Samsung’s and Motorola’s Smartphone Gaps

Motorola (NYSE:MOT) and Samsung recently reported strong quarters, further signs that the handset market is stabilizing. According to a Gartner report on the first quarter, Samsung at No.2 has 19.1% (14.4% last year) of the market and Motorola at No.4 has 6.2% (10.2% last year). However, smartphones offer high margins compared to the rest of the handsets, and both companies need to improve their smartphone strategy. Let’s take a closer look.

On July 24 Samsung Electronics reported a strong second quarter driven by strength in its two major markets: consumer electronics and mobile phones. Q2 revenue was up 11.7% to 32.51 trillion Korean won ($26 billion). Net income was 2.25 trillion won, up 5% from last year and almost five times last quarter’s profits. Samsung ended the quarter with 6.11 trillion won ($5 billion) in cash, up 0.81 trillion won ($665 million).

By segment, semiconductor revenue increased 7.2% to 6.14 trillion won ($5.04 billion) as DRAM prices were up due to weak supply and growth in PC sales. Growth in the smartphone market also led to an increase in NAND prices.

LCD segment revenue declined 8.1% to 5.10 trillion won ($4.19 billion) but improved sequentially, driven by demand for LCD panels. Digital Media revenue increased 13.8% to 10.07 trillion won ($8.78 billion) driven by strong sales of flat panel TVs and high-end digital appliances. Samsung’s new line of high-end LED TVs had strong sales of 500,000 units in the quarter.

Telecommunications revenue increased 27.4% to 9.77 trillion won ($8.02 billion) and mobile handset sales increased 14% q-o-q to 52.3 million units, with strong sales in Europe and North America.

Samsung expects to increase its market share in the third quarter, perhaps at the cost of Sony Ericsson, Motorola and Nokia. The company expects handset demand to increase 5% in Q3, led by increased marketing promotions by carriers and the expansion of 3G service in China. Samsung also expects to exceed its full-year target of 200 million units after its new Jet, Galaxy and Omnia series devices were received positively by the market.

While Samsung is gaining market share in handsets, it is not growing at the same rate in the more profitable smartphone market, where it has an approximately 3.5% share. While the success mantra for the iPhone has been the OS and applications, Samsung has been focusing more on hardware and plans to introduce more than 20 models in the year. That might help the company gain market share in the handset segment, but to do so in the smartphone market, Samsung needs to improve its software.

Recognizing this need for a focus on software, Motorola has pinned its hopes on the Android operating system. It is trying hard to make its Android bet work by getting developers to build applications for its Android phones. Motorola has lined up two Android phones for the end of the year that are rumored to be on the Sprint and Verizon networks. And in order to get back in the smartphone game, Motorola is offering these phones at prices comparable to those of feature phones.

Q2 revenue declined 32% to $5.5 billion. Net income was $26 million or $0.01 per share versus $4 million last year and a loss of $231 million last quarter. Analysts were expecting a loss of $0.04 on revenue of $5.6 billion.

Motorola’s improved earnings were mainly due to its cost-cutting measures. It reduced opex by over $1 billion y-o-y in the first half of the year and cut about 8,000 jobs over last year. The company reduced inventory by over $400 million compared to the first quarter. It now expects to save $1.8 billion in 2009, up from its previous target of $1.7 billion. The company ended the quarter with $6.5 billion in cash, up $360 million sequentially.

By segment, Home and Networks Mobility sales were down 27% to $2 billion with operating earnings at $153 million. Enterprise Mobility Solutions revenue was down 17% to $1.7 billion with operating earnings at $227 million.

Mobile Device sales were down 45% to $1.8 billion on shipment of 14.8 million handsets. Operating losses were down 50% sequentially to $509 million.

For the third quarter, Motorola expects earnings in the range of negative $0.01 to positive $0.01 per share. The stock is currently trading around $7 with market cap of about $16 billion. It hit a 52-week high of $7.68 on July 30 on its strong earnings. The company has also been upgraded by Morgan Keegan and AmTech Research. Its Android devices seem to be doing what the Palm Pre did for Palm. Will Motorola be able to execute its plans as well as Palm has?