Galaxy S7 helps Samsung shine in Q1, beat estimates

Operating income rises to $5.7 billion in the three months ended March

Samsung Electronics posted a better-than expected first-quarter profit after the early release of Galaxy S7 smartphones gave it a head-start on Apple Inc and Chinese rivals and helped counter an industry downturn.

Operating income rose to 6.6 trillion won ($5.7 billion) in the three months ended March, the world's largest maker of phones and memory chips said in preliminary results released Thursday. That compares with the 5.53 trillion-won average of analysts' estimates.

EARLY BOOST

• Samsung debuted its high-end smartphone line, Galaxy S7, in March
• Sales of the smartphones estimated to have hit nine million units during the first month
• It was triple than those of S6 in same timeframe last year

Samsung debuted its high-end smartphones in March, about a month earlier than last year's, with sales of the S7 line-up estimated to have hit 9 million units during their first month - triple those of the S6 in the same time-frame. Production of curved displays for its Edge version also went more smoothly this time, avoiding the hiccups that plagued last year's wraparound-screen line while holding down costs.

"The biggest reason for the sharply improved profitability is largely due to much lower marketing spending for the mobile business," said Yoo Eui Hyung, an analyst at Dongbu Securities Co. in Seoul. "The big disparity between the earlier profit estimates and the latest revisions stems entirely from the mobile business. The faster release surely helped but it's dubious whether the S7 can continue to surprise the market in the longer run."

The shares finished 1.3 per cent lower at 1,269,000 won in Seoul. The stock fell for a third straight year in 2015.

Sales were 49 trillion won in the quarter, Suwon-based Samsung said, compared with the 48.8 trillion won analysts expected. The company won't provide net income or break out divisional performance until it releases audited results later this month.

Most of Samsung's revenue is in phones, a decelerating market in which it also competes with Huawei Technologies Co and Xiaomi Corp. Smartphone sales in 2016 are expected to rise by a single-digit percentage for the first time, according to Gartner Inc.

"The first-quarter earnings have already reached it peak for this year and it will only go lower from here," Greg Roh, an analyst at HMC Investment Securities in Seoul, said, citing depressed industry demand.

Mobile division
Operating profit at the mobile unit probably rose 19 per cent to 3.25 trillion won in the first quarter, according to the median estimate of six analysts surveyed by Bloomberg News. The popularity of the S7 as well as a refreshed portfolio of cheaper Galaxy models, such as the A and J series, have given the division's earnings a shot in the arm.

Samsung is continuing to reduce the number of phones in its line-up as it tries to cut spending and focus on competitive devices. Total smartphone shipments for the first three months were estimated at 78 million, compared with 82 million units during the peak holiday quarter, according to four analysts surveyed by Bloomberg.

"We expect Samsung's Galaxy S7 to be the world's best-selling Android smartphone in 2016," said Neil Mawston, executive director at Strategy Analytics Inc. "Samsung's range of lower-cost models, like the J series, is also selling well."

Price declines
Operating income at the semiconductor business probably fell about 15 per cent to 2.5 trillion won in the first quarter on sales of 11.5 trillion won, according to the analyst survey. The S7's introduction did little to boost earnings at that unit because it came with few significant chip upgrades.

The unit had been Samsung's main driver of profit since 2014, when it began shifting its focus toward chips and displays to offset declining phones and TVs. But persistent price declines mean it may have again been surpassed by the mobile business.

To revive margins, the Galaxy maker started mass production of more advanced dynamic-random-access-memory, or DRAM, from February. Its new process shrinks circuit widths, which reduces the size of the chip, to produce more from each slice of silicon wafer and boost profit.

Sharp rivalry
The company's display division, which also makes screens using organic light-emitting diodes for Samsung's high-end smartphones and Chinese clients, probably posted an operating loss of 160 billion won, according to the Bloomberg survey. The slower than expected pace at which Samsung's moving to advanced LCD production technology is also hurting the business.

Foxconn Technology Group's takeover of Sharp Corp may take a toll on South Korean display makers over the longer haul. The Taiwanese group, which includes Hon Hai Precision Industry Co, agreed to take control of Sharp, intensifying competition in a market Samsung leads.