A Deep Dive on Samsung Electronics

As I was digesting Samsung’s Q2 2017 results last week, I realized that I’ve never really taken the time to come up with a robust mental picture of Samsung Electronics as a company, where its revenues come from, and how it all hangs together. I have lots of charts that I produce every quarter for my clients, but in many cases the labels on the charts don’t have a lot of meaning behind them for me. As such, over the last few days, I’ve spent a little time diving deeper and really understanding the moving parts beyond the mobile division that dominates most coverage of the company (and my view of it). Today, I’m going to share what I’ve learned.

Samsung vs. Samsung Electronics

Very briefly, before I dive into Samsung Electronics, I need to mention the larger Samsung company, which is the largest of Korea’s chaebols, massive conglomerates spanning many different industries. I’m not going to focus on that here, but it’s worth noting that the broader Samsung engages in many other businesses like ship building, construction, life insurance, a theme park, and an ad agency among other things. It’s that larger Samsung and its leadership that’s been embroiled in recent scandals in South Korea, not Samsung Electronics. For our purposes today, it’s Samsung Electronics I’ll focus on.

Three Main Visions, Plus Harman

Samsung Electronics has three main divisions, and in March the company closed its acquisition of Harman Kardon, which makes audio and other systems both in and beyond the automotive industry. It’s a very small part of the company at this point, generating around 1% of its revenue, and so far it hasn’t generated any meaningful profits for Samsung, reporting just 20 days of results in Samsung’s Q1 and seeing its operating profits mostly wiped out by acquisition costs in Q2. The diagram below shows the main divisions and their sub-divisions, a number of which you’ll notice are referred to by the abbreviations Samsung often uses when discussing them:

The three main divisions are:

• CE (consumer electronics): this division encompasses all of Samsung’s appliances, such as washing machines, air conditioning units, and most importantly TVs, which make up a decent chunk of its revenues and are in a sub-division called Visual Display (VD). This division also makes health and medical equipment, which will be far less familiar to most of us
• IM (IT & Mobile Communications): this division houses Samsung’s mobile devices business, including phones, tablets, and wearables among other things, but also its mobile network equipment business, which sells technology to wireless carriers around the world.
• DS (Device Solutions): this division is the one that makes components that go into other devices, and it has two main subdivisions, Semiconductors, and Display Panels. The Semi division, in turn, has three parts as well: memory, which accounts for the bulk of its revenue, System LSI, a chip design business, and then its recently separated Foundry business, which manufactures chips. Display panels makes mostly LCD and OLED panels which go into other devices, whether televisions, mobile phones, or others.

Mobile and Memory the Two Biggest Pieces

So far, I’ve only shown you the divisions without breaking down Samsung’s actual business and revenues and where its money comes from. The pie chart below shows a revenue breakdown based on these divisions and subdivisions to the extent that they’re reported by Samsung in its quarterly earnings:

Within the overall picture, you’ll see that two parts generate over half of Samsung’s overall revenues: Mobile, which accounts for 40%; and Memory, which accounts for 20%. Mobile dominates the IM division, with well over 90% of its revenues, while Memory accounts for around 80% of the Semiconductor business and 52% of Device Solutions. The CE division accounts for just under 20% of total revenues, with Visual Displays 62% of the total.

However, the margin breakdown is very different (and disclosure from Samsung less granular), as shown in the next chart:

Now, you’ll see that the semiconductor division, which was just 20% of revenues, accounts for nearly 60% of operating profits over the past year, while the mobile division with its 40% of revenues contributes under a quarter of operating profits, while the CE division is the least profitable of the bunch by some way. Semiconductors’ contribution to profits has risen dramatically over the past couple of years as it’s grown fast and prices have risen due to supply constraints. However, though I’ve seen some write off this recent stellar performance as solely being about rising prices (which won’t last), Samsung has significantly expanded its market here, selling memory beyond the mobile phone and PC markets including a rapidly growing server business.

A Decent Chunk of Inter-Segment Revenue

Another thing I frequently hear about Samsung is that much of its component sales go to other parts of Samsung. That would be a logical assumption given the scale of its mobile and TV businesses, but the scale of inter-segment selling isn’t actually all that large in the grand scheme of things. Samsung doesn’t report these numbers directly, but the sum of the divisional revenues it reports does exceed its actual reported total sales by around 10%, suggesting that that’s the scale of revenue generated by selling from one part of Samsung to another.

Exynos chips produced by the semiconductor division clearly make their way into Samsung’s smartphones in at least some markets, while its flexible OLED displays are prominent features on its recent flagships too. But it would be an exaggeration to say that the bulk of Samsung’s components business goes into its own devices – after all, it has the number one global market share in three distinct segments of the memory market: DRAM, NAND flash, and SSD, something it wouldn’t be able to achieve merely by selling to itself. In fact, in Q2, Samsung became the largest chip vendor by revenue, ahead of Intel, for the first time.

A Highly Profitable Business, at Least for Now

Pulling everything together, Samsung is a highly profitable business, and speaking of Q2 superlatives, is likely to have been the most profitable consumer technology company in the world in the quarter in dollar terms. Its operating profit in Q2 came in at $12 billion, roughly 20% up on Apple’s Q2 last year and therefore also likely ahead of this year’s figure from Apple. That’s a one-off, in what’s typically Apple’s smallest quarter, and over the course of a year it’s likely to fall behind Apple again. But it’s a sign of just how far it’s come in the last couple of years, off the back of the strong performance of that semiconductor business, driven mostly by high memory sales at unusually high prices. But its display panel business is also having a good year, one likely to get even better in the near term as Apple and others place big OLED display orders in a market where Samsung has the lion’s share.

Longer term, some of this will come back down to earth. LG recently announced a massive investment over the next few years in OLED production, and similar investments are likely to be made in other markets where prices are currently artificially high due to supply constraints. These and other factors are likely to both lower prices and increase competition for Samsung over the medium term, bringing profits and growth rates down. But between its fairly stable mobile business and its big presence in components, Samsung continues to be really well positioned relative to most other big consumer hardware companies.