Samsung released its Q1 C2009 financials today, and overall the results are positive compared to a very weak and soft Q4 2008 quarter. There were some questions whether the company's reorganisation early in the quarter would have a negative impact on its focus and ability to execute in the market. It appears that so far this has not occurred. It is worth bearing in mind that along with the reorganisation of Semiconductor and LCD to Device solutions, and Telecoms and digital Media to Digital Media & Communication, Samsung also dismissed 20 top executives in an attempt to revitalise the company. Given the current economic climate and the company structure changes as well as changes at senior executive level, Samsung has performed well in the market and delivered a 9% top line increase for the quarter. However, as we will point out, we suspect that much of this growth and bottom line impact is due to favourable exchange rates.
The mobile phone industry has seen a sharp recent decline (indications are that shipments are down up to 20% in the year) while Samsung's shipments only declined 1%. At the same time ASPs are up 2%. Combined with cost reductions, this has led to a healthy handset business even in difficult economic times. However, as we point out, Samsung is benefiting from a very weak currency. For example, in one year the KRW has depreciated against the EUR by almost 16%. This has no doubt improved Samsung's competitiveness not only in mobile phones, but in all technology export markets. The currency benefit is reflected in Samsung's Digital media business where TV revenues increased by 19% in the year, and shipment development outperformed the overall market.
However, there are several weak points worth mentioning. Firstly, since much of the company's market robustness can be contributed to favourable exchange rates, we question how well Samsung will perform if exchange rates should normalise. This is what economists call “bugger thy neighbour”, where currencies are kept low to encourage exports and limit imports. Operating profits for Samsung are sharply down (down 93% from a year ago), while its Device solutions struggle with soft demand and inventories. For example its semiconductor business feels the pain of the decline in the PC market, though it is getting some boost from high end mobile phones and low cost notebooks that more often use solid state storage than traditional notebooks. LCD struggled in particular in the large screen market, where volumes declined sharply and ASPs were also down. However, Device solution's LCD could see increasing demand in markets such as China (government subsidies on certain consumer electronics products should help drive demand).
Going forward there are two main industry issues we challenge Samsung to address.
1. How Samsung aims to position itself in the consumer software and services market. For high end mobile phones, Samsung is supporting Symbian (has even announced its own application store and development platform -for which we remain sceptical about), it is also supporting Windows Mobile, and is scheduled to release Android-based phones this year. An OS agnostic policy could work for the company, but if that is the case we encourage Samsung to seek out partnerships for applications, services and content instead of trying to develop its own solutions such as it is doing on Symbian. The alternative is to focus on one platform and build up a healthy eco-system around it, and branch it out beyond mobile phones.
2. How Samsung will integrate software and services across mobile and other digital consumer electronics products. In January it placed Telecoms and Digital Media under the same management team. We are therefore looking forward to how Samsung will create new innovative consumer solutions by leveraging these assets. Instead of each individual product group developing its own software and services strategy, it should be done at a corporate level for consumer products. This vision is currently lacking, but could come about with the recent business reorganisation.
