Why Samsung Is Still Smiling
At first glance, Samsung Electronics’ (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=SSNGY), latest quarterly results, announced in Seoul today, look disappointing. The company, Asia’s largest and most profitable information technology giant, posted an 8.5% year-on-year decline in its net profit in the three months through Dec. 31, to $2.52 billion.
Much of the blame lay with weak prices for liquid crystal display panels, mobile phone handsets, and memory chips for handheld gizmos such as music players. Yet Samsung remain upbeat. “We’ve staged a solid recovery in earnings despite price declines in some product categories,” says Samsung Senior Vice-President Chu Woo Sik. “The outlook for the coming year is sanguine.”
Investors agreed. In Seoul trading, Samsung’s stock climbed 3.6%, its biggest gain in more than four months, to $646 following the release of the results. Top of the TV Heap
What explains the optimism? Samsung’s all around financial muscle is one factor. Its margins remain sky high. Despite falling profits, Samsung’s net earnings margin is a healthy 15% for the quarter, albeit down from 17% for the same quarter a year earlier. This year, Merrill Lynch (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=MER) reckons profits could reach $9.4 billion, up from $8.5 billion in 2006. That gives the company plenty of cash to invest in the future.
Another reason is Samsung’s strength in TVs. Last year, the company says, it became the globe’s No. 1 TV maker, topping revenue and shipment rankings for color TVs overall as well as liquid-crystal display (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=LCD) TVs and flat-panel TVs.
In all, Samsung sold 20 million sets in 2006, with revenues topping $10 billion, up 71% from 2005. This year’s targets are even bolder.
Earlier this month, Samsung said it is targeting sales of 24 million sets in 2007, including 13.5 million flat-panel TVs. “Given its economy of scale and enormous cash holding, Samsung is more likely to keep its TV leadership in years to come,” says Daniel Kim, a Hong Kong tech analyst at Merrill Lynch, which rates Samsung a “buy”. DRAM Shortage Builds Sales
Then there’s Samsung’s chip business. The company’s leading position in dynamic random access memory (or DRAM) chips, which are used in PCs, is a huge bonus. In particular, the company is poised to benefit from new demand for DRAM chips created by Microsoft’s new Windows Vista operating system.
The Vista launch comes during a shortage of DRAM chips, which is already boosting Samsung’s bottom line. Indeed, the shortage helped increase margins in Samsung’s memory business to 31% from 26% in the fourth quarter of 2006, despite falling prices of NAND chips, which are used in MP3 players and other electronic devices.
“You’ll probably see Samsung strengthen its consumer electronics portfolio this year with new fancy gizmos, but DRAM will remain as its main money spinner,” says Michael Min, an analyst at brokerage Korea Investment & Securities.
Of course, Samsung still faces a number of challenges in the months ahead. In TVs, rivalry with Japanese companies is hotter than ever. Earlier this week, Matsushita Electric Industrial (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=MC) announced plans to build a new, 10 million capacity plasma TV plant, the world’s biggest, in Japan, by 2009 (see BusinessWeek.com, 1/11/07, ). Sony’s LCD Coattails
Meanwhile, a strong end to 2006 boosted sales of Sony’s (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=SNE) popular Bravia LCD TV line. Despite Samsung’s global dominance, the Japanese company took a 31% share of the important U.S. LCD TV market at the end of December, against Samsung’s 22%, says Goldman Sachs (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=GS). LCD TVs make up 24% of the world’s TV market (see BusinessWeek.com, 1/09/07, ).
At least Sony’s success isn’t necessarily bad news for Samsung. The two have a joint venture in LCD panels, which means Sony’s gains also benefit its Korean partner (see BusinessWeek.com,11/28/06, ).
That partly explains why Samsung’s LCD panel business posted a 10% operating profit margin in the last quarter, although the average price of LCD panels for monitors and notebook PC screens dropped by nearly 30%—even more for TV screens.
Mobile phone handsets, though, are a real concern. Amid increased competition from Nokia (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=NOK) and Motorola (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=MOT), Samsung, the world’s third-largest mobile phone maker, saw its telecom unit’s profit margin slip to 8% in the quarter ended in December, from 11% in the previous three months. The unit’s revenues declined 6%, to $4.98 billion.
The company also faces legal headaches. Antitrust regulators in South Korea, the U.S., and Japan are probing possible price-fixing in LCD panels. Meanwhile, Seattle-based Washington Research Foundation has filed a lawsuit accusing Samsung of patent infringement in the use of Bluetooth wireless technology in its products (see BusinessWeek.com, 1/3/07, ).
For all those worries—and its earnings dip in the fourth quarter—Samsung’s chieftains have plenty left to cheer about.