Samsung Gets Ahead in Handsets by Not Phoning It In

Samsung Gets Ahead in Handsets by Not Phoning It In

Samsung’s preliminary earnings suggest it has struck gold with models that stand out

Water resistance is one of the features that Samsung’s Galaxy S7 boasts, which Apple’s iPhone doesn’t. PHOTO: REUTERS

SEOUL—The conventional wisdom is that smartphones have become commodities: ubiquitous, interchangeable slabs of metal and glass whose falling prices spell disaster for companies that have come to rely on selling them at high prices.

With its preliminary second-quarter earnings numbers, Samsung Electronics Co. is showing that, even if that is the case, there is still plenty of money to be made selling handsets that can stand out from the pack.

On Thursday, Samsung said it likely earned 8.1 trillion Korean won ($7.00 billion) in the three months that ended in June, a 17% increase from a year earlier and the biggest quarterly operating profit the technology giant has recorded since early 2014, during the glory days for smartphone makers.

The results are in contrast to those of longtime rival Apple Inc., which in April reported its first quarterly revenue decline in 13 years, raising questions about the sustainability of smartphones as a profit engine at a time when Chinese handsets can offer many of the same specifications, often at a fraction of the price.

For Samsung, the second-quarter earnings surprise highlights the Suwon, South Korea-based company’s ability to bounce back after a pair of underwhelming flagship smartphone releases the last two years.

While Samsung won’t break out the details of its second-quarter earnings until the end of the month, analysts have attributed the strong operating profit to the success of the Galaxy S7, which the South Korean technology giant introduced in early March to favorable reviews.

Unlike its two predecessors, the flagship Galaxy S7 combined a sleek curved-edged look that sets it apart from the iPhone, with practical features that consumers have long clamored for, including water resistance and expandable memory. Those features are missing from the latest iPhone. And Apple’s next iPhone, expected to be released in the fall, will likely offer only subtle improvements on existing models, further underscoring the challenge of standing out in an increasingly crowded field of look-alike smartphones.

Analysts estimate that Samsung shipped as many as 17 million Galaxy S7 smartphones in the second quarter, after moving about 10 million units in the last three weeks of the first quarter.

That puts the Galaxy S7 on a sales pace that is nearly twice as fast as that of last year’s Galaxy S6, which analysts estimate took Samsung about six months to hit 27 million unit shipments. The rollout of the Galaxy S6, a product that received upbeat reviews, was marred by supply constraints that hampered Samsung’s ability to profit off a potential hit product.

All of this makes the Galaxy S7 a rare blockbuster at a time when global smartphone sales growth is expected to slow to about 7% this year, about half last year’s growth rate, according to a report last month by research firm Gartner.

Samsung’s Galaxy S7 has proved a hit on which it is capitalizing. PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGES

Even as growth in the overall smartphone market slows and consumers replace their smartphones less often, Samsung’s success shows that there is still money to be made by creating a product that still stands out, says Patrick Moorhead, principal analyst at Moor Insights & Strategy.

Mr. Moorhead said smartphones, though they are becoming more similar, aren't yet commodities.

The question will be whether Samsung can continue to differentiate its smartphones from those of its rivals.

Samsung’s distinctive curved screen displays are likely to become a lot more common in the industry, as Samsung’s components business gains traction selling organic light-emitting diode, or OLED, display panels, to outside customers like Apple and other Android handset makers.

While that would boost profits in Samsung’s components division, it could hurt Samsung’s mobile business by depriving the Galaxy S series of a key selling point.

If Samsung can continue persuading consumers that its smartphones are worth paying up for, it appears well-placed to fulfill its promise to investors of sustaining mobile profit margins in the low double-digit percentages, as executives have promised investors.

In the third quarter of 2014, Samsung’s mobile profit margin tumbled to 7.1%, from 18% the quarter before. Since then, the company has struggled to push it back to its peak levels, though in the first quarter of 2016 the mobile division reported an operating profit margin of 14%, the highest in about two years, thanks to strong sales and cost cutting.

That number could rise higher once final second-quarter results are reported later this month, analysts estimate, though the company didn’t disclose profit estimates by division.

Samsung said its second-quarter revenue likely rose 3% to about 50 trillion won from 48.5 trillion won a year earlier.

Samsung shares tacked on 2% on Thursday after the earnings release, bringing its year-to-date advance to 15% and putting the stock within striking distance of a fresh three-year high. Apple shares, in comparison, have fallen 11% this year.




source: WSJ