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Slowing Smartphone Sales Impact Samsung’s Earnings

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Samsung’s exposure in the semiconductor industry

Since the start of 2016, semiconductor stocks have been falling. A slowdown in PC and smartphone sales, a weak macroeconomic environment, falling DRAM (dynamic random access memory) prices, and a slowdown in technology innovation have negatively impacted their earnings.

A major player hit by this trend has been Korean (EWY) smartphone maker Samsung (SSNLF), which has exposure in more than one vertical of the semiconductor supply chain.

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Samsung has exposure to the business of foundry, the manufacturing of semiconductors and electronic devices such as smartphones, wearables, and home appliances. In this series, we’ll look at the current state of Samsung and the growth strategies adopted by the company in this slowing electronics industry.

Financial performance

Samsung’s fiscal 4Q15 earnings missed analysts’ estimates. The company’s revenue growth slowed to just 1.1% YoY (year-over-year) during the quarter. Smartphone sales fell 3.8% YoY, while semiconductor sales rose 24% YoY.

Semiconductor business accounts for 25% of the company’s revenue and has acted as a cushion to falling smartphone sales. However, this cushion reported lower profits due to a steep fall in memory chip prices. Prices fell as global sales of PCs and tablets, in which these chips are used, hit multiyear lows.

On the profitability front, even though the company’s operating profit rose 15% YoY, its net profit fell 40% YoY due to non-operating expenses. The strengthening of the Korean won negatively impacted the company’s fiscal 4Q15 earnings by ~$331 million.

While Samsung reported a sharp fall in profit, rival Apple (AAPL) reported a record high profit in the same quarter. Despite a record profit, Apple reported its slowest growth in iPhone sales of just 1% YoY during the quarter.

Weak guidance for fiscal 1H16

Samsung expects its fiscal 1H16 revenues to remain flat as macroeconomic and industry headwinds prevail. However, its revenue is likely to grow in fiscal 2H16 as these headwinds fade. Even Apple expects to report its first fall in iPhone sales in fiscal 2Q16 ending March 2016.

Mobile chip suppliers Cirrus Logic (CRUS) and Qorvo (QRVO) posted similar guidance. They expect growth to pick up in the second half of 2016, anticipating that demand will grow with the launch of new flagship products by various smartphone customers including Apple and Samsung.

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