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Samsung Electronics Expected To Outclass Apple in Operating Income
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Samsung Electronics Expected To Outclass Apple in Operating Income
  • By Michael Herh
  • July 7, 2017, 19:45
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Samsung Electronics' second quarter earnings is expected to surpass those of Apple.
Samsung Electronics' second quarter earnings is expected to surpass those of Apple.

 

Samsung Electronics recorded the best business performances ever. The Korean electronics giant announced via a tentative public disclosure that it posted 60 trillion won (US$54 billion) in sales, 14 trillion won (US11.7 billion) in operating income, and operating margin of 23.3 percent,

A dominant view is that Samsung Electronics' second quarter earnings will surpass those of Apple with the biggest market capitalization in the world. The industry and global investment banks estimated that Apple's second-quarter operating income would stand at US$10.55 billion. Samsung Electronics' business results are all the more amazing because Apple is not expected to post an earnings surprise in the second quarter. This is expected to mark the first time Samsung Electronics will outperform Apple in quarterly operating income. Apple will announce its second-quarter earnings on August 1.

Even Samsung Electronics's second quarter sales are expected to eclipse the combined sum of FANG, the Big 4 IT companies in the US. FANG refers to Facebook, Amazon, Netflix, and Google. Foreign news media estimated Fang's second quarter operating income at US$11.15 billion.

Samsung Electronics’s best-ever performances are mostly credited to its semiconductor business. Analysts say that the semiconductor business division earned up to eight trillion won (US$7.2 billion), more than half of the 14 trillion won (US$11.7 billion). Some DRAM products are said to have an operating margin of over 50%.

"Samsung Electronics has made a preemptive investment in semiconductor microprocessing since three to five years ago, commercialized 3D NAND flash products for the first time, and actively invaded the market of SSDs (solid state drives) for enterprises and PCs. These efforts have begun to pay off handsomely," said an official in the semiconductor industry.

It is also accepted as an established fact that Samsung Electronics surpassed Intel, the "King of Semiconductors." Intel is a longstanding semiconductor industry leader that has ranked first in semiconductor sales for 24 years. Nomura Securities predicted that Samsung Electronics's semiconductor sales will exceed US$ 14.4 billion of Intel by amounting to US$ 15.1 billion. IHS, a market research firm, said that Samsung Electronics will record higher sales than Intel in the second quarter of this year. "This trend will continue, making Samsung Electronics the No. 1 semiconductor maker beginning in 2017."

The display business division’s earnings are estimated at 1.5 trillion won (US$1.35 billion). In OLEDs (organic light emitting diodes) for smartphones, Samsung Electronics has been virtually dominating the market with a share of more than 90%, and LCD (liquid crystal display) panel prices were solid.

The IM (IT and mobile) business division, which spent its worst year with the discontinuance of the Galaxy Note 7 last year, reportedly earned 3.7 trillion (US$3.3 billion) to 3.8 trillion won (US$3.4 billion). The Galaxy S8, which was launched to make up for Galaxy Note 7’s failure, was well received in the market. Moreover, it is said that the time of its launch was delayed to the end of March, later than in the past, leading Samsung Electronics to focus on promoting sales of the smartphone in the second quarter. This also contributed to boosting second quarter performances. But according to industry watchers, a rise in marketing cost played a role in hampering productivity.

The consumer electronics (CE) division did not have a dramatic element or factor, it is estimated that the CE division posted 500 billion (US$450 million) to 600 billion won ((US$540 million) in operating income.

In addition, beginning in this quarter, Samsung Electronics included the business scorecard of Harman, a US electronic auto parts company, in its earnings in its financial statements on a consolidated basis, becoming the last piece of the puzzle. The market estimates Haman's 2Q operating profit at around 200 billion won (US$180 million) to 300 billion won (US$270 million).

Samsung Electronics’s second quarter earnings surprise elevated the market’s expectations. This is because the company is expected in the third quarter to receive a business scorecard that surpasses that of the second quarter.

Parts such as semiconductors and displays will continue to fuel Samsung Electronics’s run more than others. With a sharp rise in demand for memory semiconductors for servers, data centers, mobile devices and artificial intelligence (AI), the demand is outweighing the supply worldwide.

Under these circumstances, Samsung Electronics is unrivaled in terms of technological competitiveness, and is busy receiving a flood of orders from many customers. The supply of smartphone OLEDs to major customers such as Apple is expected to start in earnest in the third quarter. The Galaxy Note 8, a new smartphone model, is scheduled for its launch in the second quarter of this year.

In the securities market, Samsung Electronics’s operating income is expected to hover around the 13 trillion won-to-14 trillion won (US$11.7 to 12.6 billion) level in the third quarter. Some expect that Samsung Electronics will post 15-plus trillion won (more than US$13.5 billion)in operating income. There are increasingly more experts who expect that the company will post over 50 trillion won (US$45 billion) in operating income this year. The first half of the year already saw its operating income hit nearly 24 trillion won (US$21.6 billion). Samsung Electronics recorded its highest operating income of 36.79 trillion won (US$33.1 billion) in 2013.

However, a dominant view is that this big rise in Samsung Electronics’ earnings in the semiconductor sector will finally come to an end when taking into account the characteristics of the semiconductor market, the largest contributor of Samsung Electronics’ earnings surprise, that takes a roller coaster ride.

This is because some analysts say that the semiconductor market will face a “demand” cliff when corporate data centers ramping up demand for memory get settled. In addition, China, which promotes its semiconductor with an investment of 200 trillion won (US$180 billion) begins to supply a large quantity of semiconductors, the semiconductor market cycle may face the worst downturn.

According to global market research firm IHS Markets, global DRAM market revenue is expected to decline relatively significantly to US$53.4 billion in 2019 after swelling from US$41.5 billion last year to US$55.3 billion this year and US$57.8 billion next year.

In this situation, Samsung Electronics has to devise countermeasures and needs to make a decisive investment to maintain its position as a global leader when encountering the next super good cycle. But now the company is devoid of its control tower as vice chairman Lee Jae-yong, the actual leader of the Korean IT giant, is under arrest. This is the core of a possibility that Samsung Electronics will be faced with a crisis.

In addition, even though there are rising voices that Samsung Electronics has to cut M&A deals in order to get on the waves of the fourth industrial revolution such as AI and IoT, the final decision making position is empty, disabling the company from going forward.

In fact, Samsung Electronics has not made any large-scale new M&A deal announcement after its acquisition of Harman, a US company specialized in electronic parts for automobiles, in November of last year.

Lately, global competitors have been accelerating the diversification of their business. For instance, Intel of the US took over Mobileye, an Israeli self-drive company, for US$15.3 billion and Amazon acquired organic supermarket chain Whole Foods Market. But Samsung Electronics has no choice but to watch it.

In particular, experts in the electronics industry say that the situation of Samsung Electronics is a stark contrast to the SK Group’s move that SK Group chairman Chey Tae-Won flew into Japan and directly tackles negotiations over the acquisition of Toshiba's semiconductor business unit and produced desired results.

Even though the absence of such M&As and investment does not immediately show its impact, Samsung Electronics is concerned that it will undermine the company’s future growth engines.

"The fact that investments made three to five years ago enabled Samsung Electronics to enjoy a huge semiconductor boom now," said a representative of the Korean business world. "We urgently need to seek out and invest in innovative technologies and products such as cloud service and convergence. The absence of its leadership for an investment drive is presenting a crisis for Samsung Electronics."

"It is true that a growing sense of crisis is prevalent inside Samsung Electronics as China has been aggressively investing in the semiconductors and mobile sectors lately," another representative said. “Despite such a situation, the Samsung Group is bereft of its chairman who will direct future strategy. This makes Samsung Electronics worry that the company will fall in a serious crisis in three to five years.”