South Korea's Samsung Electronics has joined a group of information technology giants to report earnings that beat industry expectations. Samsung, the world's largest maker of television and liquid-crystal display panels and the second-largest maker of semiconductor chips and mobile phones, on Apr. 24 posted a first-quarter operating profit of $349 million, swinging back to the black from a loss of $550 million in the previous quarter.
"The results were a surprise," says Brian Park, electronic analyst at Prudential Investment & Securities. "What's assuring is that Samsung displayed its ability to squeeze its costs to improve profitability at a time of crisis." The profit, nevertheless, is less than a fifth of $1.9 billion Samsung earned the year before. First-quarter sales also fell 13% to $21.3 billion from the previous quarter although it represented a 10% gain from the year before.
The star performer was its mobile-phone business. Rejecting analysts' criticisms that Samsung is bent on increasing its market share at all costs, the Korean company said it earned $833 million on sales of $7.26 billion in its telecom business. The profit came as Samsung's global market share topped 18% in the first three months, up from 16.4% the year before.
The profitability of the handset business caught virtually everybody by surprise. That's because Samsung's large profit margin of 11.5% for the quarter beat the 8.9% margin reported by Nokia (NOK), the unquestioned king in the handset industry. Samsung's average selling price for its handsets—a key indicator for demand and profitability—rose 2% to $122 from the previous quarter, whereas Nokia's average selling price fell to $86 from $94, though Nokia unit sales are more than double Samsung's.
But like executives from Apple (AAPL), IBM (IBM), Intel (INTC), and Google (GOOG), which all reported quarterly profits that beat Wall Street expectations, Samsung officials were cautious in forecasting for the rest of the year. "We can't say with confidence that profitability will increase in the second quarter," says Robert Yi, the vice-president heading Samsung's investor relations team. "Also, we cannot rule out the possibility of a repeat of last year when we had a good first half and a disappointing second half."
Things looked bad even in the first quarter for two of Samsung's main businesses. Its chip and LCD panel divisions, traditionally the company's money makers, kept bleeding red ink. With prices of memory chips remaining below manufacturing costs, Samsung lost 13¢ for every $1 of revenue in the first quarter from its chip business. Sharp price declines also meant it lost 8¢ for every dollar of LCD panel sales. In a thin-margin business of television, Samsung remained profitable, with its brand accounting for one in every five LCD TVs sold on the planet.
Industry officials say the worst appears to be over for LCD panels and the memory chips used in storing data for computers and mobile gadgets, but recovery would be slow. "Samsung is poised to benefit most in a recovery as it has the most efficient production processes and factories for memory chips and LCDs," says Michael Min, a technology specialist at fund manager Tempis Capital Management in Seoul. "The company will no longer post a loss like in the fourth quarter, but you can't expect any strong demand for chips until you see a global economic recovery."
Samsung, the world's largest memory chipmaker, agrees any improvement in chip demand will be limited for the time being. Cho Nam Seong, senior vice-president for semiconductor marketing, said he remained concerned that oversupply would prevent an improvement in memory chip prices in the coming months.
Rolling Out 20 Smartphones
Samsung executives, however, remain confident their company will continue boosting its share in the handset industry. "Demand will stay flat or increase marginally in the second quarter," says Kim Hyung Do, Samsung's planning vice-president. "But we expect to outperform market growth in view of our enhanced product lineup and strengthened joint promotion with carriers in the U.S. and Europe."
Samsung agreed with Nokia that the world's mobile-phone sales are expected to decline by 10% or so for all of this year. But Kim predicts Samsung will meet its target of selling more than 200 million handsets for all of this year, up from 196 million last year.
Samsung officials say the company is beginning to benefit from its investment in distribution channels in emerging markets such as China and India. They also expect better profit contribution from its rollouts of some 20 smartphones, upgraded Ultra Touch feature-rich phones, and the scheduled introduction this quarter of a phone using the Google-backed Android operating system.
The big test will probably come when Apple introduces its next-generation iPhone in the second half of this year. "I have no doubt Samsung will keep increasing its market share over the next two, three quarters," says analyst Thomas Kang at market researcher Strategy Analytics, who reckons that the 30% fall in the Korean won against the dollar since the end of 2007 is improving Samsung's profitability by at least two percentage points. "Samsung will face major challenges when the won starts gaining its strength and Apple gets more serious in its handset business."
Moon is BusinessWeek's Seoul bureau chief.