Samsung Electronics Announces First Quarter Results

Registers net income of 7.57 trillion won on sales of 53.68 trillion won

1Q consolidated operating profit reaches 8.49 trillion won

Samsung Electronics announced revenues of 53.68 trillion Korean won on a consolidated basis for the first quarter ended March 31, 2014. Samsung’s revenue slipped 9 percent quarter-on-quarter due to weaker seasonality but saw gains compared with the same period last year.

For the quarter, the company posted consolidated operating profits of 8.49 trillion won, representing a 2-percent increase on-quarter. Consolidated net profit for the quarter increased by 270 billion won to 7.57 trillion won.

In its earnings guidance disclosed on April 8, Samsung estimated first quarter consolidated revenues would reach approximately 53 trillion won with consolidated operating profit of approximately 8.4 trillion won.

Although market demand for electronics devices such as smartphones and tablets in the January-March quarter is traditionally slow, profit margins for Samsung’s IT & Mobile Communications (IM) division were driven by strong demand for smartphones and efficient management of marketing expenses, as well as a net positive impact from adjustments to reserve items that accounted for 1 percent of the mobile unit’s revenue.

Despite the overall decline in market demand, the Semiconductor Business continued its solid profitability momentum driven by the expansion of the 20-nanometer-class process migration and a greater appetite for DRAMs used in servers and for graphics solutions.

Samsung is expected to see profits rally in the second quarter and beyond, on the back of improved sales of display panels and home appliances. Orders for display panels that are used for premium smartphones and TVs are expected to increase, as new mobile devices are rolled out into the market and as consumers look forward to the upcoming World Cup in Brazil. The outlook for household appliances will also pick up on seasonal demand for air conditioners, as well as orders for high-end TVs based on the World Cup effect.

To sustain growth throughout this year and in 2015 Samsung will strengthen its core business areas with differentiated products through expansion of the next generation V-NAND market by honing in on not only the enterprise business but also the consumer-focused SSD market. For System LSI, Samsung expects to gain a competitive edge with application processors with 14-nanometer process technology.

Samsung is also poised to expand its new product categories such as wearable devices, strengthen its B2B business footprint through Knox and in the education market and make advancements in its ecosystem for device connectivity.

“While developed markets are expected to lead global economic recovery, macroeconomic uncertainties, such as currency fluctuation in emerging markets due to QE tapering in the US, are expected to continue in 2014,” said Robert Yi, Senior Vice President and Head of Investor Relations. He said, however, “we expect our overall earnings to improve starting from the second quarter, driven by improvements in the Display Panel segment and the Consumer Electronics division in conjunction with steady growth momentum in mobile and memory businesses.”

Capital expenditure in the first quarter was 5.4 trillion won, which includes 3.3 trillion won for the memory business and 700 billion won for display. As for our capex plan for the year, we expect to finalize it in due time and total spending will be similar to levels registered in 2013.

Memory Improves Profitability on Process Migration

Samsung’s Semiconductor businesses – including Memory and System LSI – posted 1.95 trillion won in operating profits for the quarter on 9.39 trillion won in consolidated revenue. The Memory chip business alone recorded the bulk of sales with 6.29 trillion won in revenue, a 3-percent decrease in gains quarter-on-quarter.

In spite of weak seasonality, the memory business addressed strong server and graphics solution demand and improved profitability by enhancing profitability through expanding cutting-edge 20-nanometer-class DRAM migration. The NAND business maintained profitability by actively responding to market demand in high-density cards and increasing sales in high value-added 3-bit NAND despite a recent ASP decline.

As for System LSI, revenue declined from the previous quarter as mobile AP demand decreased under weak seasonality, while CIS sales increased led by the launch of ISOCELL, a high mega-pixel product.

For the memory market in the second quarter, we expect server and graphic related DRAM demand to remain strong while contents per PC and mobile DRAM demand growth to pick up momentum. Samsung will continue to enhance profitability by improving cost competitiveness through the expansion of 20-nanometer class process migration and increasing offerings of high value-added differentiated products. For the NAND business, Samsung expects to continue a differentiated strategy based on SSD for datacenter and PC coupled with increased demand from mid-tier smartphones and increased applications of cost competitive 3-bit NAND products.

For System LSI, high-end mobile AP demand will remain weak through the second quarter, but earnings are expected to improve during the second half of the year as Samsung plans to seek growth momentum with solid sales of high-density CIS as well as the launch of new 20-nanometer AP products.

As the company completed qualification of 14-nanometer process during the first quarter, we plan to ramp up production of the 14-nanometer process which is expected to begin by the end of 2014 and earnings contribution is expected from the first half of 2015.

Higher Panel Shipments Expected for Second Quarter

The Display Panel segment posted revenues of 6.10 trillion won in the first quarter with an operating loss of 80 billion won amid traditionally weak seasonal demand.

During the first quarter of 2014, the overall LCD market experienced an on-quarter decline in demand for TV and tablet panels as product makers reduced orders. For Samsung, earnings were impacted by cost increases related to the ramp-up of production in China coupled with the decline in ASP.

Looking ahead, the LCD panel market is likely to improve due to increased demand for TVs related to the World Cup and declines in ASP are expected to abate. Samsung expects increased shipments of both mass-market panels as well as premium products, such as curved panels, to drive growth while expansion of the UHD TV market should lead to improved profitability.

For OLED panels, weak seasonal demand led to a decline in sales for the first quarter. Concerning the outlook for the second quarter, Samsung expects to increase shipments of larger and higher resolution panels for tablets and mass-market smartphone lineups. The company will also focus on leading innovation in the production of flexible panels and expanding the applications of OLED to the emerging wearable devices category.

Mobile Business Leads Solid Earnings Momentum

The IT & Mobile Communications (IM) division – consisting of Mobile Communications and Networks – posted operating profits of 6.43 trillion won on 32.44 trillion won in revenue for the March quarter. Out of the total IM earnings, the mobile business was responsible for 31.36 trillion won.

Although market demand for both smartphones and tablets decreased during the first quarter, operating profits for the IM division jumped 18 percent compared with the previous quarter thanks to steady smartphone shipments, efficient execution on marketing expenditures and a positive impact from adjustments of one-off expenses.

As for smartphones, Samsung continued to see solid sales of GALAXY S4 and GALAXY Note 3 while also strengthening its premium product portfolio through the introduction of a new flagship smartphone, GALAXY S5.

Looking at the tablet business, the company maintained solid tablet sales momentum by shipping nearly 13 million units during the slowest quarter and reinforced its mid to high-end lineup, including launches of the premium GALAXY Note PRO and GALAXY Tab PRO devices equipped with 12.2-inch displays, office functionalities and PC-level performance.

For the next quarter, smartphone and tablet demand is expected to slightly increase under continued weak seasonality, but Samsung will maintain solid earnings momentum through full-fledged global sales of GALAXY S5. Based on its differentiated features, and initial response from the market, Samsung expects GALAXY S5 to surpass sales of GALAXY S4.

In 2014, Samsung will actively respond to rapid demand growth in China’s LTE market by leveraging its LTE technology leadership, while further strengthening its product line-up across various price points. Additionally, as the wearable device market is expected to grow, the company will reinforce its market leadership to gradually increase the wearable device business’ contribution to entire earnings.

Premium TV Sales Outperform Market Growth

The Consumer Electronics Division – encompassing the Visual Display, Digital Appliances, Printing Solutions and Health and Medical Equipment businesses – posted an operating profit of 190 billion won for the quarter on revenues of 11.32 trillion won.  The Visual Display business accounted for 7.39 trillion won of earnings.

Seasonally low demand for consumer electronics goods during the first quarter corresponded with the Division’s overall sales retreating by 21 percent on-quarter. Despite challenging conditions in the TV market, Samsung outperformed the market thanks to increased sales of premium products, including UHD TVs, in developed markets, including China. Latin America was also a bright spot, buoyed by increased demand for TVs due to the World Cup, helping Samsung post on-year growth for the region in the mid 70-percentage range.

Looking forward, while competition is likely to intensify and slight on-quarter demand growth is forecast, Samsung expects demand for UHD TVs to drive meaningful growth in the global TV market. Against this backdrop, the company will focus on increasing sales of value-added premium products, including UHD and curved TVs, and actively responding to the rising demand driven by the World Cup and emerging markets.

For the Digital Appliances Business, earnings declined on-quarter under weak seasonality and increased expenses associated with new product launches. Looking ahead, we expect modest growth in the appliance market thanks to increased demand in developed markets and strong seasonal sales for air conditioner products. Samsung will also focus on improving supply chain management capabilities in strategic regions and continuing efforts to build brand power through its premium product lineup.

※ Consolidated Sales and Operating Profit by Segment based on K-IFRS (2012~2013)

Note 1: Sales for each business include intersegment sales

Note 2: CE (Consumer Electronics), IM (IT & Mobile Communications), DS (Device Solutions), DP (Display Panel)

Note 3: Information on annual earnings is stated according to the business divisions as of 2013.

* The conference call regarding this announcement can be viewed on

http://www.samsung.com/sec/aboutsamsung/ir/newsMain.do (Starting 9:30 am KST, Eng. ver available.)