Company Result

Sony and Samsung turn in profitable quarters

Sony and Samsung both delivered on their recent turnaround promises with their quarterly results, as they reduce their reliance on the pressurized smartphone business and grow revenues from components such as chips and displays.

The smartphone market may have hit its second-highest quarter of shipments ever in Q315 – up 6.8% year-on-year to 355.2m, according to new IDC figures – but that growth level is slow compared to previous years, and the results fell below IDC’s forecasts because of lower than expected shipments of higher priced models, including iPhones and top end Android devices. Those findings show how the established brands, including Samsung and Sony (and even Apple) face rising competitive pressure from Chinese firms which can cope with lower average selling prices and margins.

The shift of the market towards the lower end has hit profits for most big-name smartphone makers in recent quarters, and they are trying to refocus their efforts on product where they have higher differentiation from the market, and therefore better ability to charge a premium. For some, like Apple and HTC, this mainly involves investing in new form factors like smartwatches; for Samsung and Sony it has involved a transfer of resources to IoT (internet of things) devices, but for more immediate results, a concerted effort to leverage components capabilities.

Sony – which announced its purchase of Toshiba’s imaging chip unit this week, looking to consolidate one of its strongest businesses – returned to fiscal Q2 profit in the quarter ended in September. It announced net profit of ¥33.6bn ($278m), reversing a year-ago loss of ¥136bn and beating analyst estimates.

This means CEO Kazuo Hirai has now delivered a full four quarters in the black, as a result of radical cost cutting and refocusing of activities. Sony maintained its full year operating income guidance of ¥320bn but raised profit forecasts for the gaming division by one-third. The imaging technology on which Sony is setting such great store will feed most immediately into smartphones, but is also important to a big bet on virtual reality, where the company aims to compete with Facebook’s Oculus Rift headset and enhance its PlayStation gaming experience.

Gaming and image sensor chips were the stars of the Q2 show. Operating income at the semiconductor division rose by 15% and revenue by 7.4%, while profits from cameras were up 29%.

Meanwhile, Samsung reported net profit of KRW5.31 trillion ($4.7bn), but this fell short of analyst expectations, partly because of high marketing costs in a competitive landscape, and the Korean giant warned of a profit decline in the current fourth quarter. “In the fourth quarter, the company expects earnings to decline from the earlier quarter, as it does not expect the foreign exchange rate to have a positive effect in the fourth quarter,” Samsung said in a statement. Q315 sales were ahead of forecasts at KRW51.7 trillion.

Although the firm saw strong smartphone sales, these were concentrated heavily at the low end, with price cuts on premium Galaxy models failing to light a fire under the flagship products. “Samsung’s lower end smartphones under $150 sold well, but it didn’t help lift the margins at all,” Lee Seung Woo, an analyst at IBK Securities, told Bloomberg. “Aggressive marketing in the US can help Samsung expand its Galaxy share of the high end space, but it’s giving up a substantial profit margin for it.” Operating margin in the mobile devices business has fallen to about 9%, less than half of the leve in the first quarter of 2014.

Nevertheless, Samsung said it planned to increase capex spending by 14% this year, to KRW27 trillion, as it builds up its chip and display businesses. It is digging into its $50bn cash mountain to support this, and to buy back and cancel $10bn worth of shares, in a surprise move to boost shareholder value.

Earnings at the chip unit rose to KRW3.66 trillion from KRW2.26 trillion a year earlier.

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