Samsung Q1 15A – Pointless gimmicks pay

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The pointless curved screen should generate some EBIT.

• Samsung reported its full Q1 15A results that revealed a better performance in the handset business than many had anticipated.
• Q1 15A revenues / EBIT were KRW47.2tn / KRW5.98tn in line with the guided range of KRW47tn / KRW5.9tn.
• Samsung shipped 99m mobile devices of which 80% were smartphones (79.2m) at an average price of $200.
• This was slightly ahead of RFM estimates where 96.2m (78.9m smartphones) were expected to sell for an average price of $194.
• This is what underpinned IT and Mobile Coms revenues of KRW25.9tn which was nicely ahead of RFM estimates of KRW23.6tn.
• The best news was margins where cuts in OPEX allowed Samsung to return IT and Mobile Coms EBIT margins to 10.6% up from 7.5% in Q4 14A.
• Device Solutions (semiconductors and panels) continued to perform strongly but Consumer Electronics slipped into the red largely on the back of lower revenues from the seasonally weak Q1 revenues.
• Optimism on the Galaxy s6 is running high as supply side surveys are revealing that the Galaxy s6 edge is genuinely out of stock as demand has been surprisingly high.
• This fact has been corroborated by RFM’s own research which has revealed component shortages holding up supply as well as good demand for the s6 edge at retail.
• Samsung would not be drawn on how well the device was selling other than to say that it is doing better than the s5.
• The s6 edge is a good looking device with cool looking, but useless, curved edges to its screen.
• However, the fact that the curves are pointless does not matter as it is quite possible to sell huge volumes at high prices if the useless gimmick is perceived to be cool and desirable.
• It is looking like Samsung has won some desirability with this device and stands to reap the benefits in the next 2 quarters.
• Consequently, it looks likely that IT and Mobile Coms margins should improve again in Q2 15E as ASPs and gross margins rise by more than OPEX.
• Samsung is being very cautious on OPEX following the very difficult six months it suffered at the end of 2014A and I think that 12% margins should be achievable in Q2 15E.
• Without a major renaissance of its product line, I estimate that this will be the limit of Samsung’s ability to raise its margins.
• Form here, in order to sell more products it will either have to cut prices or raise its sales and marketing expense, either of which will keep a lid on margins.
• Samsung has recovered well from the nadir of Q3 14A but I think returning to steady growth will still be difficult given its commoditising product line.
• I would continue to prefer Microsoft or Google in this space.