Samsung’s Challenging Turnaround
Last night, Samsung reported its full results for the second quarter. As it usually does, it had signaled roughly what results would look like at a high level meeting a couple of weeks earlier, but we now have the full details. The results in the earnings report present a nice summary of the challenges Samsung faces at this point in its history.
First, the good news
The good news is it’s becoming clearer that Q3 last year was the nadir of Samsung’s crisis, and that things have actually improved quite a bit since then, as shown in the chart below:
As you can see, Q3 was the low point for margins, operating profits, and possibly for year-on-year revenue declines too. All three metrics seem to have recovered a little from then, although we’ll have to see this year’s Q3 before we can be certain. What is clear is profits and margins have recovered significantly for Samsung as a whole, while revenues are now back to 2012 levels, though still down from their peak in 2013.
Semiconductors, not mobile, the star
However, whereas Samsung’s peak was driven by its mobile devices business, the current star is not mobile but semiconductors:
Semiconductor margins were eclipsed by mobile margins for a period in late 2012 but, since then, they’ve been increasingly moving ahead as that business finds greater and greater success even as the mobile business flounders. Despite the fact the semiconductor business is quite a bit smaller than Samsung’s mobile business unit, it generates higher total profits thanks to these higher margins.
Mobile hasn’t recovered as well
Although Samsung’s overall business has recovered somewhat from its downturn, the mobile business remains mired in stagnation rather than returning to growth. The IM (IT and Mobile) business unit, dominated by mobile device sales, is enjoying a new, much lower normal, rather than a resurgence to anything like its peak:
Both revenues and profits are significantly down from the heady days of 2013 and there’s no sign things are going to recover. Though the decline has stopped, at least for now, it’s come, at least in part, at the cost of significant price reductions and Samsung has now signaled it will begin discounting the Galaxy S6 to try to spur lackluster sales, a very early concession they are falling short of expectations.
A pincer movement is to blame
What’s the reason for this struggle to grow? Well, that’s been well covered before and it comes down to what is effectively a pincer movement, with Apple at the high end and a variety of Android vendors, most of them Chinese, at the low end, pressuring the two parts of Samsung’s mobile business at the same time. Samsung has lost scale at the low end, which directly impacts margins and the inroads into its premium business by Apple and the resulting slashed prices have cut into margins at the high end. Even if Samsung manages to stabilize shipments and revenues (and there’s no guarantee it can), it’ll likely do so at far lower margins.
Where does Samsung go from here? Well, stabilizing the mobile business as best it can is clearly a major imperative, but Samsung’s future has to look beyond that too. The semiconductor business is one strong possibility – between them, these two divisions account for the vast majority of Samsung’s profits today. So, if mobile isn’t carrying its weight, the semiconductor business must step up. Samsung has, ironically, benefited in this part of its business from Apple’s competitive success in smartphones but it’s not yet clear Samsung can win many other component contracts from competitors, let alone those that are growing the fastest. However, there are opportunities in the new markets where chips are finding their way into devices and even relatively dumb objects in what is invariably referred to as the Internet of Things. In reality, that’s a diverse set of opportunities, but Samsung has already demonstrated its intention to compete in wearables and home automation at both the device and chipset level, so there may be some growth opportunities there. However, what’s becoming increasingly clear is Samsung’s future is quite a bit dimmer than its past.