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14 November 2018

Samsung looks to 5G networks to reduce its over-reliance on chips

Samsung has announced its latest quarterly figures, which once again were heavily reliant on its semiconductor business. But, amid intensifying pressures on the handset unit, the Korean giant was keen to talk up its growth potential in network infrastructure.

Total revenues for the quarter were $57bn, up 5.5% year-on-year, while operating profit was about $15.5bn, up 20.9%. Group net profit was KRW13 trillion, up 20% year-on-year.

Samsung’s statement indicated the reliance on chips and displays. It said: “In the third quarter, operating profit reached a new quarterly high for the company driven mainly by the continued strength of the memory business. Total revenue increased year-on-year and quarter-on-quarter on the back of strong sales of memory products and OLED panels.”

In the breakdown of quarterly results for the individual business units, the semiconductor operations reported revenues of about $22bn in the quarter, with operating profit of $12bn. Samsung expects slightly weaker demand in the current quarter, but over the next year as a whole, it is anticipating a slight increase in sales, driven by demand for public cloud infrastructure and mobile storage.

It will be important for Samsung to build up its networks business, to ensure its continuing influence on the mobile ecosystem, especially at a time when its smartphone growth is slowing, and under intense pressure from new challengers, mainly from China. In its third quarter results, it reported flat handset shipments and a double-digit decline in revenue in its mobile communications division.

The company has talked about the rise of its network infrastructure business before – at the dawn of 4G, it was hopeful of leveraging contracts in the WiMAX market to take a significant role in mobile network infrastructure. But the eclipse of WiMAX by LTE left Samsung with just a few 4G contracts, mainly in Korea. Its prospects in 5G look better though. Operators are more keen than ever before to have new choices when they procure network kit. Since the start of 4G, the industry has consolidated – the death of Nortel, the merger of Nokia and Alcatel – and in countries which are imposing sanctions on Chinese suppliers, operators may have only two realistic choices for the mainstream RAN (Ericsson and Nokia).

So some will look to Samsung, which has advanced technology in some key 5G areas such as millimeter wave, as a counterpoint. It already has a position in the 5G procurement contracts of three US operators (AT&T, Verizon and Sprint), which could be a valuable springboard into other markets.

On the results call, Robert Yi, EVP of investor relations, said Samsung was poised to “establish our position at the forefront of the 5G era” via its network equipment business. He said the company will start shipments of 5G network gear by the end of this year.

In networks equipment, revenues were actually down year-on-year, which Samsung blamed on the hiatus period between 4G investment slowdown and the start of real 5G deployments.

Meanwhile, Samsung said handset shipments were “broadly flat” in the quarter, although it said it expected to see a resurgence of growth in Q4, when it will launch new A7 and A9 handsets for the midrange and low end sectors. However, because of rising competition, and consequent need to invest heavily in marketing, plus a greater focus on the lower end models, it warned that profitability for the division would continue to decline. Yi explained: “Profitability is expected to weaken due to an increase in marketing expenses as we enter the peak season.”

In the third quarter, Samsung’s mobile communications business generated revenue of KRW24 trillion ($21.1bn) revenue, down 12% year-on-year, a fall that the company blamed on “intensified competition”. It reported pre-tax profit of KRW2.2 trillion, up 1%.

Kyeong Tae Lee, VP of the division, said device sales were also hit by the discontinuation of some models, while profit had also been affected by unfavorable foreign exchange rates in some regions, and the cost of marketing the Galaxy Note 9. In future, Samsung is seeking new ways to differentiate its smartphone range, such as introducing 5G at an early stage, and launching folding phones, as well as pushing premium features into mass market phones to stimulate demand.