Samsung Electronics (PINK:SSNLF) delivered a yet another stellar performance in Q1 2013, riding the smartphone boom to grow revenues by 17% and operating profits by an even higher 54% over the same period last year. Driven by the immense popularity of the Galaxy S III as well as the Galaxy Note smartphones, Samsung’s mobile division continued to generate a bulk of the profits accounting for almost 75% of $7.9 billion in operating profits generated last quarter.
With the Galaxy S4 being launched in several countries this month, Samsung will be looking to carry the momentum into the coming quarters as well. The remaining divisions were however affected by a sluggish economy and weak seasonality, which caused sales of consumer appliances as well as demand for display panels to decline in the developed markets. Weakening demand for PCs worldwide weighed on semiconductor sales, but this was more than offset by the surging popularity of smartphones and tablets.
Smartphones drive Samsung’s growth
The past year has seen Samsung gain a lot of the smartphone market share. The release of Galaxy SIII last year saw Samsung take a decisive lead in the smartphone market, selling almost 50% more smartphones than Apple did during the year. For the full year 2012, Samsung accounted for more than 30% of smartphone sales worldwide, increasing its lead over Apple whose market share remained stagnant at about 20% year over year. From a primarily feature phone player, the company has become the biggest smartphone maker with smartphones accounting for almost 54% of its sales in 2012, up from about 28% in 2011. We believe that the big market share gains that Samsung has achieved in recent years 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.
Going forward, however, burgeoning emerging market sales of low- and mid-end smartphones will have an impact on margins as the developed markets gradually become more and more saturated. Emerging markets will expose Samsung to intense competition from local manufacturers and drive down pricing levels in the long run. Samsung will therefore be looking to delay the inevitable by penetrating the high-end developed markets more and taking market share away from rivals such as Apple that have a greater presence in these markets. It will be interesting to see if Samsung’s Galaxy S4 launch will help it wrest market share from Apple, and if Apple will look to counter the threat by taking on Samsung in the emerging markets with a cheaper iPhone. While Apple’s intentions are unclear, Samsung has already made a statement by unveiling the Galaxy S4 in the heart of the U.S. in New York.
Other divisions disappoint
Meanwhile, weak economic conditions worldwide are impacting consumer purchases of home appliances such as TV sets and air-conditioners. The impact is being felt mostly in the developed markets of the U.S. and Europe, where demand for TVs is expected to wane further. As a result, revenues from the consumer electronics division declined almost 2.3% y-o-y and operating profits fell by more than a half over the same period last year. However, demand for consumer appliances in emerging markets continues to grow impressively, offsetting some of the developed market decline. The overall state of the market may still recover in the latter half as demand for premium options such as LED TVs and smart TVs slows down the developed market decline. The sales mix of LED TVs has been rising steadily, growing to the low-80s last quarter – up from the high-70s in Q4.
Declining demand for PCs is having an impact on the chipset division, causing PC DRAM sales to take a hit. However, the transition to mobile devices is creating a shift in mix and the company could fall short of the demand if it fails to ramp up production adequately. Samsung will therefore look to get its NAND flash fab in China up and running by early next year. The tightness in supply may however cause prices to improve from current levels, limiting the near-term impact on chipset sales. Apart from memory chipsets, Samsung also builds app processors, including its very own Exynos line, which is used in both the Galaxy S series and the Note phablets. The growing demand for smartphones and tablets should help keep sales of mobile chipsets high, and Samsung should continue to benefit from this transition so long as it meets its capacity build-up targets.
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