Samsung Returns to Roots in Components as Phones Stall

Samsung Electronics Co.
In November, Samsung said the number of smartphone models it produces would be cut by as much as a third this year as it focuses on products where it has a competitive edge. Photographer: Krisztian Bocsi/Bloomberg

Samsung Electronics Co. is relying on a 40-year-old memory-chip unit for earnings growth as sales of its Galaxy smartphones are eclipsed by Apple Inc. and Xiaomi Corp.

Buoyant demand for semiconductors, including from competitors in the phone business, and a falling won helped Samsung post fourth-quarter operating profit that beat analyst estimates, even though it slumped 37 percent from a year earlier.

The world’s biggest mobile-phone business, under pressure at the high end from iPhones and in the mid-range from Xiaomi’s Redmi 2, contributed less than a third of earnings, according to analyst estimates. Vice Chairman Lee Jae Yong is leading a strategy revamp by cutting the number of smartphone models, spending $15 billion on a new chip plant in South Korea and reinventing the company as a maker of Web-connected devices.

“Apple and Chinese producers are rivaling Samsung in smartphones, but they are also its biggest customers for components, especially in memory chips,” said Greg Roh, a Seoul-based analyst at HMC Investment Securities Co. “It’s about the right time for Samsung to find the sweet spot from its component businesses rather than from end-product units.”

Shares of Suwon, South Korea-based Samsung rose 0.5 percent to 1,314,000 won at the close of trade in Seoul. The stock fell 3.3 percent last year after a 9.9 percent decline in 2013.

Chip Investments

Operating profit at Samsung fell to 5.2 trillion won ($4.7 billion) in the three months ended December, compared with the 4.8 trillion-won average of analyst estimates compiled by Bloomberg.

Sales totaled about 52 trillion won in the quarter, the company said in a filing today. That’s about a 12 percent decline from a year ago.

Samsung didn’t provide net income or details of division earnings with audited results due to be reported later this month.

Operating profit from semiconductors was probably 2.7 trillion won in the fourth quarter on sales of 10.8 trillion won, according to the median estimate of six analysts surveyed by Bloomberg News. That would be a 35 percent increase in earnings from a year earlier.

Samsung and Globalfoundries Inc. are teaming up in the made-to-order chip business, an alliance aimed at winning orders from Taiwan Semiconductor Manufacturing Co. In October, Samsung said it would spend 15.6 trillion won building a chip plant south of Seoul.

Marketing Boost

“Samsung’s main business is now shifting back to semiconductors,” Peter Lee, a Seoul-based analyst at NH Investment & Securities, said in a Jan. 2 report. The annual operating profit from the chip business this year will outpace that of the mobile unit, he said.

Operating income at the phone division probably fell to 1.6 trillion won on sales of 27 trillion won, according to the analyst survey. That would be the unit’s smallest quarterly profit in almost four years as Samsung faces increasing competition in China and India, the world’s two biggest smartphone markets.

Fewer shipments and higher marketing spending for new models during the quarter curtailed profit growth and limited the benefits of the September release of the large-screen Note 4, said Lee Seung Woo, an analyst at IBK Securities Co. in Seoul.

In November, Samsung said it would cut the number of smartphone models it produces by as much as a third this year to focus on products where it has a competitive edge. That’s a reversal of its previous strategy of selling devices for anywhere between $100 and $1,000 across multiple screen sizes.

Currency Impact

Samsung probably shipped 75 million smartphones worldwide in the last three months of 2014, after selling 78.7 million units in the third quarter, according to HMC’s Roh.

The won traded at an average of 1,086 against the U.S. dollar during the fourth quarter, compared with 1,025 in the previous three months, according to data compiled by Bloomberg.

“Currency tailwinds should boost profits for memory and display panels, as more than 90 percent of revenues are in U.S. dollars,” Shawn Kim, a Seoul-based analyst at Morgan Stanley, said in a Jan. 6 report.

Lee Jae Yong has taken a greater role at Samsung since his father, Lee Kun Hee, was hospitalized in May after a heart attack. Under younger Lee’s leadership, Samsung Group made changes to its executive ranks across the more than 70 companies that comprise South Korea’s biggest chaebol during its annual management revamp in December.

Tizen TVs

The display unit, which includes liquid-crystal displays and screens using organic light-emitting diodes, probably posted an operating profit of 340 billion won as higher sales of large-screen televisions boosted panel prices, according to the analyst survey.

“The Note 4 had a positive impact on Samsung’s component units in the quarter, which largely helped offset negative factors came from its mobile and TV businesses,” said Lee Do Hoon, an analyst at CIMB Group Holdings Bhd in Seoul.

Samsung unveiled the first TV sets powered by the Tizen software platform at the Consumer Electronics Show in Las Vegas this week, and all the Web-connected models it sells in 2015 year will run the operating system.

While Samsung helped develop Tizen as a challenger to Google Inc.’s Android, the software has struggled to find success on smartphones.

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