Samsung Electronics Exceeds Q3 Expectations, Q4 Remains 'Uncertain'

Samsung Electronics Q3 Earnings Announcement Surpasses Market Expectations
Mobile and Home Appliances Greatly Improved Due to Post-COVID-19 Rebound Consumption, Semiconductors Also Exceed Expectations

[Asia Economy reporters Changhwan Lee, Dongwoo Lee, Gimin Lee] Samsung Electronics' surprise third-quarter performance was largely due to pent-up demand caused by COVID-19, which significantly boosted set businesses such as mobile and home appliances. The core semiconductor business also exceeded expectations thanks to increased mobile demand and expanded sales to Huawei.

On the 29th, Samsung Electronics announced that its consolidated third-quarter results showed sales of KRW 66.9642 trillion and operating profit of KRW 12.3533 trillion, up 8.0% and 58.8% respectively compared to the same period last year.

Sales surpassed the record quarterly high of KRW 65.98 trillion set in 2017, and operating profit exceeding KRW 10 trillion occurred for the first time in seven quarters since Q4 2018 (KRW 10.8 trillion).

The most notable improvement was in the IM (IT & Mobile) division, responsible for smartphones. The IM division posted Q3 sales of KRW 30.49 trillion and operating profit of KRW 4.45 trillion. Sales increased by 4.24% year-on-year, while operating profit rose by 52.40%.

Sales of flagship models such as the Galaxy Note20 and Galaxy Z Fold2 increased by 50% compared to the previous quarter, driving Q3 results. Increased sales of tablets like the Galaxy Tab S7 and wearables such as the Galaxy Watch3 and Galaxy Buds Live also contributed to profit growth. Smartphone shipments in Q3 are estimated at 80 million units, and tablet shipments at 10 million units.

Kim Kyungmin, a researcher at Hana Financial Investment, explained, "Shipments increased mainly in mid- to low-end models, improving profitability, and the increase in volume raised profit margins compared to before. The expansion of online channel sales also contributed to profitability improvement."

[Image source=Yonhap News]

The semiconductor business also delivered results beyond expectations. The semiconductor division's Q3 operating profit was KRW 5.54 trillion, up about 82% year-on-year. Sales increased 7% to KRW 18.8 trillion. Although server demand, which had driven performance, weakened, the memory division actively responded to increased mobile and PC demand due to COVID-19 and expanded sales of SSDs (solid-state drives) for new game consoles, improving results.

It is also analyzed that increased orders from Huawei had an impact. Huawei reportedly made concentrated purchases of Samsung Electronics' semiconductors from late August to early September, before U.S. sanctions began. Recently, significant new orders in the foundry (semiconductor contract manufacturing) sector also contributed to defending performance.

The Display (DP) division posted sales of KRW 7.32 trillion and operating profit of KRW 470 billion without one-time gains (compensation). Recent display price increases and higher TV and smartphone sales acted as positive factors.

The CE (Consumer Electronics) division, responsible for TVs and home appliances, also saw operating profit improve 200% to KRW 1.56 trillion in Q3 compared to KRW 520 billion in the same period last year. Sales increased 27% from KRW 11 trillion to KRW 14 trillion during the same period. Demand in the TV and home appliance markets surged due to economic stimulus effects in various countries and revenge consumption centered on major countries in Q3.

TV sales sharply increased by actively responding to increased TV replacement demand and marketing premium products such as QLED and large-sized TVs aligned with recent consumer trends. Home appliances saw significant sales growth in premium products like the Bespoke refrigerator and Grande AI. Interest in hygiene appliances increased due to COVID-19, and sales of dryers and Air Dressers also rose, contributing to improved performance.

On the 29th, when Samsung Electronics announced its confirmed third-quarter earnings, citizens were passing by in front of the Samsung Electronics PR Center in Seocho-gu, Seoul. Despite the resurgence of the novel coronavirus (COVID-19), Samsung Electronics achieved a record high with third-quarter sales approaching 67 trillion won. Operating profit also exceeded 10 trillion won for the first time in two years. The third-quarter operating profit was 12.3533 trillion won, an increase of 58.83% compared to the same period last year. Photo by Kim Hyun-min kimhyun81@

◆Expectations of Performance Slowdown in Q4 Due to COVID-19 Resurgence and US-China Trade Disputes

In Q4, performance is expected to slow down compared to Q3, mainly in semiconductors. Since U.S. sanctions against Huawei intensified after the 15th of last month, semiconductor supply to Huawei, one of Samsung's top five customers, has been halted, and a decline in server DRAM prices is also expected through Q4.

A company official stated, "In Q4, overall profitability is expected to decline due to continued weak server memory demand and intensified competition in the set business. Especially in semiconductors, profitability may decrease due to server price weakness caused by customer inventory adjustments and initial costs of new production lines."

However, Samsung Electronics plans to actively respond to solid mobile demand in Q4, expand the transition to 1z-nanometer DRAM, and strengthen cost competitiveness to offset weak server DRAM demand. NAND sales will focus on expanding mobile and notebook sales, continuing the transition to 6th-generation V-NAND.

In particular, Samsung expects the foundry business to grow in the high single digits next year, supported by the expansion of 5G adoption and growth in HPC (high-performance computing) applications. The company said, "Customer demand for high-performance and advanced process technology is greatly increasing, so next year, foundry market share is expected to rise significantly."

Recently, concerns have grown over the rapid deterioration of the global economy as COVID-19 resurges mainly in Europe and the U.S., leading to renewed lockdowns. This could worsen demand for sets such as mobile and home appliances again. Marketing costs for set products like mobile devices are also expected to increase in Q4 due to new product launches by competitors such as Apple.

Accordingly, Samsung plans to promote the popularization of foldable smartphones and expand its mid- to low-end 5G smartphone lineup to increase sales. In the network business, the company intends to actively expand new 5G equipment orders domestically and internationally.

Home appliances are expected to see profitability decline as the year-end peak season effects such as the U.S. Black Friday are offset by intensified competition and the COVID-19 resurgence. The company said, "COVID-19 cases are rapidly increasing mainly in developed countries, and some countries are reinstating movement restrictions and lockdowns. There are concerns about prolonged global economic contraction. Although risks are growing due to intensified peak season competition, we will do our best to defend performance through cooperation with distribution channels and strengthening non-face-to-face sales."

Lee Seungwoo, a researcher at Eugene Investment & Securities, said, "In Q4, profits are expected to slow compared to Q3 due to the won-dollar exchange rate decline, reduced Huawei semiconductor sales, and an adjustment process following the sharp increase in set shipments in Q3."