Samsung Q4 14A – Breathing Space

Some relief as handsets did not worsen materially.

• Samsung reported Q4 14A preliminary results that beat expectations but were not enough to lead me to believe that the worst is over.
• Q4 14E revenues / EBIT were KRW51tn-KRW53tn / KRW5.0-KRW5.4tn compared to consensus at KRW52.2tn / KRW4.8tn.
• RFM was more conservative on the revenue outlook but in-line when it came to EBIT, with forecasts of KRW49.3tn / KRW4.8tn.
• The good news is that these numbers were clearly not the collapse in handset margins that I had feared, but was not brave enough to forecast.
• My concerns centred on the unprecedented popularity of the iPhone 6 and the fact that this was the first quarter where it had been available for the full 3 months.
• Samsung appears to have weathered the storm well but it will have cost it dear in terms of pricing.
• Three main factors appear to be behind the better than expected overall profitability.
  • First FX: a very large proportion of Samsung’s revenues are in US$ and the USD strengthened against the KRW during Q4 14A.
  • Second: demand for semiconductor components has been strong quarter giving robust pricing on a stable cost base.
  • Third: Volumes of TV panels have also been quite strong. This has been largely due to seasonal discounts but it looks like Samsung has been able to eke out some margin from the greater scale delivered by greater shipments.  
• The biggest question mark is how the handset business fared during the quarter.
• The Galaxy Note 4 will have helped a little but Samsung usually cedes share in Q4 as it winds down inventory and with Apple on one end and Xiaomi on the other things will have been difficult.
• Consequently, I think that margins have probably come down slightly, to around 6% or so which is better than I had feared.
• This is critical because if Samsung can hold handset margins around these levels, it will have avoided the death spiral that engulfed all former handset market leaders when they ran into trouble.
• As a commodity handset maker with huge volume, I think that Samsung should be able to earn around 10% simply from the advantages that it has with huge scale.
• That will require a significant realignment of the cost base to face a commoditised reality, but that is something that Samsung knows how to do and it can move quickly when it has to.
• Samsung is not out of the woods yet but if it can hold the ship steady it will be able to focus on the future rather than endlessly fighting fires.
• Key to 2015E will be the Samsung Galaxy S6 which I expect to launch at or right before Mobile World Congress in March.
• The early signs are not good and this device is showing every sign of being as unexciting as the Galaxy S5.
• Returning to growth is still pretty far off and the ecosystem players Microsoft, Apple and Google look like much better places to start off in 2015E.