This is how Samsung overtook Apple as the most profitable company in the world

Samsung’s 2Q17 earnings saw it overtake Apple as the most profitable technology company in the world, underpinned by strong demand for its electronic components.

Samsung posted net profit of about US$9.9 billion (KRW11.05 trillion) in 2Q17. That was up 89% from the comparable quarter a year earlier. The profit was squeezed from revenue of roughly US$54.9 billion, which also increased 20% from a comparable period a year ago.

In contrast, Apple reported a net profit of more than US$11 billion in its fiscal 2Q17 (March quarter), which came on revenue of US$52.9 billion. That’s great, but there are a few notes to take down. The cited Apple figures are for the March quarter, not the June quarter.

For the June quarter, Apple is expected to report operating profit of $11.6 billion, according to S&P Global Market Intelligence. If that is the case, Apple would fall behind Samsung in June quarter profitability. Samsung’s operating profit for the June quarter rose 73% to a record high of $12.7 billion.

 

Galaxy S8 plays its part in Samsung’s rise

Source: Shutterstock

Samsung’s mobile division, where it competes more directly with Apple, registered operating profit of $3.7 billion, with much of the gains being attributed to the company’s Galaxy S8 flagship handset.

Samsung needed more support from the Galaxy S8 to help it repair the damages it suffered, following the global recall of its Galaxy Note 7 over a battery problem that caused overheating and fire. The recall troubled Samsung, denting the company’s reputation, costing it about $5 billion to deal with the aftermath and causing Samsung to lose market share in the usually important holiday season.

Samsung’s share of the smartphone market dipped 5.2% year-over-year to 18.1% in 4Q2016 (the December quarter) and sent it second-place as Apple’s share of the market climbed to 18.3% and saw it emerge as the top smartphone vendor in the quarter, according to research firm IDC as shown in the chart above.

But Samsung started regaining ground early this year, with IDC saying that Samsung was the top smartphone vendor in 1Q17 (March quarter) with 22.8% share of the market compared to 14.9% for Apple.

Samsung said its smartphone shipments remained flat in the latest quarter relative to the previous quarter. The company shipped 93 million smartphones in the previous quarter. Assuming it shipped the exact same number of handsets in the latest quarter, it means its smartphone shipments climbed from 90 million in the same period a year earlier.

In contrast, Apple reported that it shipped 50.8 million iPhones in the latest quarter, down from 51.2 million shipped in the comparable period a year ago. The expectation on Wall Street was that Apple would ship 51.4 million iPhones in the quarter, which never came to pass. The iPhone contributes the bulk of Apple’s revenues and profits.

Apple is hoping for a boost to its handsets business from the new iPhone expected to be launch later this year. The company has typically launched new iPhones in September. The new iPhone will mark Apple’s 10 years in smartphone business and it is expected to feature significant design improvements because of the symbolism around it and also because Apple is looking to jumpstart growth in its smartphone business.

Samsung, on the other hand, is hoping for a boost to its mobile division both from its new Galaxy S8 lineup and refurbished Note 7. The company refurbished the recalled Note 7 handsets and started selling it in its domestic market this month. If the Note 7 is not hit by fresh problems, it could lend much-needed support to Samsung’s top and bottom lines.

 

Apple’s success will benefit Samsung too

Although Samsung and Apple are fierce competitors in the smartphone vendor market, Apple’s smartphone success actually builds on Samsung’s profit machine. Samsung sells components that Apple uses in the production of its iPhones as well as other devices. These components include display panels and advanced memory chips. As such, when Apple is selling more iPhones, Samsung benefits through more demand for its displays and chips.

For Samsung, its chip business is its most profitable operation. In the latest quarter, the semiconductor division brought in $7.2 billion in operating profits, thus contributing more than half of the $12.7 billion overall net operating Samsung reported in the quarter.

In the display division, which produces OLED and LCD screens used in smartphones, Samsung booked $1.5 billion in operating profits in the latest quarter. As part of the upgrade in the next iPhone, Apple is even expected to adopt the OLED display in the device as opposed to LCD that it has been using in its handsets and Apple is widely expected to turn to Samsung for the OLED display for the new iPhone.

If the hugely anticipated new iPhone that is coming out this year turns out to be a success, it would give Samsung tough competition in the vendor market while boosting its components business. Samsung also sells components to other smartphone manufacturers such as Sony (SNE).

As for Apple, the rise of Samsung in smartphone vendor market is a serious threat to its growth and profitability. While Samsung has multiple sources of income and doesn’t rely on handset sales for the majority of its profits, Apple relies heavy on the iPhone for its revenues and profits. It is the iPhone that generates the cash that the company is investing to diversify into new markets such as services.

Apple is also working to double its services sales by 2020. The company generated $24 billion in services revenue in fiscal 2016, so that means it is looking for additional $24 billion in the next four or five years.

 

While the smartphone business remains a vital source of revenue and profits for Samsung and Apple, the smartphone industry is cooling as shipment growth has been slow in the recent quarters. As such, Apple and Samsung can be seen diversifying into other more promising businesses to ensure they can continue growing. Samsung is leaning on its components business, while Apple is betting on its services business.

(By Neha Gupta)

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