May 01st, 2017

Samsung Electronics – Quick & Dirty

As the street covers Samsung’s (005930.KS) semiconductor business quite closely, we focus our attention on the display, mobile, and CE portions of Samsung’s business.  Here are our notes from the 1st quarter conference call, and while there were some questions concerning the company’s decision not to pursue the conversion to a holding company, we reserve comment on that issue to a later date.
General

• Revenue strength from memory & display – Higher ASP and premium products drove sales – As expected
• Overall revenue y/y up only slightly due to delayed S8 launch
• Gross margin up 5.3 bps – Op margin up by 6.2 bps - ASP improvement helped
• 2Q – Components up – DRAM, 10 nano processor, CMOS image sensor demand
• OLED – focus on flexible displays – No specifics
• Maintain LCD profitability by reducing costs – No specifics
• Mobile – Expect ASP and profit yoy improve – Galaxy S8
• TV – Earnings improvement from launch of QLED TV
• Appliances – Strong seasonal demand for A/C
• 2017 overall
  • Overall earnings up      
    • Driven by components and increased OLED supply – Assume A3
      • Watching 3D NAND supply in 2H
      • New model smartphone competition in 2H – Assume Apple
• Mid to Long Term Drivers
  • Demand for low power chipsets
  • Flexible OLED
  • TV sets – Focus on software & connectivity

 
Repurchase program
               

• Phase 1 complete ($2.15b US) – Cancelled 1m common shares & 225k preferred
• Phase 2 approved – Expect 900k common and 225k preferred over 3 months (4/28 – 7/31)

 
2Q Guide
 
                Semiconductor

• DRAM – Mid-single digit growth – bit growth high single digit
  • 1Q – bit growth declined low teens – ASP up low 20%
  • Year – DRAM bit growth high teens – in line w. mkt
• NAND – bit growth mid – single digit – grow in line w. mkt.

                                                1Q – bit growth - low teen decline – ASP up low teens
                                                Year – NAND bit growth ↑low 30% - above market growth (30%)
                Display

• Expect handset & tablet sales flat in 2Q – Consensus to slightly negative
• Expect blended ASP up – A bit optimistic based on recent prices
• Expect smartphone mix – High 80%
  • 1Q - OLED was low 60% of segment revenue
  • 1Q - Mobile – 93m units (handsets) & 6m tablets
  • 1Q - Blended mobile products ASP $170
  • 1Q - Smartphone mix – mid 80%

                TV/Appliance

• Expect TV shipments up low single digit - consensus
• 1Q – TV units – 10m

 
Capex

• 1Q spend - $4.4b (US) on Semi - $3.7b US on display
• 2017 not set yet but expect significant increase

 
Display details
 
                1Q

• OLED up q/q – Increased flex shipments – prep for S8
• LCD – supply down – Higher ASP and lower industry supply helped

                                                Large panel UHD – as expected
                2Q         

• Expect increased demand for LCD UHD -
• Continued size migration
• Supply demand still favorable
• Focus on cost reduction & yield improvement
• More ultra-large – Hi Res – Curved products – Same focus as everyone else

                2017

• OLED – Sales up y/y – Increased supply of flexible displays
• LCD – Intense competition in mid and low LTPS (small panel) - China
• Market for UHD and Ultra-Large will continue to grow
• Frameless and curved TV still a focus – Mostly China

 
Mobile Details
 
                1Q         

• Demand for smartphone & tablet decreased – seasonality
• Smartphone shipments increased slightly – Galaxy S8 helped
• Rev & profit down due to S7/Edge discounting – Likely more aggressive discounting to move older inventory

                2Q

• Demand for smartphone & Tablet flat – as expected
• Expect Revenue & Profit up – S8 sales
  • Expect record sales
• Overall smartphone shipments flat – weaker mid and low models

                2017

• Slight increase in smartphone demand (y/y) – as expected
  • Strong growth in mid to high end replacement
  • Competition w. new smartphone releases in 2H – assume Apple
• Expect to increase shipments & revenue y/y & profitability
  • Based on S8 and new flagship in 2H – Possible Note 8 although rumors say Note line will be cancelled
• Network – Will grow Revenue y/y
  • Based on IoT and LTE
  • Preping for 5G

TV Details
 
                1Q

• Demand down Q/Q – as expected
  • Europe and Latam weak
• Focus was on Curved and QD TV
• Increased panel price & currency lowered performance y/y – as expected
• Appliances – North American strength and Southwest Asia were strong
  • Overall sales growth up y/y
  • But costs also up
    • Flat earnings y/y

                2Q

• TV – Modest q/q growth on new products – nothing new
  • Market down on weak Europe
• Expect QLED, UHD, and curved to be focus – need this to show growth – success of new QLED line will be important
• Appliances – Peak season appliances (A/C)
  • Focus on new products
    • Family Hub 2.0
    • FlexWash

                2017

• Expect demand recovery in emerging markets – no details
• Shift to UHD
• Global TV market to see slight growth - consensus
  • Currency risk offset by expansion of premium products

 
Q&A

• Red Tint – Not a product defect – as expected
  • Software update allows consumer to adjust color
  • Additional software update to get more color detail
  • Display Expansion
  • Already converting L7-1 – as expected
  • A3 on schedule – as expected
• QLED
  • Still in introductory mode
  • Strong reviews in Europe
• Cash             
  • If cash balance over $61b – will entertain additional shareholder return
• S8
  • How will profitability be maintained for S8 if cost and marketing are higher?
    • Using highest quality components
  • Expect similar profitability – “We’ll make it up in volume?” – Hope this is not their philosophy -
  • Dual sourcing
• OLED TV
  • Developing ‘various’ technologies including QD – Indicates little