Samsung has been experiencing mixed financial forecasts lately, resulting from concerns about a saturating premium smartphone market and mixed opinions regarding its new flagship smartphone. However, it seems that analysts and fund managers are now feeling more optimistic about Samsung’s profit margins due to healthy looking preliminary sales of the Galaxy S5, such is the fickle nature of investor sentiments.
The shift in opinion comes as Samsung Electronics claims that it shipped 1.3 times as many Galaxy S5s on its global launch day compared with the Galaxy S4, with demand for the S5 doubling in some European countries. Samsung insiders are suggesting that the company is aiming to ship at least 35 million Galaxy S5s in the second quarter of the year, which is expected to generate around 17 trillion won in revenue. Of course, all of those shipments won’t translate into sales, but it’s a positive outlook.
So how realistic are these expectations? If we cast our minds back to the launch of the Galaxy S4, numbers like 10 million a month and 80 million shipments a year appeared at first, but we ended up with sales figures closer to just 20 million for the first quarter, and yearly sales were gradually revised lower and lower. The Galaxy S4 is estimated to have shipped around 64 million units worldwide to date, but that’s only translated into sales of roughly 40 million units, which is just a 62 percent conversion of shipments into sales.
If we were to do some rough maths and carry that 62 percent conversion over to the 35 million estimate, we arrive at a first quarter sales target of 21 million for the Galaxy S5, which is just a tad higher than the actual results achieved by the Galaxy S4. Whilst it might appear pessimistic to expect sales to be relatively flat, this will still end up having a positive result on Samsung’s bottom line.
“We believe the mobile phone division performed better than our previous estimates on the back of the strong smartphone and tablet results ― higher units and higher margin ― due to lower marketing spending,” Mark C. Newman, Bernstein Research
In terms of income, smartphones are Samsung’s biggest revenue generator, so handset sales have tremendous sway over the company’s financial prospects. In a bid to improve profitability whilst sales remain flat, Samsung has cut down on its advertising budget this year, which should easily offset the slightly higher costs of production for the Galaxy S5. As long as sales hold up, Samsung is looking to be in an even stronger position than last year.
My suspicion is that expectations for the Galaxy S4 were simply too high, partly because of the widely successful Galaxy S3. Samsung seems to have more realistic sales expectations this time around, which, combined with sensible cost cutting measures, should result in another positive year of the smartphone giant, and should go some way to settling those investor nerves.