a proportion and a mix change?

Unidentified Company Speaker

We also manufacture components so it's difficult for us to say what component is used for which product. And in the case of Octa Core, in terms of functions and characteristics there is no issue and there is no issue with supply too. So hope to expand this business.

Operator

The next question is by (inaudible) Korea Securities and Investment.

Unidentified Analyst

Yes. Let me ask about the semiconductors at first and then talk about the mobile phone. For semiconductors three bit products -- TLC products are getting a lot of attention. I'm interested in how much it is used in the embedded products, especially for SSD. What will your strategy be in that regard? And for system LSI, utilization rates actually dropped and had a bearing on first quarter results. In the second quarter and beyond how do you think they will recover, utilization rates? And after I hear the answers to that I'll ask about the mobile phone side.

Unidentified Company Speaker

Well, TLC, we don't use that word. We go by 3-bit MLC, so please I would like to correct the usage of the word. As you know, we have brand SSD so we have our own brand of SSD which is being sold on the retail market and a great part of that is adopting 3-bit MLC. And many PC makers around the world, many have already gone to market, many are now preparing for market, many are planning future launches. But 3-bit MLC based SSD is actually taking off a quite considerable part of the entire market and embedded solutions, where there is tablets or certain phones, mobile phones, 3-bit MLC products have already been adopted. So in terms of future growth I think the speed will become faster. And then you asked about system LSI. Due to seasonality there was decreased set demand in the households. Mobile DRAM was strong but if you look at sets compared to the fourth quarter or the previous quarter, it did drop. So because of that cyclicality, the results did decline slightly. This year, the 28-nano process will be ramped up and so after the second half we think that the results will start picking up. In fact, after the second quarter or starting the second quarter, we should see this recovery start. Thank you.

Unidentified Analyst

Regarding mobile phones, well first quarter earnings actually were very favorable I think because $200 to $300 mid-price range products actually had a big bearing. So these price range products, will they increase, will they go similar to the high end models or will you have a specific strategy just for this big price range product category on its own.

Unidentified Company Speaker

Now, regarding the midrange products, going forward we plan to try to achieve balanced growth together with the high end products as well. Thank you.

Operator

Next is from Korea Investment. (Inaudible) Please go ahead with your question.

Unidentified Analyst

I have a question, two questions for the cell phone business. I won't be asking numbers but I would like to ask your perspective. SEC has been in the cell phone business for 15 years but you have never been around number one but now you are number one, I believe. So in many ways there will be checks from other competitors and there will also be first a competition. So you might walk the road of Motorola, Nokia and Apple. So compared to Motorola, Nokia and Apple what kind of differentiating factor or competitiveness do you have and will that suffice to maintain your number one position in the market? And my second question, it's once again on smartphone. There is the mid-range smartphones in the $200 to $300 range and while they help you in terms of volume increase but the mid-range smartphones, could it cannibalize your high-end smartphones, because iPad Mini, it did cannibalize the iPad market. So what's your diagnosis on that issue?

Unidentified Company Speaker

Yes. Now, I will like to address your first question. Well, we will keep a keen eye on the market demand and the changes in our environment and we are prepared to meet any changes in the environment or customer needs. And going forward, we will try our best to expand user experience and to give them their best value. And now to address your second question. Our premium product and mid-range products, they target different segments in terms of price and also features, and our product is planned in regards to specific segments. So I don't think there is a fear of cannibalization.

Operator

The next question would be given by Mr. Matt Evans from CLSA.

Matt Evans - CLSA

Just very simply, I wanted to confirm that all of the provision that was made was booked in the IM division.

Unidentified Company Speaker

Yes, correct.

Operator

Next (inaudible). Please go ahead with your question. So we will move on to the next person. The next question is from HSBC, [Nikki Shaw]. Yes, we lost you on the line, so could you please repeat the question.

Unidentified Analyst

I have a question regards to LTE market. Last year, you have mentioned that you expect the market of about 150 million this year and have you made any adjustment to your forecast, and what is your forecast for next year's figure? What's SEC's view? And now semiconductors for your system LSI. SMC and global foundry was (inaudible) for [16-29] and I think they're moving forward their schedule. For Samsung system LSI, well, what is your mass production schedule? I would appreciate it if you could give us a timeline?

Unidentified Company Speaker

Yes, now on the LTE outlook. Market research institute's data, if you look at those data, they expect the number to go over 200 million by 2014 and the terminal will also see an increase along with that market increase. And we will do our best to outperform the market. And as for system LSI, or the 14-nano, for 14-nano we hope to maintain leadership in the market. And we have accumulated knowledge for the transistors and I believe that we have an advantage in processors. And moving on to the next question.

Operator

The next question is from (inaudible).

Unidentified Analyst

Yes, my question has to do with TV and mobile phones. First, regarding smart TVs, there sales portion. What percentage does it account for out of total sales? What is it now and what is your outlook for next year smart TVs. And ULT, I think you said you want to strengthen that. So this year and next year, how much market penetration are you looking for? And demand for TVs that are bigger than 50-inches, I think demand is quickly growing. So could you also give us a growth outlook for this year and next year? What percentage will it account for in your sales, this year and next year? Now regarding mobile phone, recently in Barcelona, the Samsung Knox was launched. So the enterprise market I think, have you seen some visible results from your enterprise market? And when do you think that you will start seeing a significant contribution from that side in terms of your total bottom line?

Unidentified Company Speaker

Yes, first of all let me talk about the proportion of smart TVs as a percentage of total sales. Well, actually, the percentage was increasing and Samsung Electronics is leading that. It was 35% in the first quarter and we think that is likely to continue to increase. For UHD TV, UHD TV, according to our market research organization, they said that there is a market of about 900,000 units. That would be the size of the market. So we are just at the started phase now. And so we will watch out for the market demand trends as we go about strengthening our product line up.

Yes, now regarding Knox. B2B and B2C, we don’t actually divide between those distinctions when we report our earnings, so we seek your understanding for that. We are using security solutions for the public market to go into various new markets. Because it is a B2B business, we are unlikely visible results right away. We want to continuously build an ecosystem conducive to supporting B2B business. Thank you. Next question, please.

Operator

Next question is from Daiwa Securities, Jae Lee. Please go ahead.

Jae Lee - Daiwa Securities

I have a couple of questions, please. First, in regards to CapEx, you have indicated that there could be some upside to the total amount in the second half, so I was wondering if you can provide a bit more color on this as to which business, either display or semiconductor, will have a bit more intensity going forward. And second question would be regarding the display business. Maybe could you provide rough breakdown of the display panel profit between the OLED and the LCD business, please?

Unidentified Company Speaker

I told you that we might see a slight increase in the second half because if you look at the splits between first half and second with the past, it's about 50:50 or 45 to 55 for first half and second half. And this year because of our given circumstances, we expect to see more concentration in the second half. And it's an overall increase for the second half and not for individual business lines. And for display, LCD's proportion in sales is somewhere around 50%, a little over 50%. And for medium to small size, it's on a similar level to that of last quarter. We will entertain the next question.

Operator

The next question is from Mr. [Hang] from Credit Suisse.

Unidentified Analyst

I've just a couple of short questions. First is, I think you already mentioned, coming into the quarter you had a customer specific inventory issue on the system LSI products. Has that pretty much cleared, and looks like the business is actually a lot slower than normal seasonality, whether any yield issues ramping up your new generation application processors?

Unidentified Company Speaker

I think I did answer this previously. But in terms of our products we do not have any problems at the moment in terms of performance or functionality but it's just because of we are adjusting the ramp-up timing because of requests from the customers and also because of the seasonality that we saw in the first quarter.

Unidentified Analyst

And just on DRAM, given the market tightening up a little bit here, do you have any plans to maybe increase wafer capacity this year on DRAM or announce a new fag. And I am just wondering on smartphones, what the volume increase might be on a quarter-on-quarter basis in terms of just a percentage.

Unidentified Company Speaker

Regarding DRAM capacity, our main specialty product, mobile -- or these are products for mobile servers. Regarding these specialty products, we want to maintain our competitive advantage and also expand our capacity to fill growing demand. So that will be our focus going forward. But that will not -- we do not have any plans at the moment this year for an increase in capacity.

Unidentified Analyst

And the smartphone growth?

Unidentified Company Speaker

Next question please.

Operator

From Samsung Security, Mr. [Hwang] please go ahead.

Unidentified Analyst

Yes, good morning. Many research institutes say that the OEM cost for S4 is higher than for S3, and if you look at the introduction to the peer market, the price has gone lower. Is it a gross margin decrease? And in the second half you mentioned that competition will become fiercer and with that I believe that you will have to enhance marketing or would you work with the price? Would you lower the price?

Unidentified Company Speaker

Yes, we do not disclose the costs associated with individual models but we will try our best to maintain a good profitability and price, I think it will be maintained. Thank you.

Operator

The next question is from BNP Paribas, Mr. Peter Yu. Go ahead please.

Peter Yu - BNP Paribas

Regarding the Galaxy S4 we hear that there are many rumors of different causes for delay. How much of shipments do you think we're likely to see in this quarter? We'd like your guidance on that. And the second question has to do with, compared to Galaxy S3 if you look at Galaxy S4, it's mostly using Qualcomm's Snapdragon chips rather than Exynos chips. Well, Snapdragon chips are used in virtually every other high-end smartphone used, so in terms of hardware performance doesn't it mean that Samsung is losing some of its unique differentiation? And also, if there is continued delay for the flexible display sign and I think you're going to continue to lose your differentiation in terms of hardware. So can you give us your strategy in terms of how you intend to differentiate in terms of your hardware?

Unidentified Company Speaker

In terms of -- I can't give you details about our expected shipments or expected sales but we have to re-unveil the new product according to carriers and the media. The response has been quite good and we have significant pre-order amounts. So we think that we can outperform in terms of initial sales versus the Galaxy S3. And we intend to respond to the various needs of the market flexibly and we are using multi-vendors in the interest of better supply and demand balance. And we have very high quality requirements and we believe that our products with those chips can provide very high functionality and performance to our customers.

Operator

Next is from Merrill Lynch, Mr. Dong-je Woo. Please go ahead with your question.

Simon Dong-je Woo - Merrill Lynch

I am Dong-je Woo from Merrill Lynch. Thank you for your presentation and a great result. Now, on semiconductors, new products for 3D NAND and FinFET structure logic chips. These are the new products that come immediately to mind, and by the end of this year or early next year will there be an introduction of samples, in particular for FinFET? Do you need product patents because that's really difficult so why not go with double patent that is tailored to the FinFET logic chip?

Unidentified Company Speaker

Well, 3D NAND for memory as was mentioned before, we will be issuing a sample within the year and mass production. We will keep a keen eye on the market demand and application acceptance. And as for FinFET, we will likely see it come into play by 2014 and now on DPT and QPT. As of now I don't expect any technical glitches so we will be very flexible in application regards to the given circumstances.

Simon Dong-je Woo - Merrill Lynch

And lastly, I have a question on mobile business. For the past few years Android OS has played a very bid role and Samsung has well used Android OS. But the Android Os is being upgraded and even if we see an upgraded OS for Android, the consumers, will they feel satisfied with the upgraded Android OS. Because I personally think that customers won't see the differentiation between the old version and the new version. So to meet that consumer change, will (inaudible) be an alternative. Do you have plans for a separate OS strategy? And my last question is related to low-end tablets. Well, if we look at the iPad Mini example, it's becoming very popular and of course quantity increase is something you do well but when it comes to profitability, $100-$200 mini-tablet, will it give you the same level of profitability. So I would like to ask your opinion on this.

Unidentified Company Speaker

I would like to address the OS question first. Android is a very competitive platform and according to customer satisfaction survey, the customer loyalty for Android is begin enhanced. And with the introduction of new version Android OS, many customers are interested. And the customer satisfaction for the upgrades are at a high level. So we will be introducing to the market, the new OS (inaudible) and we will be providing upgrade faster than our competitors to satisfy our customer needs. And to address various market needs we will also pursue a multi-OS strategy. And as for tablet question, 7-inch and 8-inch tablet market is showing steady demand. This is a market segment that we have begun. So based on our business experience so far, I believe that we can a provide a differentiated lineup and continue our growth momentum. And for the low-end, we would stay away from blind price competitiveness. We will focus on quality, brand and design, and channel capability.

Operator

The next question is from Mehdi Hosseini from Susquehanna International.

Mehdi Hosseini - Susquehanna

I have one follow-up on the NAND commentary. Can you please clarify if your 45% bit growth is shipment growth and not really demand? Or how should we think about demand versus supply? And I have one follow-up.

Unidentified Company Speaker

It's the sales amount, sales volume provided sales.

Mehdi Hosseini - Susquehanna

Okay. Thank you. And would it be possible to provide any kind of color or information on the mix of CapEx?

Unidentified Company Speaker

On a complete company-wide basis regarding our CapEx, as I have mentioned before, we are continuously in the process of adjusting our plans and establishing the plans. So I don’t think we are ready at this to provide you with a lot of details about the exact mix.

Mehdi Hosseini - Susquehanna

Sure. This adjustment, as you have stated it appears that you're going be more competitive on the system LSI and that 14-nanometer. Is that variability has to do with your, how you're going to plan for available capacity when you are ready to volume ramp 14-nanometer in 2014 or variability has more to do on the memory side?

Unidentified Company Speaker

As we said before, for SEC, the basic investment direction for us is to use our technology and to take it to the market. So in terms of our technology we have a lot of competitiveness in OLED, memory, DRAM, NAND flash, and then going forward we're seeing to move into 20-nano, 14-nano in system LSI. These are all areas where we already have the technology ready. So it's not that we are emphasizing any one part of these technologies, it's hard to say. What is important is that as these products are continuously developed, it depends on where we see an increase in demand that will determine our decision making in terms of CapEx or investments. So at this point we have to watch out to see the demand trends.

Mehdi Hosseini - Susquehanna

Okay. And just one follow-up. Do you have any assessment on overall smartphone unit shipment this year for the industry and how we should think about Samsung out growing it?

Unidentified Company Speaker

Yes, in the second half will launch new products. It will be fiercer competition in the market. It will be a tough one. But on an annualized basis we think we could outperform the market. We will be making our best efforts to do so.

Operator

Next question is (inaudible) from Jefferies.

Unidentified Analyst

I have two questions, both in semiconductors. First, would you please tell us what portion of the sequential increase in R&D expenses was directed towards semiconductors and what effect did it have on the semiconductor segment profitability?

Unidentified Company Speaker

Yes, I would have to refer to the materials, so would you just go ahead with your second question first?

Unidentified Analyst

Okay. So second question is, would you be able to share with us your view on DRAM and NAND cost reductions this year. Perhaps in comparison with the last couple of years and basically help us understand what impact this is having on your memory capacity plans.

Unidentified Company Speaker

They are difficult questions. On cost reduction for DRAM, as was mentioned before, the 20-nano process, we have strength in mobile DRAM and server DRAM. So migration I believe, if it moves towards that direction I think we could see an improvement in supply. And as for NAND 1X, that’s [10-nano] NAND product. We hope to expand that business and for the 3-bit MLC we will work hard for cost reduction and also on stable supply. And compared to the past how much cost reduction was a part of your question. Well, we will be working with product mix to realize efficient cost. So we will continue our efforts to reduce cost in that way. And how much influence it will have on the R&D and the profitability, well as was mentioned, there has been an increase in first quarter and the semiconductor also show an increase as did the IM business with sets. So R&D in these two areas increased. So on a company-wide basis, if you look at the increase, semiconductor, display panel, IM, CE, all these business divisions show an increase this quarter. And the trend, as of now, I believe will continue. We pursue our technological path so the R&D in proportion to ourselves I believe will increase.

Operator

The next question by [Monica Gardi from Pacific Securities]

Unidentified Analyst

Could you comment on the DRAM CapEx plan for this year and are you planning, so you talked about that you might be adding some capacity or maybe moving capacity to server DRAM and mobile DRAM. But would you be adding new DRAM wafer capacity or it's mainly transitioning from PC DRAM to mobile DRAM and server DRAM? Thank you.

Unidentified Company Speaker

In terms of DRAM CapEx we have not made any definitive decision at this point. As I said before, rather than new capacity increase, mostly we're focusing on process migration. And we are focusing on the processes where we are extremely strong or we are especially strong in. So we want to apply our leading edge technology to many of our product lines and this will lead to big growth.

Unidentified Analyst

Then kind of a follow up on the China [fab executions], someone asked before too. Could you give us some idea how much wafer capacity you think you could have end up this year in the China fab? And also, is the China fab going to be only for 3D NAND or could you ramp any planar NAND also in that fab?

Unidentified Company Speaker

Regarding the Chinese, it's for NAND only. And I told you before that rather than this year, we are looking towards the first half of next year to start mass production. And we are working very hard to move it up so that it's in the first half rather than the second half.

Operator

Stanford Bernstein's Mark Newman. Please go ahead with your question.

Mark Newman - Stanford Bernstein

I guess first question is what should we think about the product mix for mobile? Should we expect the mix to keep moving towards more high-end premium products what we saw last year? And as the Galaxy S4 ramps through the year, could you comment on the product mix? And then I also have a follow-up question on flexible and unbreakable display. I didn't quite catch your earlier comments, so what are the plans on flexible and unbreakable display?

Unidentified Company Speaker

Yes, on product mix, as was mentioned on an annualized basis for each segment we will go for a balanced approach. And as for flexible display, we cannot tell you the product road map so I ask for your understanding.

Unidentified Company Speaker

This was our first attempt to simultaneously translate the earnings conference call. So if you have any inconveniences, I would like to ask for your understanding and if you will please give us your comments for improvement, we would greatly appreciate it. Thank you.

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