The Korean electronics maker expects second-quarter profits to soar fivefold thanks largely to its aggressively marketed high-end LCD TVs
Don't tell Samsung Electronics executives that there's no money to be made making TVs. Samsung, which is fast eclipsing Sony (SNE) as the top TV brand, announced on July 6 that it expects operating profit for the three months ended in June soared fivefold from the previous quarter, to as much as $2 billion. Samsung, which is also the world's top memory chipmaker and the second-largest mobile-phone maker, gave no details in its earnings guidance, but industry watchers say the surprise came from its highly competitive TV business.
The better-than-expected profit forecast also confirmed that the information technology sector is recovering from the global recession. "There's no doubt the industry has turned the corner and is moving towards normalcy, albeit slowly," says Song Myung Sup, electronics analyst at brokerage HI Investment & Securities in Seoul. Investors welcomed the news, pushing Samsung shares 5.5% higher, to $500 apiece, its highest in a year, on the Seoul bourse. Samsung's stock has risen 40.6% so far this year, vs. a 27.1% gain for the benchmark Kospi index.
The rapid improvement in profitability also underlines the resilience of Samsung. "The company has taken advantage of its better cash position and a weak Korean currency to keep pouring money into marketing, which makes Samsung among the first beneficiaries of a recovery," says Park Kyung Min, chief executive officer at asset manager Hangaram Investment Management. The Korean won has lost its value against the dollar by 26% since the beginning of last year.
"confident" tv will be growth engine
The best example is a bet on a new flat-screen TV technology that uses LEDs (light-emitting diodes) as its light source. Even as consumers are tightening their purse strings in the face of looming threats of job losses, Samsung introduced a new line of large-screen LCD (liquid crystal display) TVs sporting LEDs that cost some $600 more than traditional flat-screen units. Samsung President Yoon Boo Keun, who heads the TV business, points out he wanted to create a buzz in the industry to break out of a trap where revenues drop even as unit sales increase.
Then Samsung began an aggressive global marketing campaign costing hundreds of millions of dollars. Its advertising and promotion events for the new generation of high-definition LED-lit TVs focused on three factors: it's ultraslim (thinner than 3 centimeters); its LED technology makes picture quality sharper and brighter; and the new TVs cut power consumption by about 40% compared with old LCD TVs.
The strategy struck the right chord with consumers. Despite the economic downturn, consumers bought some 500,000 LED-lit Samsung TVs in the first 100 days of the mid-March launch. In the high-end premium market, or TVs costing $3,000 or more each, Samsung took a share of 83% in May, up from just 4% a year earlier, according to market researcher NPD Group. "We are confident the TV business will continue to be a growth engine," says Samsung TV chief Yoon.
With consumers willing to pay a premium for an LED-lit TV, Yoon's visual display department, which also includes computer monitors and home theater systems, was a star player in the second quarter. "The bulk of Samsung's second-quarter profits came from its mobile phones and TVs," reckons Lee Hak Moo, a corporate analyst at brokerage Mirae Asset Securities in Seoul. "Handsets have been a major profit center in recent years, but TVs beat everybody's expectation."
Overall, Samsung says earnings from its global operations recovered to the level before the U.S. banking crisis rocked consumer confidence last autumn. It says its consolidated profit, incorporating earnings from subsidiaries abroad, totaled between $1.7 billion and just over $2 billion in the April-June period, up from $371 million in the first quarter and $1.9 billion a year earlier. It forecast second-quarter sales of $24.5 billion to $26 billion, up from $22.6 billion three month earlier and $23 billion a year earlier.
Samsung will release details of its second-quarter performance on July 24. Industry analysts expect the company to post marginal profits from its memory chip and LCD display units in the second quarter after reporting losses in the preceding three months. "Despite poor performance in the first quarter, Samsung's earnings this year as a whole will be better than last year's by double digits—and next year will probably see earnings jump by more than 50%," says Song at HI Investment.