Samsung Q1 15E – Tight control.

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Samsung appears to have OPEX tightly under control.

• Samsung has guided to a good set of results as components was strong and OPEX was brought very rapidly under control.
• Q1 15E revenue and operating profit are expected to come in at KRW47tn and KRW5.9tn compared to consensus at KRW50.1tn / KRW5.5tn and RFM at KRW45.8tn / KRW4.62tn.
• I see three main factors that are likely to have driven this result.
  • First. Demand for memory appears to have been robust during the last three months and here Samsung is dominant with both market share leadership and superb profitability.
  • Second. I had been expecting a 10% decline QoQ in handset ASPs to clear older stock before the Galaxy s6 as well as continued commoditisation.
  • Samsung typically gains sell-in share in Q1 but it looks like it has not had to cut its prices as hard as I expected to shift its stock.
  • Third OPEX has been tightly controlled in the IT and Mobile Coms business allowing better operating leverage at lower levels of sales.
• As a result, Samsung has been able to generate more profit than forecast during the last three months.
• The big question is what the next three months will bring as the Galaxy s6 will be generally available for most of the quarter and a lot is riding on this.
• Management has led the market to hope that it can return the IT and Mobile Coms unit to mid-teens profitability which I think is unlikely to be achieved.
• The Galaxy s6 is a nice looking device but outside of hardware driven performance, it offers no functionality that cannot be obtained elsewhere.
• This is because the user experience is essentially defined by Google which is exactly the same on all handsets which carry the Google apps.
• Hence, I think Samsung will have to reduce pricing on this device more quickly than expected as it will rapidly become a commodity.
• With its current market share of 24% in smartphones and its competitors all around 5-8% market share, there are significant scale benefits to be had.
• These should allow handset margins to return to 10-12% (3x higher than all of its peers) but no further as there is very little differentiation.
• Consequently, I think that Samsung will miss this forecast and I continue to see a difficult year ahead although the comparisons to 2014A get much easier after Q2 15E.
• I see little upside in Samsung and scope for disappointment leading me to continue in preferring Microsoft and Google.