Samsung Electronics Announces Second Quarter Results

Samsung Electronics Announces Second Quarter Results

Registers net income of 6.25 trillion won on sales of 52.35 trillion won

2Q consolidated operating profit reaches 7.19 trillion won

Samsung Electronics announced revenues of 52.35 trillion Korean won on a consolidated basis for the second quarter ended June 30, 2014. Samsung’s revenue fell 2 percent quarter-on-quarter. Operating profit for the quarter was 7.19 trillion, a 15-percent drop from a quarter ago.

The second quarter was affected by several factors including the slow global sales of smartphones and tablets and escalating marketing expenditure to reduce inventory. Slower demand for mobile devices also impacted Samsung’s logic chip business or System LSI.

In its earnings guidance disclosed on July 8, Samsung estimated second quarter consolidated revenues would reach approximately 52 trillion won with consolidated operating profit of approximately 7.2 trillion won.

The appreciation of the Korean currency also chipped away at this quarter’s operating profits, which amounted to about 500 billion won in missed revenues prompted by the foreign exchange market.

Looking ahead, the second half of 2014 will remain a challenge. With strong seasonality, the Consumer Electronics Division expects to see gains in the third quarter driven by shipments of premium TVs with curved and UHD features.

Prospects for growth remain unclear as competition over global market share intensifies in the mobile industry. Samsung expects to see its sales of mobile devices increase with the rollout of flagship products and new models, but profitability may suffer due to a heated race over price and product specifications.

Demand for memory chips will continue to rally in the July-September quarter while supplies stay limited. This will increase profit margins. On the other hand, System LSI will be hard pressed to see profitability due to weak demand and investment spending for next year.

For the Display Panel segment, LCD panels for premium TVs are projected to generate steady revenue but profit margins for OLED panels will hit a snag due to a lull in the sales growth rate compounded by expanded shipments of mid-range products.

Compared with the second quarter, negative foreign exchange implications on business in the September quarter will have less impact.

Memory Leads Solid Earnings Momentum Whereas System LSI Struggles

Samsung’s Semiconductor businesses – including Memory and System LSI – posted 1.86 trillion won in operating profits for the quarter on 9.78 trillion won in consolidated revenue. The Memory business recorded the bulk of sales with 6.92 trillion won in revenue, a 10-percent increase in gains quarter-on-quarter.

Solid demand for memory and main applications led to an increase in revenue by 4 percent compared with the previous quarter. The profit margin however, declined by 5 percent due to a slowdown in the System LSI business. During the second quarter, Samsung made efforts to improve profitability by actively responding to growing demand and by continuing the expansion of the 20-nanometer class migration.

For DRAM, as overall demand was steady through all segments, Samsung carried out a flexible product mix strategy by responding to increased demand in PCs, servers, graphics, and mobile devices in China. For NAND, profitability was maintained by meeting the increased demand for SSDs by data centers and with sales of 3-bit products and high-density cards.

As for System LSI, its revenue slightly decreased from the previous quarter due to weak customer demand for mobile AP, whereas LSI product sales including high-pixel CIS increased. The Memory market for the second half is expected to see strong demand due to steady seasonality and tight market conditions.

Samsung will keep expanding the 20-nanometer class migration to strengthen cost competitiveness and maintain profitability and market leadership by offering differentiated new products. NAND demand is expected to grow thanks to an increase in demand for new enterprise SSD and new mobile products being launched with high density NAND in China.

In addition, V-NAND will expand applications from enterprise servers to PCs by developing the appropriate products for diverse applications. For System LSI, increase in profitability is expected to be difficult within short term, due to weak customer demand for high-end mobile AP, amidst new 20-nanometer mobile AP products being launch.

In the second half of 2014, the 14-nanometer process is on track to begin mass production by the end of the year and an emphasis will be placed on strengthening our competitive edge in core businesses by increasing efficiencies and cutting costs.

LCD Panel Shipments Expected to Improve in Second Half

The Display Panel business posted revenues of 6.33 trillion won in the second quarter with an operating profit of 220 billion won.

The improved earnings in LCD panels were due to the increase in shipments in both large size panels and UHD TVs. For OLED panels, higher shipments of new high-end smartphones led to a modest increase in sales for the second quarter.

In the second half of the year, the LCD panel market is likely to improve with higher expected shipments of TV panels being driven by strong year-end seasonal demand. For OLED panels, concerns over decreasing orders for OLED panels will further bearish earnings.

Samsung will strive to improve profitability by increasing sales of mass market UDH-TVs and premium products, while also further developing its high-end product line-ups. It will also strengthen line-ups with ultra-high resolution products to enhance its competitiveness and pursue product diversification to increase external sales of mid-tier products with improved cost competitiveness.

The company will also focus on expanding the applications of flexible display to the fast-growing wearable device market.

Mobile Business: Shipments up but profitability uncertain

The IT & Mobile Communications (IM) division – consisting of Mobile Communications and Networks – posted operating profits of 4.42 trillion won on 28.45 trillion won in revenue for the second quarter. Out of the total IM earnings, the mobile business was responsible for 27.51 trillion won.

Market demand for IM products during the second quarter is traditionally low and this affected the division’s overall sales. The demand for smartphones remained the same as in the previous quarter and tablet demand slightly decreased.

In such market circumstances, sales for both smartphones and tablets also decreased due to pre-existing inventories in European markets and as a result, the company increased marketing expenditure.

In the second half of the year, market growth is expected to improve with stronger seasonal demand. To meet this rise in demand, Samsung will focus on releasing new premium mobile devices, and a new flagship model in the large screen category, along with new mid-to-low-end models with more advanced features and competitive pricing.

Samsung will solidify its smartphone market leadership by further strengthening its product portfolio and leveraging its differentiated technologies and design. In China, Samsung is looking to respond to growth in the LTE market by enhancing the competitiveness of its high-end smartphones and mass-market products.

For tablets, Samsung will expand the availability of the GALAXY Tab S and Galaxy Tab 4 in other global markets by leveraging its channel capabilities.

Additionally, as the wearable device market is expected to grow, Samsung aims to strengthen its market leadership by introducing a more diverse product portfolio.

Despite this plan, prospects for improving profit margins are still uncertain, due to the increasing market competition.

CE Business Improves With Growth in Premium TV Sales

The Consumer Electronics Division – encompassing the Visual Display, Digital Appliances, Printing Solutions and Health and Medical Equipment businesses – posted consolidated revenue of 13 trillion won with an operating profit of 770 billion won, a 15% and 300% increase in gains respectively quarter-on-quarter.

In spite of traditionally weak seasonal demand in the TV business, Samsung outperformed the market in both sales volume and shipments by successfully introducing strategic products, like the new UHD·Curved TVs, and by actively responding to market demand driven by the World Cup. As a result, sales for UHD TVs nearly doubled compared to the first quarter in China and in some other advanced markets.

With Samsung’s expanded line-up of premium products including UHD TVs, Curved TVs and large-size TVs, which are over 60 inches, the company has been able to maintain its leadership in the global TV Industry. In particular, Samsung recorded a 35.6 percent revenue in the U.S. in 2014, the highest ever TV market share for the country.

Looking forward, Samsung expects to see continual growth in TV sales compared to last year, due to strong seasonal demand for flat panel TVs and continued growth in emerging markets.

As competition is likely to intensify, the company will focus on improving sales and profitability by actively responding to rising demand in growing markets with products that meet the needs of the market, as well as premium models.

For the Digital Appliances Business, earnings increased quarter-on-quarter primarily in advanced markets as a result of increased sales of premium products and a seasonal rise in air conditioner sales. In the second half of 2014, Samsung expects demand will continue to grow with the prospect of the economic recovery in North America and emerging markets. To ensure sustainable growth and maintain stable profits, the company will focus on enhancing product competitiveness and improving capabilities of products including air conditioners.

※ Consolidated Sales and Operating Profit by Segment based on K-IFRS (2012~2014.2Q)

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.