Market Insight

Samsung S7 range evolution, not revolution, is at the heart of improved 2016 revenues

July 28, 2016

Jusy Hong Jusy Hong Research and Analysis Director, Smartphone

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Samsung announced its Q1'16 earnings results today, 50.94 trillion KRW revenue and 8.14 trillion KRW operating profit which makes 16.0% operating margin rate. Revenue increased by 4.9% while operating profit went up by 18.0% from the same period of the year earlier. Mobile division which includes handset business unit recorded 26.07 trillion KRW in revenue. Operating profit of IM(IT and Mobile) group recorded 4.32 trillion KRW, which makes 16.3% operating margin. This is the highest operating margin since Q3’14.

 

Our analysis

The revenue of Samsung Mobile business has shown a downtrend from Q3'13 when it peaked at 35.66 trillion KRW. It rebounded in the first quarter of 2016 and continued an increasing in the second quarter. The operating profit exceeded 4 trillion KRW again after 8 quarters because of improved product line-up efficiency, early launching effect of S7 and sold more Galaxy S7 Edge, which has higher margin, than flat version.

Challenges in smartphone business

The handset business of Samsung has been showing constant growth in unit volumes. However, both revenue and operating profit have declined. This is mainly because of severe competition in both premium and mid/low-end smartphone markets.

Samsung is facing strong challenges in every direction:

 1. Chinese OEMs, which dominate the world biggest smartphone market, pushed Samsung to 6th position in China smartphone market and increase its presence in emerging regions.

2. Global smartphone market has slowed in developed markets. Virtually every consumer already owns a smartphone, so for Samsung to make a new sale it must persuade a consumer to upgrade.

 3. The replacement cycle for smartphones is getting longer under the unfavorable economic situation in the most of the countries. Smartphone makers need dramatically better models than those currently owned by consumers to drive replacement sales.

4. Commoditized and undifferentiated smartphone hardware between OEMs. Vendors are struggling to stand out from each other.

5. Demand is coming from emerging market where customer's preference is highly focused on low-end and cheaper smartphone. These markets have lower average selling prices and less need for high end innovations where Samsung is strong.

 

Changing Samsung smartphone line-up shares in 2016

Samsung explained that the successful launch of its new Galaxy S7 was the main reason behind the improved year on year earnings. However, IHS found that Samsung is increasing unit volumes more in the mid/low-end smartphone segment rather than high-end such as the premium smartphones Galaxy S and Galaxy Note series. These flagships are direct counter models to compete with Apple's iPhone.

The combined share of these Samsung Galaxy S and Note series as a share of Samsung total smartphone shipments declined to 26% in Q2'16, from 60% in Q2'14. On the other hand, the J series, which mostly consists of low-end models, accounted for 57% in the last quarter.

The shipment volume of Galaxy S7 in the first half of this year was 25 million according to IHS smartphone research. The shipment is only 2 million units bigger compared to the 23 million shipments of Galaxy S6 during the same period of 2015. But Samsung launched Galaxy S7 earlier which IHS believes worked well in the premium smartphone market and helped Samsung to sell S7 faster. Samsung could shift to Galaxy S7 more than 80% in Galaxy S series shipment in the second quarter. The previous S series models accounted for 27% and 48% in 2015 and 2014. And the share of S series with "Edge Display" accounted for 56% of Galaxy S7 shipments in the second quarter, which helps boost revenues because the ASP of the Edge display model is higher than the flat display model. 

Increased in-house component usage

Samsung uses more in-house components in its smartphone models this year. The shipment of smartphone with AMOLED display increased rapidly. AMOLED equipped smartphones accounted for 87% of total shipments in Q2'16, up from 55% in the year earlier. Samsung Mobile is purchasing all AMOLED panels from Samsung Display. AMOLED panels are now used widely, even on lower-end smartphones such as J series. This is an area of differentiation for Samsung from other competitors in the market.

In addition, Samsung is increasing usage of its own Exynos application processor chipset as well. The share of the smartphone, using Samsung’s Exynos chipset as sole and multi sources accounted for 60% of total shipments in the last quarter. Exynos was the sole chipset for the Galaxy S6 but now Samsung is using Qualcomm’s Snapdragon 820 chipset in some regions, e.g. the USA, for its latest Galaxy S7 along with Exynos elsewhere. More Samsung smartphone models overall use Exynos as a main or sub chipset this year. This will help Samsung’s chip business.

Samsung’s ability to use in-house display, memory and chipset expertise both helps Samsung to differentiate its models, and insulates Samsung from design issues with suppliers. Last year this helped Samsung enormously because of the troubled Qualcomm Snapdragon 810, but this year Samsung is finding it harder to use its chipset to differentiate. However, Samsung’s display capabilities remains extremely valuable and is enabling Samsung to create excellent flagship portfolio industrial designs this year which is supporting its earning success.

 

Geography
South Korea
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