Samsung Electronics on July 24 posted an impressive set of quarterly earnings, highlighting the resilience of its consumer electronics business. For the three months through June, operating profits were just over $2 billion, a fivefold increase on the previous quarter and up 5% from a year earlier. Revenue totaled $26 billion, up 13.4% from the first quarter and 11.7% from April-June last year.
The big surprise was the impressive profitability of the TV business. Samsung is showing that tough competition among TV makers does not necessarily mean profits have to be razor-thin. Samsung's Digital Media division, which makes TVs, computers, printers, and other home electronics products, earned $848 million in the second quarter, up from $304 million three months earlier and $112 million a year ago.
That represents a respectable profit margin of 9%. Samsung didn't provide a breakdown of the contribution from TVs alone, but Michael Min, an electronics specialist at fund manager Tempis Capital Management, figures about 75% of the $848 million profit came from selling TVs. "Margins in TVs must have topped 10%," he says. "That's like a hitting a home run."
Samsung's strategy is to concentrate on high-end LCD (liquid-crystal display) TVs, particularly those using LEDs (light-emitting diodes) as a light source. Even as consumers worried about rising unemployment are cutting back on spending, Samsung this year introduced a new line of large-screen LCD TVs sporting LEDs that cost some $600 more than traditional flat-screen sets. Then it splurged on hundreds of millions of dollars in marketing to promote LED-lit TVs that offer a brighter and sharper picture, a thinner screen, and greater energy efficiency.
Help from a Weak Won The high-end focus and aggressive marketing paid off, enabling Samsung to increase the amount of profit it makes per TV. Since its mid-March launch of LED-lit LCD TVs, it has sold more than half a million sets. "The company bet that customers are willing to pay a premium for the right products, even during tough times," says Lee Hak Moo, corporate analyst at brokerage Mirae Asset Securities. "It was a huge marketing success." A bit like Hyundai Motor, though, which posted impressive profits on July 23, Samsung is aided by the weak Korean won, which has lost about a quarter of its value against the dollar in the past 18 months. By contrast, Japanese rivals' competitiveness is suffering due to the strength of the yen.
Samsung's mobile-phone business, which generated $800 million in earnings, is another bright spot. The world's second-largest handset vendor after Nokia (NOK), Samsung sold 52.3 million phones in the second quarter, an increase of 14% from the previous quarter. That was enough to give Samsung a global market share in mobile phones of 20%, compared with 16.7% in 2008 and 11.3% in 2006, according to market researcher Strategy Analytics.
Remarkably, Samsung executives are confident the company will keep snatching market share, with troubled rivals such as Motorola (MOT) and Sony Ericsson the likely losers. Kim Hyong Do, vice-president at Samsung's telecom unit, expects his company to achieve its target of selling more than 200 million handsets this year, even though for the overall industry Strategy Analytics forecasts a 10% drop from last year's 1.2 billion phones. "With the scheduled launch of [new] flagship models such as Jet, Galaxy, and Omnia II in the second half of this year, we expect a steady market share growth," says Kim.
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