Galaxy S7 Propels Samsung Profits

Samsung said it recorded a 10% jump in profits for the first quarter due to sales of its new flagship smartphones: the Galaxy S7 and S7 Edge.
Samsung Galaxy S7, S7 Edge: An Up-Close Look
Samsung Galaxy S7, S7 Edge: An Up-Close Look
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On Thursday, April 7, Samsung said that it expects to record profits of $5.7 billion for the first three months of the year, a number that is up 10% compared to the year-ago period. The company will post its final earnings later this month. The jump in profits can be pinned on the strong debut of the Galaxy S7 and S7 Edge smartphones, which have won over consumers. Analysts, however, question whether or not Samsung can maintain this momentum.

Samsung did not say how many devices it shipped during the first quarter of the year, but shipments of the S7 alone are estimated at 10 million since its early March debut. That's a much healthier launch than last year's Galaxy S6. Samsung's overall quarterly shipments have averaged about 85 million units for the past few years, according to IDC.

While the 10% increase in profits is welcome, the number is still down 22% compared to the first quarter of 2014. Moreover, Samsung cut its phone prices over the last year, which pushed margins down to about 10%. By way of comparison, analysts estimate Apple's gross margin to be about 40%.

Investors are worried about an implosion. "S7 sales popped in the beginning, but could very well fade as rivals launch new models," said Alpha Asset Management fund manager C.J. Heo to Reuters. "We have learned from the past."

Others suggest Samsung merely moved profits it would have generated in the second quarter of the year to the first quarter and that's the only reason the company is seeing profits at all. Samsung has typically launched the Galaxy S series handsets in April or May. This year the devices went on sale in March.

Competition in the space is fierce. LG has a new flagship model, the G5, in carrier stores. It has a modular design and can interact with several removable accessories. HTC is expected to unveil its 2016 flagship model at an event planned for April 12. On Wednesday, April 6, Huawei showed off the P9 and P9 Plus devices, which feature dual cameras.

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Samsung ended 2015 with shipments of about 324.8 million devices and 22.7% of the market, putting it in first place. Apple ranked second with yearly shipments of around 231.5 million iPhones and 16.7% of the market. Huawei rose to third place with shipments of 106.6 million handsets and 7.4% of the market.

Shipments from the major vendors are expected to climb this year, but individual companies' share of the market will remain about the same though 2016, according to IDC.

Huawei, more so than Apple, should worry Samsung. The company has pushed hard in its home market of China where it prices phones about 25% less than Samsung prices its own.

The Galaxy S7 and S7 Edge carry premium prices of $670 and $780, respectively.