Samsung Electronics Announces First Quarter Results
Registers net profit of KRW 4.63 trillion (R51.2 billion) on sales of KRW 47.12 trillion (R521 billion)
1Q consolidated operating profit reaches KRW 5.98 trillion (R66.2 billion)
Samsung Electronics Co., Ltd. announced financial results for the first quarter ended March 31, 2015. Samsung’s revenue for the quarter was KRW 47.12 trillion (R521 billion), an 11 percent decrease quarter-on-quarter (QOQ), while the operating profit for the quarter was KRW 5.98 trillion (R66.2 billion), an increase of KRW 690 billion (R7.6 billion) QOQ. In the company’s earnings guidance disclosed on April 7, 2015, Samsung estimated first quarter consolidated revenues would reach approximately KRW 47.0 trillion (R520 billion) with consolidated operating profit of approximately KRW 5.9 trillion (R65.2 billion).
The first quarter saw growth across the Device Solutions (DS) and IT & Mobile Communications (IM) Divisions. The Memory Business further accelerated its 20-nanometer class migration for DRAM, while DDR4/LPDDR4 sales increased for mobile devices and servers. The Display Panel segment saw profit growth, as OLED panels for smartphones and LCD panels for premium TVs saw increased sales. The Mobile Business also saw profit growth, due to increased sales of new middle- to low-end smartphones, all the while decreasing marketing expenditures.
In the second quarter, the company expects its overall earnings to increase compared to the previous quarter, despite an expected growth in marketing expenditures. With premium smartphone sales entering into full swing, the DS Division is expected to see demand in growth for its semiconductor products. The System LSI Business is expected to improve its overall business performance through increased supply of 14-nanometer application processors. The Display Panel segment expects smartphone and TV sales to boost its earnings from OLED and LCD panel sales. The IM Division earnings are expected to grow, due to increased global sales of the Galaxy S6 and S6 edge. Meanwhile, the Consumer Electronics (CE) Division expects to see improvements, as seasonality should improve air conditioner sales, while the flagship SUHD TV sales are expected to increase.
Looking ahead to the rest of 2015, despite strong seasonality, competition is expected to toughen for the set business and there is also a risk of weaker demand due to the weak Euro and emerging market currencies. For the component business, while we expect stable supply and demand conditions, weak demand for set products and increase in LCD panel supply may negatively affect earnings. While the information technology (IT) industry has typically had a weak 1H and a strong 2H each year, this may be less so for 2015.
Capital expenditure (CAPEX) for 1Q 2015 totaled KRW 7.2 trillion (R79.6 billion), including KRW 4.4 trillion (R48.7 billion) for the Semiconductor Business and KRW 500 billion (R5.5 billion) for the Display Panel segment. While we expect the total CAPEX to remain at a similar level to that of 2014, there is a strong possibility that it may increase. CAPEX will be adjusted depending on macroeconomic conditions and each business’ market conditions.
Semiconductor Business to Strengthen through Differentiated Products
Semiconductors posted KRW 10.27 trillion (R113 billion) in consolidated revenue and KRW 2.93 trillion (R32.4 billion) in operating profit for the quarter.
Although the first quarter is generally a low season for DRAM, demand remained high due to flagship smartphone launches and server demand for data centers. Profitability was secured by accelerating 20-nanometer class migration and sales of differentiated products, led by DDR4/LPDDR4.
Solid demand also continued for NAND products, driven by the increasing density of smartphone storage and launches of SSD-adopted high-end notebook PCs. The company secured cost competitiveness of NAND products and increased sales of solution products, such as SSD and UFS.
While seasonality resulted in decreased revenues for the System LSI Business, profitability improved as production began for 14-nanometer mobile application processors.
Looking ahead, flagship smartphone sales are expected to pick up. Also, as the specification of smartphones in general become increasingly sophisticated, demand for mobile chips are expected to grow. Meanwhile, chip demand for servers is expected to grow as new server platforms expand and enterprise SSD adoption increases. The company will continue to reduce costs by expanding 20-nanometer migration and secure profitability by increasing sales of differentiated products, such as DDR4/LPDDR4. In addition, NAND products are expected to become more competitive, due to 10-nanometer class migration, increased sales of high capacity UFS for mobile devices and an increase in 3D NAND-based SSDs for PCs and servers.
Meanwhile, the System LSI Business is expected to increase supply of 14-nanometer mobile application processors for new flagship smartphones, while responding actively to growing demand for LSI products, including CMOS Image Sensors and DDI. The System LSI Business will attempt a turnaround through stable supply of 14-nanometer products and increased sales of high-value LSI products. At the same time, the System LSI Business will also look to diversify its foundry customers, in order to solidify its foundation for future growth.
Display Panel Segment to Expand Premium Product Lineup
The Display Panel segment posted KRW 6.85 trillion (R75.8 billion) in consolidated revenue and KRW 520 billion (R5.75 billion) in operating profit for the quarter. Despite seasonality concerns and decreased TV panel shipments, the profitability of LCD panels was solid due to increased sales of premium TV panels, such as those for UHD TVs. Earnings improved QOQ for OLED panels, as sales of new high-end smartphone display panels increased.
In the second quarter, earnings for LCD panels are expected to remain solid, due to increased sales of premium products, such as UHD, Curved and 60-plus-inch TV panels. Although there is increased demand for OLED panels stemming from high-end smartphones, earnings associated with OLED panels are expected to see limited improvement due to costs required to start the new A3 production line.
In the 2H 2015, the growth of the UHD market and the trend toward larger displays may present opportunities. However, there are risk factors, such as the effect of exchange rates upon consumer demand for TVs and smartphones and the increasing production capacity across the display panel industry. In response, the Display Panel segment will look to improve profitability by strengthening premium LCD product lineups, including Curved and ultra-large displays, as well as low-end products. Profitability for OLED panels is also expected to improve, as product lineups will accommodate smartphones across the low- and high-end spectrum. Market leadership will be reinforced through the mass production of flexible display panels, which is expected to function as a growth driver for mid- to long-term growth.
Increased Sales, Decreased Expenses Improve Profitability for IM Division
The IM Division posted KRW 25.89 trillion (R286 billion) in consolidated revenue and KRW 2.74 trillion (R30.3 billion) in operating profit for the quarter.
Smartphone sales increased QOQ. However, tablet and feature phone sales decreased, along with a decreased ASP, resulting in a slight decrease in revenue. Meanwhile, earnings improved due to more efficient management of marketing expenditures, expanded sales of middle-end smartphones including the Galaxy A Series, and a strengthened premium lineup following the introduction of the Galaxy S6 and S6 edge.
In the second quarter, market demand for smartphones and tablets is expected to remain at a similar level QOQ. Global sales are expected to improve with the global launch of the Galaxy S6 and S6 edge. In particular, the Galaxy S6 and S6 edge have been receiving positive feedback from the market. However, total smartphone shipments are expected to remain at the same level as the previous quarter, due to a possible decrease in sales of middle- to low-end models, while marketing expenses are expected to increase due to the global launch of the Galaxy S6 and S6 edge.
In 2015, continued growth is expected due to the growth of emerging smartphone markets, such as China and India, as well as the global expansion of the LTE business. However, increased competition in the middle- to low-end market and a possible decrease in demand due to the impact of foreign exchange rates in specific regions may present challenges.
The IM Division will drive smartphone sales growth in 2015 by strengthening its leadership in premium smartphones and actively responding to the growing middle- to low-end market with a streamlined lineup. Further, the overall cost efficiency across all business areas, including R&D and marketing, will be increased to improve profitability.
UHD TV Full Lineup to Strengthen Market Leadership
The CE Division, encompassing the Visual Display (VD), Digital Appliances (DA), Printing Solutions and Health and Medical Equipment (HME) Businesses, posted KRW 10.26 trillion (R113 billion) in consolidated revenue, registering a loss of KRW 140 billion (R1.55 billion) for the quarter.
Market demand for flat panel TVs decreased due to the first quarter being a traditionally slow season, as well as the falling exchange rates in Europe, Russia and Brazil. An increase in material costs due to the strong US dollar further contributed to the losses. Meanwhile, the DA Business saw improved earnings year-on-year (YoY) due to increased sales of premium products such as the Chef Collection.
In the second quarter, while flat TV demand is expected to remain at the same level as the previous quarter, the growth of the UHD TV market is expected to continue.
Samsung Electronics will increase sales of the top-of-the-line SUHD TV to expand its UHD TV lineup and improve profitability. Additionally, Samsung will continuously expand region-specific models to actively respond to demand in emerging markets. The DA Business will actively prepare for the peak season of air conditioner sales, while releasing innovative new products to improve business performance.
Consolidated Sales and Operating Profit by Segment based on K-IFRS (2013~2015.1Q)
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 2015.