Category Archives: Samsung

Earnings, LG, Q1 2016, Samsung, Sony

Samsung, LG, and Sony Smartphone Roundup

For some reason, Samsung, LG, and Sony all ended up releasing their earnings this morning Asian time. As such, I spent some time earlier today updating all my models and charts, and tweeted out a few of them. There’s a full Samsung deck as part of the Jackdaw Research Quarterly Decks Service, which subscribers have already received, but I thought I’d do a quick roundup of key charts and the trends they represent as they relate to their respective smartphone businesses especially.

Samsung – recovery back on track

At Samsung, the mobile recovery appeared to falter a little last quarter, but is back on track this quarter, in large part thanks to the Galaxy S7 launch. Here are three key charts for Samsung.

First off, year on year growth in the mobile business unit, which turned positive again after briefly dipping below zero last quarter:Screenshot 2016-04-28 11.34.49When it comes to margins, the IT and Mobile business unit did considerably better this quarter as well, with the best margins in almost two years:Screenshot 2016-04-28 11.35.22 And thanks to a combination of that increase at the IM unit as well as slightly weaker operating margins in semiconductors, IM became the biggest contributor to profits again for the first time in two years:Screenshot 2016-04-28 11.35.46To what should we attribute all this? These were the bullet points from Samsung’s management for the quarter as relates to mobile:

Earnings increased QoQ led by improved product mix with S7, and improved profitability of mid to low-end through streamlined line-up

Strong sales of S7 due to enhanced practical features as well as early introduction

Global sales expansion of 2016 A/J series.

The Galaxy S7 was both introduced earlier than the S6 last year, bringing the boost to revenues and margins forward, but it seems so far to be selling better, as it fixed some of the missteps with last year’s model. A pretty decent quarter for Samsung in smartphones overall, albeit still not close to its past glory days.

LG – Challenges Typical to Android Vendors

LG looked for a period in 2013 and 2014 as if it was finally figuring out smartphones – shipments were up, margins were briefly positive, and reviews of its flagship devices were too. But then things started to fall apart, and the trend since then hasn’t been so good:Screenshot 2016-04-28 11.40.32It’s harder to tell what’s going on there with the smartphone shipments line than the margin line, but over time it’s trending consistently downwards, as you can see in this trailing 4-quarter smartphone shipment chart:Screenshot 2016-04-28 11.42.21LG appears to be suffering from much the same malaise as the other mid-tier Android smartphone vendors:

  • Increasingly strong competition at the high end from Apple and from Samsung’s resurgence as the dominant premium Android vendor
  • Significant pressure from Chinese vendors producing increasingly good Android smartphones for far less
  • A hollowing out of the mid-market by the introduction installment plans and the availability of both older flagship devices and budget premium devices from others.

There’s no real end in sight here – LG is failing to turn itself around as Samsung has, and the threat from Chinese vendors is only getting stronger. It needs a new strategy to fix things.

Sony: Fewer, More Expensive, Phones

Speaking of new strategies, Sony’s was evident in its reporting this quarter. Its strategy is now to focus on the premium market only, which will see it sell far fewer phones at a far higher ASP. The chart below shows what’s happened to shipments lately, with both a quarterly and annualized perspective:Screenshot 2016-04-28 11.46.01As you can see, the strategy to sell fewer phones is clearly working – sales dropped off a cliff from Q4 to Q1, and the company hasn’t sold so few phones in many years. What about the other side of the strategy? Well, that seems to be working too – revenue per device sold is up:Screenshot 2016-04-28 11.48.02The problem, though, as you can also see from that chart, is that the higher ASPs aren’t – yet – leading to higher margins. In fact, margins fell this quarter, and that means an even bigger loss per device, given what happened to shipment numbers. It’s likely that the problem here is that it’s very hard to scale down the operation that produces smartphones as quickly as the number of smartphones sold scales down. Certainly, cost of sales should come down fairly rapidly, but all the other general costs of running a smartphone business aren’t as easy to cut, at least not quickly. It remains to be seen whether that other side of the strategy can fall in line too. If not, Sony will have just cut its business in half without seeing any of the margin benefits it should see from focusing on premium devices. It’s also not clear whether anyone can make money selling just 3 million smartphones a quarter.

Android, AOSP, Cyanogen, Microsoft, Samsung, Smartphones

Samsung’s Microsoft deal and Cyanogen

1 Comment

SamMobile reported last night that Samsung was planning to pre-install a number of Microsoft applications on the Galaxy S6, which is to be announced in a few weeks at Mobile World Congress. I think this is a huge boost for Microsoft’s Android apps and for the services behind them – far bigger than the applications that come pre-installed with Microsoft’s own devices, obviously. To get on Samsung’s flagship device (presumably others will follow) is a huge coup for Microsoft. But it’s also a big deal for Samsung, which has until now been pre-installing ersatz versions of Microsoft apps on its devices for productivity.

But what I really wanted to talk about here was what this says about Microsoft’s broader strategy, and what it might mean for the rumored investment Microsoft is making in Cyanogen. Nokia, of course, forked Android itself using AOSP when it created the Nokia X line of smartphones shortly before the Microsoft acquisition was announced, but it was killed off right after Microsoft took control. So rumors of an investment in yet another Android fork seem funny – was Microsoft hedging its bets on Windows Phone and preparing another Android-based device line?

I think the much more likely explanation is that Cyanogen and Microsoft are planning something rather different, something much more along the lines of that Samsung deal. Cyanogen’s biggest weakness is that it’s missing all the Google apps and services that you sacrifice when you use AOSP. The challenge for any company doing this outside of China has always been what to replace them with. Inside China, it’s simple, because Google’s own services are largely irrelevant and local alternatives are actually better. But outside China, Amazon and others have struggled to provide really compelling replacements. The two companies that have comprehensive sets of services and applications that can replace Google’s today are, of course, Apple and Microsoft. Apple’s are (today) unique to its own products and platforms, but Microsoft is increasingly pursuing a cross-device strategy. Hence its investment in Cyanogen.

I wouldn’t be at all surprised if at least some flavor of Cyanogen devices in future come with Microsoft apps and services where the Google ones would normally be. We won’t see Microsoft launching another Android-based line of devices, but rather an Android-based line of devices that puts Microsoft’s services and apps front and center. That, after all, is the real goal here: getting Microsoft’s services in front of as many customers as possible, integrated into the platform in a way that makes them the default options for key tasks, and which provides benefits across the platform. Windows Phone has been the only platform where that’s been true, but Cyanogen could easily become a second. Quite what Cyanogen’s current customer base would make of that is unclear, but then Cyanogen’s future depends on broadening its appeal way beyond the hackers and tinkerers who flash alternative ROMs on their Android devices, and Microsoft could be a great fit there.

Both these deals – Samsung and Cyanogen – are good for both parties. Samsung and Cyanogen both need compelling apps to set their platforms apart, while Microsoft badly needs the broader exposure it will get from being pre-installed on these devices.

Earnings, Q3 2014, Samsung, Smartphones

Thoughts on Samsung’s Q3 2014 earnings

6 Comments

Note for new readers: this post is part of a series on major tech companies’ earnings for calendar Q3 2014. 

I’m going to link here quickly to two of my past posts on Samsung as they provide useful context which I don’t want to revisit in this post:

  • Is Samsung’s Exceptionalism Coming to an End? – on Techpinions. This post focused on the fact that Samsung had always seemed an exception to my rules for success in tech, and it seemed inevitable that its reign would sometime come to an end.
  • Thoughts on Samsung’s Q2 2014 earnings (and its future) – on this blog. In this post I talked about Samsung’s margins as being unusual for a pure consumer electronics business, and how those margins were likely to revert to the mean eventually because of Samsung’s lack of differentiation. (This is also the most-read of any post on this site since its inception a year ago)

All past analysis on Samsung on this blog can be seen here. My analysis tends to focus on Samsung’s mobile business specifically – other than a brief mention of chips, I won’t cover Samsung Electronics’ other businesses (air conditioning, TVs, refrigerators and display panels, among other things).

Plunging growth numbers

It’s worth starting with a quick financial review, to make sure we’re all on the same page. The relevant business unit from a mobile point of view is “IM”, or IT and Mobile communications. This includes PCs and tablets as well as smartphones, but it’s the lowest-level division where Samsung reports both revenues and profits, so it’s the one we’ll focus on here. However, it does report revenues for the Mobile segment specifically, so we’ll start there. First, revenue growth:

Screenshot 2014-10-30 13.51.42

As you can see, year on year revenue growth has plummeted from positive 90% in Q1 2012 to negative 30% this past quarter. The decline over the past year is alarmingly linear, and one wonders how much worse things can get before that decline levels off. Continue reading →

Margins, Samsung, Smartphones

Smartphone margins and Samsung

Since I’ve been talking to a few journalists about Samsung’s fairly dismal Q3 earnings forecast, and pointing people back to my previous pieces on Samsung, one thing that’s been coming up a lot is profitability and margins in smartphones. I thought I’d quickly jot down a couple of thoughts on this point in particular, as there seems to be a poor understanding of this topic in general.

The key here is that there are at least two components to profitability in smartphones, though they’re often conflated or one ignored entirely:

  • Gross margin, i.e. the difference between the cost of manufacturing a device (cost of sales or cost of goods sold) and its selling price.
  • Operating margins, i.e. gross margins minus all the shared costs of running the business that sells the smartphones, including all non-manufacturing employees, advertising, general and administrative costs, depreciation and amortization and so on.

It is entirely possible for a company to make a positive gross margin on each phone sold (even a significant one) and yet be hideously loss-making because its advertising, general and other costs are greater than the gross margin on the device. Motorola, for example, claims that it makes money on each device it sells, but that’s a reference to gross margins, and the business unit itself continues to be unprofitable as part of Google, because the other costs are greater than the modest gross margin it makes on its device sales.

This is important in the context of Samsung’s earnings forecast for a couple of specific reasons. Firstly, Samsung’s overall margins have benefited from two key factors:

  • Firstly, it has achieved significant share of the premium smartphone market, and an extremely high share of the premium Android market. Gross margins are much higher at the premium end than at the low end, and this is a major component of Samsung’s overall high margins relative to every competitor except Apple.
  • Secondly, it has massive scale, as easily the largest smartphone vendor in the world over the last couple of years. Scale is important because it spreads shared costs such as advertising, general employee costs and so on over a much greater number of devices. In other words, if Samsung spent a billion dollars on advertising and sold a hundred million phones, advertising costs per device would be $10, but if it sold two hundred million phones, advertising costs per device would be $5. The more devices over which you can spread these shared costs, the bigger the impact on operating margins. There are also some scale benefits to gross margins, of course.

Both this quarter and in previous quarters, Samsung’s earnings have taken a hit because of reduced scale (affecting mostly operating costs per device) and reduced prices (affecting gross margins), so both parts of the profitability equation are suffering at once. Some have suggested that Samsung should go harder after the low end of the market, while others have said that would be stupid because there are no margins there. This is where the above understanding of profitability becomes relevant: yes, the gross margins are lower at the low end, but there’s massively more scale there, which can help operating margins. So it’s not as simple as saying that Samsung should steer clear of the low end because the margins are poor.

Having said that, Samsung does face increasing pressure at the high end, especially since Apple has closed a major competitive window with the new iPhones launched a few weeks ago. So it may be increasingly important for Samsung to focus on the low end. However, that’s easier said than done too: the low end is arguably the main focus of many of the most aggressive moves in the industry at present, with Microsoft providing reference designs for cheap Windows Phones and Google launching the Android One initiative, along with the Moto G and other low-cost smartphones. It’s not necessarily going to be any easier for Samsung to compete at the low end than at the high end, especially if it wants to generate the kinds of margins it has in the past in smartphones. But there’s not really anywhere else to go: the mid-market is rapidly disappearing as the market bifurcates between premium and low-cost, with very little in-between.

Hence, perhaps, Samsung’s renewed investment in the chip business, as a potential supplier to other players. There’s far less competition in that business than in smartphones, and Samsung already has a very strong role in this business as a supplier to Apple and itself. Even as Apple’s reliance on Samsung chips wanes, there are plenty of other opportunities for Samsung to go after here. But of course the average selling price of a chip is far lower than the average selling price of smartphones. Even if the margins are good, it’s extremely unlikely that Samsung will be able to make up the difference on chips alone. Which means it has to continue to go after the smartphone market aggressively too, even though it faces falling margins and shipments going forward.

Android, Android Wear, Motorola, Samsung, Smartphones, Smartwatches

Motorola’s lessons for Samsung

I’ve been testing three of Motorola’s new devices for the last several days: the new Moto X and Moto G smartphones, and the Moto 360 smartwatch. I don’t do traditional reviews – there are plenty of sites out there that do those well – but I thought I’d share some of my thoughts about these devices, briefly, but also about what they can teach us more broadly, and tech Samsung specifically.

Moto X

Last year’s version of the Moto X was already a very good device in a number of ways, and this year’s version fixes several problems: the price/performance ratio feels a lot better, the materials and build make for a more premium experience, and the camera is a lot more competitive. I’ve been using the Moto X as my main phone for the last few days, and I’ve really enjoyed it. The camera still isn’t as good as the iPhone camera, or arguably the Galaxy S5 camera, especially in low light. And the digital shutter mechanism still frustrates me by taking pictures when I’m trying to change the focus point. But it’s an awful lot better, and I’ve taken some nice pictures with it, including this one:

IMG_20140914_162715In short, the Moto X is much better on the things it was bad at. But it’s also got even better at the things its predecessor was good at – namely the little software customizations that added significantly to the stock Android experience without taking it over, adding huge numbers of visual customizations and tweaks, or overloading the device with gimmicks and widgets. What Motorola has done really well in these devices is creating in its software elements that significantly add value to Android without feeling like they’re trying to replace it. They’re done in such a way that they feel like they are – or should be – part of the core OS, both visually and in terms of their functionality and integration into the OS itself. Unless you’ve used stock Android, it would be hard to see where Android itself ends and Motorola’s enhancements to it begin.

In many respects, this is just the sort of thing Samsung should have been working on over the last few years, to set its handsets apart against the flood of other Android phones. Instead, it’s focused on gimmicks – features that are eye-catching and make for good demos, but that don’t really make life easier or improve upon the core Android experience. If Google were keeping Motorola, I would say these features should slowly work their way back into the core Android experience as Motorola invents new ones. Under Lenovo, I wonder to what extent these innovations will continue and to what extent Lenovo will embrace them at a corporate level and build them into its other devices too. If it’s smart, it will realize what it’s getting here and fully embrace it.  Continue reading →

Earnings, Q2 2014, Samsung

Thoughts on Samsung’s Q2 2014 earnings (and its future)

4 Comments

This is, and isn’t, part of my series on tech companies’ Q2 2014 earnings. It is, because it uses Samsung’s Q2 earnings as a jumping off point, but it isn’t because it’s more of a think piece about where Samsung goes from here than being specifically about one quarter’s earnings.

The importance of Samsung’s mobile business

Having said that, let’s start with those Q2 earnings. Here’s the growth rate in mobile sales specifically (this is part of Samsung’s IT & Mobile (IM) business unit):

Mobile revenue year on year growthAs you can see, growth has slowed dramatically over the last few quarters and dipped into the red in the last two. That trajectory isn’t looking good at all. Now, here’s the operating margin for the IM business unit as a whole (this includes Samsung’s much smaller PC business as well as tablets and smartphones):

IM profit marginThe margin is bouncing around a bit but definitely dropped in the last quarter or so. Longer term, it was somewhat consistently between about 17-20%, but this quarter it dropped to just over 15%. Let’s now put this in the context of Samsung Electronics overall: the two charts below show that IM business unit as a percentage of revenues and operating profits: Continue reading →

Android, Android Wear, Google, Google I/O, Samsung, Smartwatches

The three problems with Android Wear

I’ve been using an Android Wear device – the Samsung Galaxy Live – since I picked it up at I/O last week. I’ve tried a number of other smartwatches before now, and it’s interesting to see the differences. As it’s currently constituted, I see three flaws with Google Wear, two of which seem to be pretty fundamental, and one of which should be fixed soon:

Cards are a bad UI for small screens

Cards make a ton of sense on smartphones and tablets and on the web, where they provide useful visual separation between discrete chunks of information, and they work well on Twitter.com, in Google Now on smartphones, and elsewhere. But on a space-constrained screen they really don’t work because they’re a terribly inefficient use of screen real estate. There are several different layers of information in Android Wear, as shown in this triptych:Android Wear triptych 560px

The first screen is what you see before you interact with a card – the card stays in the bottom half, and takes up just a third of the screen. The amount of information presented is extremely limited. If I then interact with the card, I get the middle screen, which is slightly richer but still takes up only half the pixels on the display. If I then swipe, I get even more information as shown on the right. But the card still only takes up half the screen. Compare this with the Galaxy Gear 2, which (though not a paragon of great UI) uses the whole screen to display notifications. This is a minor annoyance with the weather card from Google Now, but it’s really annoying when a notification comes in about a new email, and just a tiny amount of the email shows by default – I almost always have to tap on the small card to make it big enough to have a real sense of what it’s about. The “glanceability” factor just isn’t there.

The cards UI, with its limited use of the screen space, and the rest given over to a background that really adds nothing, is just not a good fit for such a small screen. It’s a great example of the problem with applying a single design language, essentially without modifications, to multiple form factors. It’s a problem that Microsoft has struggled with too in the form of Windows 8, and one that Apple so far seems to have managed to avoid in providing useful integration between iOS and OS X without taking things too far.

Google Now is still too much just in case and not enough just in time

Continue reading →