Samsung Q3A – All at sea

Samsung is getting closer to the fate of its peers.

• Samsung has guided for Q314A results that strongly indicate that it is losing control of its handset business.
• Q314A revenues and operating profit will be KRW46tn-KRW48tn and KRW3.9tn-KRW4.3tn.
• The median of these figures is revenues of KRW47tn and operating profit of KRW4.1tn.
• Consensus was looking for revenues of around KRW50tn and operating profit of KRW4.5tn.
• I was far more optimistic forecasting revenues of KRW50tn with operating profit of KRW8.1tn.
• My hopes of some degree of recovery in Q314A based on cutting of sales and marketing while holding onto market share have been dashed as it looks like marketing has been maintained but still market share has been lost.
• This is the worst case scenario.
• It appears that Samsung has been cutting prices in order to maintain market share but has lost market share anyway.
• This increasingly looks like beginnings of the vicious cycle which ended the dominance of Ericsson, HTC, Motorola, BlackBerry and Nokia.
• Although the average consumer is not that aware of how the companies whose products they buy are doing financially, they do realise when things are going are badly wrong.
• This creates a vicious cycle where they steer clear of the products because of bad press and the company then loses even more market share creating yet more bad press.
• Samsung is in real danger of falling into this trap and unless something changes very quickly, margins are going to fall to 11-12% in handsets much more quickly than I have anticipated.
• There a possibility that Samsung has used this quarter to clear out unsold inventory but I am struggling to see what is new and interesting from Samsung to replace it.
• Hence, other than the normal seasonal pick up in the market, there seems to be very little with which Samsung is going to pick up the pace in Q414E.
• Furthermore in Q414E, Samsung will feel a full quarter of heat from the very popular iPhone 6 and 6+ which have shown no decline in shipments as a result of the bending issue.
• Samsung has ceded control of the ecosystem to Google meaning that the options that it has to differentiate its products in the future are extremely limited.
• This means that it will have to offer better hardware at increasingly attractive prices just to hang onto market share.
• For any handset maker, market share is its life’s blood for without volume there is no scale over which to spread the high fixed costs that are required.
• This is why, I find Samsung’s Q3 revenues far more worrying than its profitability.
• Another downward leg in market share implies an unravelling of the scale and brand advantage which will allow Samsung to sell commodity products but still make 11-12%.
• If share continues to fall, then this will no longer be possible and Samsung will come closer and closer to joining the long suffering ranks of every other Android handset maker in the market.
• These companies make 2-4% operating margins in the best instance.
• Consequently, I can see further cuts to consensus estimates and further downside to Samsung’s share price.
• Google and Microsoft remain much better places to invest in the digital, mobile ecosystem.