Samsung Heads Into New iPhone Season Fueled by Record Earnings

  • Quarterly operating profit of 14 trillion won tops estimates
  • Galaxy S8, display and chip sales drive growth for Samsung

Macquarie's Kim Says Samsung to Benefit From Chip Demand

Samsung Electronics Co. heads into the latter half of 2017 with record quarterly earnings under its belt, hoping to sustain that momentum as Apple Inc. prepares to debut the 10th-anniversary iPhone.

Samsung intends to use its well-received Galaxy S8 to extend its lead against its American rival. But it will also lean heavily on its position as the world’s largest maker of memory chips to grow its bottom line. The company’s ability to produce not only mobile devices but also some of the most vital parts of a phone, including displays, confers a unique advantage over Apple at a time the global market is losing steam.

The company reported its best-ever operating profit on Friday. That result, which includes the first full quarter of sales from the bezel-less S8, underscores how it’s benefiting from higher prices for the memory chips that go into all computing gadgets. Samsung also happens to be the world’s largest supplier of organic light-emitting diode displays, which may soon become standard.

“Samsung’s dominance in components that matter gives it the upper hand at least through the entire next year,” said Lee Jae-yun, an analyst at Yuanta Securities Korea. “There is only so much either Apple and Samsung can do right now to make their smartphones stand out, unless technology like foldable displays reshapes the market.”

Samsung may just end up outstripping Apple in profitability in the second quarter. Preliminary operating income rose to 14 trillion won ($12 billion) in the three months ended June, beating the 13 trillion-won average of analysts’ estimates. Its U.S. rival is projected to post operating income of $10.5 billion in the same quarter -- a typically weaker period ahead of the release of new iPhones.

Revenue rose to 60 trillion won, compared with the 58.4 trillion won projected. Its shares finished Friday little changed, taking this year’s gain to about 33 percent.

While displays and semiconductors have picked up the slack since the Note 7’s recall, the company still gets a significant portion of revenue from smartphones. It hasn’t divulged Galaxy S8 numbers but reviews for the device, which features a bezel-less display and voice-enabled digital assistant, have been favorable.

Samsung is using the S8 to repair its reputation and regain ground lost to Apple and Chinese rivals from Huawei Technologies Co. to Oppo following the well-publicized demise of the fire-prone Note 7 last year. It reclaimed its position as the world’s biggest smartphone maker in the first quarter, after losing the lead due to the recall.

It may be benefiting from the usual pre-iPhone lull. Apple is getting ready to unveil possibly the year’s most-anticipated electronic gadget around September or October, an event that typically draws global consumer attention.

Beyond ensuring the S8 holds its own against the forthcoming iPhone, the company has scrambled behind the scenes to fine-tune its production machine. It’s keen to demonstrate the smooth working of the corporation in the absence of de-facto chief Jay Y. Lee, who’s on trial over charges -- which he denies -- he bribed a presidential confidante to secure support for an important 2015 merger. 

The resilience of global memory prices is working in its favor. DDR3 4-gigabyte dynamic random access memory chips averaged $2.97 in the second quarter, compared with $1.58 a year earlier, according to data from InSpectrum Tech Inc.

“Samsung’s been successful with cutting manufacturing costs for memory chips, and that’s been a big factor, while display sales helped to boost the earnings,” said Greg Roh, an analyst at HMC Investment Securities Co. “Chip prices will keep rising and another record operating profit is in sight for Samsung in the third quarter.”

Samsung won’t provide net income or break out divisional performance until it releases final results later this month. It probably earned 7.5 trillion won in chips, 3.8 trillion won in mobile devices and 1.5 trillion won in displays in the second quarter, according to Lee Seung-woo, an analyst at Eugene Investment and Securities.

The company is on track to earn about 15.2 trillion won in the third quarter on the back of Galaxy S8 sales, with annual profit of 54 trillion won this year, Roh said.

Samsung may displace Intel Corp. as the world’s biggest chipmaker by sales this year if it can maintain its current momentum, according to Eugene’s Lee. And despite its tussle with Apple, it will continue to reap the benefits of being a major supplier to Cupertino as devices get smarter, said Chung Chang-won, an analyst at Nomura Holdings Inc.

“Sleeping with the enemy would be the way to define their relationship going forward,” Chung said. “You can’t do AI without memory and Samsung has the memory to sell.”

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