Bloomberg News

Samsung’s Record Earnings Fueled by Demand for Handsets to Chips

October 25, 2013

Samsung Profit Surges as Cheaper Handsets Team With Chip Rally

A Samsung Electronics Co. Galaxy advertisement stands illuminated at dusk in Gwanghwamun Square in Seoul, South Korea. Photographer: SeongJoon Cho/Bloomberg

Samsung Electronics Co. (005930), building smartwatches and eyeglasses that can take phone calls, posted record third-quarter earnings on surging prices for memory chips and sales of cheaper Galaxy smartphones in emerging markets.

Net income, excluding minority interest, rose 25 percent to 8.05 trillion won ($7.6 billion) in the third quarter, the Suwon, South Korea-based company said in a regulatory filing today. That compares with the 7.94 trillion-won average of 24 analyst estimates compiled by Bloomberg.

Earnings are climbing on shipments of smartphones in China and rising demand for the processors Samsung uses in its own models and supplies to rivals including Apple Inc. (AAPL:US), helping weather slowing growth in high-end handsets. After adding a smartwatch and its first phone with a curved screen, Asia’s biggest technology company registered designs for spectacles to challenge Google Inc.’s Glass in the wearable devices market.

“Samsung has proved it has better tactics to win the battle,” said Lee Seung Woo, an analyst at IBK Securities Co. “In the smartphone race, we should categorize Samsung differently from the minor league, second-tier players.”

Shares of Samsung closed unchanged at 1,449,000 won in Seoul. The stock has dropped 4.8 percent this year while the benchmark Kospi has gained 1.9 percent.

Third-quarter operating profit was 10.2 trillion won, compared with a preliminary estimate of about 10.1 trillion won given by the company Oct 4. Sales were 59.1 trillion won, compared with earlier estimate of about 59 trillion won.

Smartphone Shipments

The mobile unit, responsible for about two-thirds of Samsung’s earnings, posted operating profit of 6.7 trillion won, up from 5.63 trillion won a year earlier.

Smartphone shipments rose in the “mid-10 percent range” in the third quarter, led by cheaper handsets, the company said. High-end devices stayed at a similar level to the three months ended June. Sales of tablet computers rose in the “mid-20 percent” range during that period.

“It vacuumed up most of the lower-end market share, which most of the second-tier players were fighting for,” said Park Kang Ho, a Seoul-based analyst at Daishin Securities Co.

The pace of handset growth may slow slightly in the current quarter, compared to the three months ended September, with shipments rising by a “low single digit,” Kim Hyun Joon, vice president of Samsung’s mobile business, told a conference call today. Profit margin will remain stable through sales of high-end devices, including the Galaxy Note 3, the company said.

Apple sold a record 9 million iPhones in the first weekend of sales last month as it rolled out the 5s and 5c to markets including China, Japan and the U.S.

Round, Gear

“The Apple versus Samsung smartphone war is still focused squarely on the premium-tier for now,” Neil Mawston, an executive director at researcher Strategy Analytics, said in an e-mail. “Apple is feeling the heat from Samsung in the smartphone premium-tier and the slightly cheaper iPhone 5c is Apple’s competitive response to the Samsung threat.”

Samsung is rolling out new devices to target both higher-and lower-end consumers. The Galaxy Round with a curved display went on sale this month, and in September it released the Note 3 and the Galaxy Gear wristwatch device that can make phone calls, check e-mails and take photos.

The company registered a design in South Korea for eyeglasses that can show information from a smartphone and enable users to take calls, setting up a potential challenger to Google’s Glass.

Operating profit from the chip division more than doubled to 2.06 trillion won, compared with 1.02 trillion won a year earlier.

Hynix Fire

A fire last month at competitor SK Hynix Inc. (000660)’s plant in China has driven a rally in chip prices. The benchmark DDR3 2-gigabit dynamic random-access memory chip traded at $2.05 today, compared with $1.60 on Sept. 4 when the fire hit, according to DRAMeXchange, Asia’s largest market for the components.

The A7 processor inside Apple’s new iPhone 5s was made by Samsung, according to a teardown of the handset by IFixit. Samsung processors also are in other iPhones, the iPad and the iPad mini, according to Barclays.

Capital spending in the third quarter was 6 trillion won, with almost half of that going to the semiconductor unit. The world’s largest memory-chipmaker has spent about 63 percent of the record 24 trillion won in capital expenditure it plans for this year. That is larger than the market value of Sony Corp. (6758)

“Both Samsung and SK Hynix are ramping up PC DRAM capacity, but demand is still outstripping supply,” KTB Investment & Securities Co. (030210) said in an Oct. 17 report.

Stalling Televisions

Profit at Samsung’s consumer-electronics division, which oversees the TV and home-appliance businesses, was 350 billion won, compared with 400 billion won a year earlier.

TV makers are reeling from sluggish demand, especially from China, while tougher competition is accelerating price reductions. Global shipments for liquid-crystal display TVs may fall 0.7 percent to 205.1 million units for this year, market researcher TrendForce said Aug. 22. The final figure may be as low as 202 million units, it said.

Samsung’s display division, which dominates the market for panels using organic light-emitting diodes, had an operating profit of 980 billion won in the third quarter, compared with the 1.17 trillion won a year earlier.

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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