Samsung returns to roots in components as phones stall

Samsung Electronics Co is relying on a 40-year-old memory-chip unit for earnings growth as sales of its Galaxy smartphones are eclipsed by Apple Inc. (AAPL) and Xiaomi Corp.

Buoyant demand for semiconductors, including from competitors in the phone business, and a falling won helped Samsung post fourth-quarter operating profit that beat analyst estimates, even though it slumped 37 percent from a year earlier.

The world's biggest mobile-phone business, under pressure at the high end from iPhones and in the mid-range from Xiaomi's Redmi 2, contributed less than a third of earnings, according to analyst estimates. Vice Chairman Lee Jae Yong is leading a strategy revamp by cutting the number of smartphone models, spending $15 billion on a new chip plant in South Korea and reinventing the company as a maker of Web-connected devices.

"Apple and Chinese producers are rivaling Samsung in smartphones, but they are also its biggest customers for components, especially in memory chips," said Greg Roh, a Seoul-based analyst at HMC Investment Securities Co. "It's about the right time for Samsung to find the sweet spot from its component businesses rather than from end-product units."

Shares of Suwon, South Koreabased Samsung rose 0.5 percent to 1,314,000 won at the close of trade in Seoul. The stock fell 3.3 percent last year after a 9.9 percent decline in 2013.

Operating profit at Samsung fell to 5.2 trillion won ($4.7 billion) in the three months ended December, compared with the 4.8 trillion-won.

Sales totaled about 52 trillion won in the quarter, the company said in a filing today. That's about a 12 percent decline from a year ago.

Samsung didn't provide net income or details of division earnings with audited results due to be reported later this month.

Operating profit from semiconductors was probably 2.7 trillion won in the fourth quarter on sales of 10.8 trillion won. That would be a 35 percent increase in earnings from a year earlier.

Samsung and Globalfoundries Inc. are teaming up in the made-to-order chip business, an alliance aimed at winning orders from Taiwan Semiconductor Manufacturing Co. (2330) In October, Samsung said it would spend 15.6 trillion won building a chip plant south of Seoul.

"Samsung's main business is now shifting back to semiconductors," Peter Lee, a Seoul-based analyst at NH Investment & Securities (016420), said in a Jan. 2 report. The annual operating profit from the chip business this year will outpace that of the mobile unit, he said. Operating income at the phone division probably fell to 1.6 trillion won on sales of 27 trillion won, according to the analyst survey. That would be the unit's smallest quarterly profit in almost four years as Samsung faces increasing competition in China and India, the world's two biggest smartphone markets.

Fewer shipments and higher marketing spending for new models during the quarter curtailed profit growth and limited the benefits of the September release of the large-screen Note 4, said Lee Seung Woo, an analyst Securities Co. in Seoul.

In November, Samsung said it would cut the number of smartphone models it produces by as much as a third this year to focus on products where it has a competitive edge. That's a reversal of its previous strategy of selling devices for anywhere between $100 and $1,000 across multiple screen sizes. Samsung probably shipped 75 million smartphones worldwide in the last three months of 2014, after selling 78.7 million units in the third quarter, according to HMC's Roh.

The won traded at an average of 1,086 against the U.S. dollar during the fourth quarter, compared with 1,025 in the previous three months.

"Currency tailwinds should boost profits for memory and display panels, as more than 90 percent of revenues are in U.S. dollars," Shawn Kim, a Seoulbased analyst at Morgan Stanley, said in a Jan. 6 report.

Lee Jae Yong has taken a greater role at Samsung since his father, Lee Kun Hee, was hospitalized in May after a heart attack.

at IBK