03.08.2015, 09:04
Fitch: Samsung's 2Q Results Underscore Smartphone Challenges
OREANDA-NEWS. Samsung Electronics' (SEC) latest earnings results underscore the challenges the company faces with its weakening smartphone business, says Fitch Ratings. SEC's global leadership in smartphones is in question, and a recovery in falling profitability in its handset division is unlikely in the short term.
SEC's 2Q15 results, released on 30 July, revealed a continuing trend of falling earnings - weighed down by weakness in mobile revenue which declined by 8% yoy. In turn, operating profit in the IT and Mobile Communications (IM) division fell by 38%, while total company revenue and profit fell by 7% yoy and 4%, respectively.
The decline in mobile sales occurred despite the launch of the Galaxy S6 smartphone model at the beginning of the quarter. SEC does not provide shipments data, although market research firm IDC estimates that the company's shipments slipped by 2.3% yoy to 73.2 million units in 2Q15, while market share contracted by about 3 percentage points to 21.7%. The failure of the new flagship models to boost sales volume suggests that the company can no longer rely on new smartphone products to support profitability.
SEC's market share continues to be squeezed by Apple at the premium end, and by rapidly growing Chinese firms at the lower and mid-range. In particular, SEC's leadership in hardware technology versus second-tier players is narrowing, while Apple's profitability has been more resilient owing to its eco-system of software and media content. Notably, Apple's new iPhone 6 has experienced record sales while China's Huawei has seen high-double-digit percent increases in its mobile handset revenues.
SEC's mobile business profitability has fallen significantly, with EBIT margins dropping to 10.6% from 15.5% a year earlier. Fitch does not expect a meaningful recovery in mobile profitability soon. However, margins should stabilise in the next few quarters at the current level. The company plans to reduce overhead costs by streamlining the number of handset models. In addition, SEC's scale and vertically integrated hardware model should afford it some flexibility in managing margins.
Rising semiconductor profit has offset weakness in the mobile business. Operating profit from the semiconductor division continues to exceed that of the IM division. The latest results reinforce Fitch's view that having replaced the handset business, semiconductors would continue to support overall profitability as the company's main profit centre.
SEC retains a strong balance sheet and financial flexibility despite the challenges in its mobile business. Robust credit and liquidity profiles should continue to be supported by strong cash from operations as well as over KRW58trn (USD50bn) in cash and cash equivalents as of end-2014. SECs 'A+' Long-Term Foreign- and Local-Currency Issuer Default Ratings with a Stable Outlook were affirmed on 24 June.
SEC's 2Q15 results, released on 30 July, revealed a continuing trend of falling earnings - weighed down by weakness in mobile revenue which declined by 8% yoy. In turn, operating profit in the IT and Mobile Communications (IM) division fell by 38%, while total company revenue and profit fell by 7% yoy and 4%, respectively.
The decline in mobile sales occurred despite the launch of the Galaxy S6 smartphone model at the beginning of the quarter. SEC does not provide shipments data, although market research firm IDC estimates that the company's shipments slipped by 2.3% yoy to 73.2 million units in 2Q15, while market share contracted by about 3 percentage points to 21.7%. The failure of the new flagship models to boost sales volume suggests that the company can no longer rely on new smartphone products to support profitability.
SEC's market share continues to be squeezed by Apple at the premium end, and by rapidly growing Chinese firms at the lower and mid-range. In particular, SEC's leadership in hardware technology versus second-tier players is narrowing, while Apple's profitability has been more resilient owing to its eco-system of software and media content. Notably, Apple's new iPhone 6 has experienced record sales while China's Huawei has seen high-double-digit percent increases in its mobile handset revenues.
SEC's mobile business profitability has fallen significantly, with EBIT margins dropping to 10.6% from 15.5% a year earlier. Fitch does not expect a meaningful recovery in mobile profitability soon. However, margins should stabilise in the next few quarters at the current level. The company plans to reduce overhead costs by streamlining the number of handset models. In addition, SEC's scale and vertically integrated hardware model should afford it some flexibility in managing margins.
Rising semiconductor profit has offset weakness in the mobile business. Operating profit from the semiconductor division continues to exceed that of the IM division. The latest results reinforce Fitch's view that having replaced the handset business, semiconductors would continue to support overall profitability as the company's main profit centre.
SEC retains a strong balance sheet and financial flexibility despite the challenges in its mobile business. Robust credit and liquidity profiles should continue to be supported by strong cash from operations as well as over KRW58trn (USD50bn) in cash and cash equivalents as of end-2014. SECs 'A+' Long-Term Foreign- and Local-Currency Issuer Default Ratings with a Stable Outlook were affirmed on 24 June.
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