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Samsung, Motorola Filling Smartphone Gaps

Posted on Tuesday, Dec 15th 2009

Samsung, which started out as a small manufacturer of black-and-white televisions, was able to celebrate its fortieth birthday last month as the world’s leading manufacturer of not just television sets but also memory chips and LCD panels. It is also the No. 2 cell phone handset vendor with an approximate 21% share, while Motorola has slipped to No. 5 with a 4.7% share. However, Motorola’s luck seems to be changing with its new smartphone, the Droid, which was launched at the end of October and which Time magazine recently named the “Gadget of the Year.”

On October 30, Samsung Electronics (005930.KS) reported a strong third quarter as both its chip business and its mobile segment did well. Q3 revenue was up 18.5% to 35.87 trillion Korean won ($20.9 billion). Net income was 3.72 trillion won ($2.17 billion) and operating profit increased 185% to 4.23 trillion won ($2.5 billion). Q2 analysis is available here.

By segment, semiconductor revenue increased 25.3% to 7.46 trillion won ($4.34 billion) as memory prices and demand increased. DRAM prices increased 20% q-o-q and NAND prices 9% q-o-q. LCD segment revenue increased 20.6% to 6.73 trillion won ($3.92 billion) as strong seasonal demand led to higher prices and unit sales. ASPs for TV panels were up 16%, for monitors 17%, and for notebook computers 22%. Digital media revenue increased 14.7% to 12.37 trillion won ($7.2 billion) to outperform in the flat panel TV market.

Telecommunications revenue increased 20.6% to 10.71 trillion won ($6.24 billion) and mobile handset sales increased 15% q-o-q to a record 60.2 million units; the segment is on track to beat Samsung’s 2009 target of 200 million unit sales. While expenses for the quarter increased, Samsung maintained its profit margin through sales of feature-rich touchscreen handsets and other premium devices. The company holds about 3.5% of the smartphone market and plans to launch smartphones running on Android and Linux in the fourth quarter. It will be interesting to see if the Android bet works as well for Samsung as it did for Motorola.

Motorola (NYSE:MOT) recently launched two smartphones, Cliq on T-Mobile and the Droid on Verizon. The Droid, with a thin QWERTY slider is the first smartphone to feature the Android 2.0 OS, which lets users run multiple applications at the same time. The buzz around Android has only intensified since the Droid launch, with more Android releases from HTC, Samsung LG, and Sony Ericsson. The Palm Pre with its Web OS also had amazing features such as multi-tasking, but it didn’t have enough muscle behind it for it to be much of a success. On the other hand, the combined support of Motorola, Verizon, and Google has made the Droid quite a success, much more so than the Palm Pre. Matching the success of the iconic iPhone will be an unrealistic goal, but the Droid can definitely help in Motorola’s turnaround.

On October 29, Motorola announced its third quarter results. Q3 revenue declined 27% to $5.45 billion. Net income was $12 million or $0.01 per share versus a loss of $397 million or $0.18 per share last year, beating analyst estimates of a break-even quarter. The company ended the quarter with $7.2 billion in cash, up $700 million sequentially. Q2 coverage is available here.

By segment, Home and Networks Mobility sales were down 15% to $2 billion with operating earnings at $199 million. Motorola is rumored to be looking to sell its set-top business for $4.5 billion versus the $11 billion it shelled out 10 years ago. Enterprise Mobility Solutions revenue was down 13% to $1.8 billion with operating earnings at $306 million.

Mobile Device sales were down 45% to $1.7 billion on shipment of 13.6 million handsets. Operating losses were down 78% y-o-y and 47% q-o-q to $183 million.

For the fourth quarter, Motorola expects earnings excluding charges between $0.07 and $0.09 per share, better than analyst estimates of $0.06 per share. The company expects to save $1.9 billion in operating expenses in 2009. The stock is currently trading around $9 with market cap of about $20 billion. It hit a 52-week high of $9.23 on September 15.

Chart for Motorola Inc. (MOT)

Motorola expects to break even in at least one quarter in 2010 with the success of the Droid. However, the company needs to be careful about how it executes on the Droid success. The smartphone market was one market that continued to grow despite the recession. Though they are a little late, Samsung and Motorola cannot have failed to see this and finally seem to be filling in the gaps in their smartphone portfolios. Samsung recently launched its own smartphone platform, “bada,” which includes motion sensing, face detection, social networking, and other interactive features. The focus on software and applications is just what I recommended for Samsung to increase its smartphone market share. But will it be able to lure developers? It is offering $2.7 million in awards in a Bada application competition. Neither Samsung nor Motorola have any app developer network to speak of, a gap that still needs to be filled.

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