Samsung (SSNLF, Financial) has always been a renowned brand when it came to smartphones, and in emerging markets such as India, it has the largest market share in the smartphone arena. The company is continuously upgrading its communication devices to stay ahead of competitors like Apple (AAPL, Financial) and Google (GOOG, Financial). But, unfortunately, the estimates of the third quarter results declared by the company’s management a few days back were depressing and cast a dismal outlook for the company’s top and bottom line. Now, the question arises soon after the company’s modified guidance is out- can Samsung sustain its growth momentum in the respective operating segments, or will competitors surpass the electronics giant at ease? Let us delve into the article for better insight, but first let’s have a quick peek into what went wrong in the quarter.
What is the management saying
After the last quarter’s overwhelming results, the South Korean powerhouse has given off a profit warning for the third quarter, which is worrying from the investors’ standpoint. While the company is trying to deal with increased competition in the smartphone market by introducing cheaper alternatives, its biggest rival, Apple’s launch of iPhone 6 has set its sales on fire. The management stays cautious on the forward results and feels that the company is presently pressed from both the top and bottom line. Having a tough time to keep its position in the unpredictable and dynamic market, the company has issued a modified guidance last week, which sounds pretty grim.
Samsung now expects the third quarter to be a dull one, and hopes to earn $3.8 billion in operating profit for the period, down a whopping 60% compared to last year. Also, taken the sudden drop in sales being eminent for the company products, the revenue is projected to be nearly 20% down year-over-year.
This drop in operating profit would be the largest drop since 2009. Although the volume of smartphone shipments rose for the quarter, it was offset by a higher marketing spend and lower prices for devices. Analysts’ were predicting a drop in operating profit of 42% and this drop is feared to be more than even thought of. The sales drop would also be more than 14% predicted by analysts. It is being anticipated that the sudden fall in top and bottom line is due to the poor performance this quarter in the smartphone segment which contributes for around two-thirds of Samsung’s overall operating profit.
Against stiff competition
The fact is that currently Samsung is being gunned down by its rivals. On the lower end of the spectrum, the company has gradually lost market share to cheaper competitors which are mainly Chinese in origin. In the last quarter, Samsung was overtaken by Xiaomi as the number one smartphone maker in China. The Chinese player managed to garner 14% market share versus 12% by Samsung.
Apple’s iPhone 6 launch has spelled bad news for the company which was known to be a dominant player in the large-display smartphones’ segment. Now that the iPhone has come out with a large screen, Samsung will definitely feel the pinch.
Analysts are anticipating strong demand for iPhone 6 in developed and emerging markets, including China. Therefore, they are busy revising their margin estimates downward for Samsung.
Is the company’s future completely doomed unless it’s able to re-capture the trust in the smartphone domain? Most probably the answer is a big no, as Samsung knows how to grow itself when competition grows. Maybe, that’s the reason behind the investment news in the chip manufacturing segment which is being heard of late.
Investing in memory chip
The semi-conductor unit remains the bright spot for Samsung, amidst declining smartphone sales as rivals are picking up with its current pace faster than predicted by Samsung’s top brass. So, to hold on to its position and to see growth in the near future, the company has announced the building of the new semiconductor plant in South Korea which would be the world’s largest state of art chip making plant.
The management have agreed to invest nearly $14.7 billion to construct this plant from the first half of next year and is likely complete the building by the second half of 2017. As the company struggles to maintain its leadership in the smartphone market, this investment plan does look promising for the company.
After around five years of competition in the semi-conductor space with rivals offering competitive prices, currently there are mainly three D-RAM suppliers in the market – Samsung, SK Hynix and Micron Technology (MU, Financial).
"Our investment into the new fabrication plant will influence the shaping of Samsung’s future semiconductor business,” stated Kwon Oh-hyun, Samsung’s chief executive. Samsung is expecting to manufacture memory and processor chips depending on their demand - memory chips are widely used in all smartphones, tablets and PCs while processor chips power the mobile devices.
The semiconductor business remains a fruitful business till date generating profit year-over-year, so this new plant is aimed at cementing Samsung’s leadership in the future market.
Last word
Though analysts’ have started to revise their estimates after the company gave an idea of posting dim quarterly results, Samsung’s earning might see a comeback after the memory chip plant starts operating in 2017. As the demand for mobile D-Ram and processor chips used in smartphones continues to grow globally, Samsung is slated to see success in this segment where it has emerged to be the ruler. Yes, the smartphone segment will take some time to show better numbers as the company needs solid strategies to fight the aggressive rivals. Thus, Samsung might not report shining numbers in the third quarter, but its growth story is still on, if not smartphones then it is the semiconductor business driving its fortunes ahead.
