Samsung Balances in Two Major Markets

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Includes: ERIC, GOOG, NOK
by: Sramana Mitra

Weak demand and economic conditions in the semiconductor sector finally have taken a toll on Samsung Electronics (OTC:SSNLF), the world’s second-largest semiconductor producer. On January 23, Samsung reported its first ever quarterly loss in in the fourth quarter and in fact its first ever loss since 2000, when it started reporting quarterly results. However, the good news is that its handset sales posted a slight increase. Earlier coverage is available here and here.

Q4 revenue was down 4% q-o-q to 18.45 trillion Korean won or $13.9 billion. Net loss was 0.02 trillion won or $15 million. For the fiscal year 2008, revenue was down 15% to 72.95 trillion won ($55 billion) while net income was down 26% to 5.53 trillion won ($4 billion).

Semiconductor revenues in the fourth quarter were down 18% q-o-q driven by 21% q-o-q decline in memory sales, traditionally its cash cow, and falling NAND and DRAM prices. Despite supply cutbacks in DRAM, market oversupply continued due to weak demand. PC shipments declined 2% and spot prices 48%. While most of its competitors reduced utilization rates, Samsung fortified its product mix and leadership in next-gen products. Its operating profit margins were -14%, while those of its competitors were at -40% levels. Samsung expects the oversupply situation to continue in the first half and improve in the second half.

LCD segment sales were down 12% q-o-q, and Digital Media segment sales were down 10% q-o-q. The Telecom segment on the other hand saw revenue growing 13% q-o-q driven by 14% q-o-q growth in handsets. Shipments in the quarter increased marginally over the previous quarter, but Samsung’s annual handset shipments increased 22%, two times the market growth. However, it expects Q1 growth to decline 10 to 15% due to seasonal weakness and economic slowdown. For 2009, it plans to strengthen its high-end line-up in the US market and enhance its low-end line-up in emerging markets. The company also plans to launch a phone based on Google’s Android platform in the first half of 2009.

Overall in 2009, Samsung plans to improve profitability, enhance operational efficiency, increase cost competitiveness, and continue building on the Samsung brand. It also announced that it would reorganize its business into two divisions: Electronics Components, which includes the loss-making memory and LCD segments, and Consumer Products, which includes the promising telecom and digital media segments.

A huge upside for Samsung is its cash reserve of 6.65 trillion won ($5 billion) that will help it widen the lead against semiconductor rivals. Also, its strong presence in the handset market – it is the second-largest handset vendor after Nokia (NYSE:NOK) – should provide it with the necessary momentum.