Samsung Q4 14A – Storm rigged.

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Steady results show better weathering of the handset storm.

• Samsung reported reasonable Q4 14A results and some signs have emerged that management has regained a degree of control over the handset business.
• Revenues / EBIT were KRW52.73tn / KRW5.29tn which was comfortably within the range given on January 8^th.
• Consumer electronics, Semis and Displays all improved profitability benefitting from operating leverage to improve margins during Q4.
• The good news is that Samsung’s efforts to bring the handset business under control have borne some fruit and the business remained stable compared to Q3 14A.
• Despite a rise in ASPs from the Galaxy Note 4, Samsung has clearly been cutting prices on other products in order to hold onto market share.
• RFM estimates show that Samsung has lost some share during Q414A (22%) but this was partly due to inventory wind down as well as a well-documented loss to Apple at the high end.
• This should bounce back to some degree in Q1 15E as inventories normalise and the pent-up demand for the iPhone 6 eases.
• This caused a small decline in handset gross margins but this was offset by better control of sales and marketing expenses to give EBIT margins of 7.5%.
• This is better than the 7.1% earned in Q3 14A and is a sign that gives me hope that Samsung is much more in control of this business.
• During the quarter, Samsung has taken various actions to stabilise the business and they appear to have worked.
• This is a big improvement on Q3 where everything that Samsung did had no effect.
• However, expectations are still too high in the long run as Samsung executives think that they can return this business to mid-teens margins over the medium term.
• This is extremely unlikely because Samsung is now selling a commoditised product and all it can compete on is hardware specification, design and price.
• This puts it in the same boat as all of its competitors all of whom make 2-4% margins in the best instance.
• Samsung does have the advantage of scale and in the handset business, this is very important.
• Consequently with smartphone share of around 22%, RFM estimates that margins could return to 10-11% best case.
• While I am more comfortable that Samsung has got the ship under control, the destination continues to look very unrealistic.
• I continue prefer Google and Microsoft over Samsung.