In what's been a superb earnings season to date for big-name tech companies, Samsung Electronics' Q3 report might take the cake for the sheer number of firms the report yields positive takeaways for. Everyone from memory chip rivals to mobile suppliers to chip equipment firms can smile a little upon seeing Samsung's numbers and earnings call commentary.
Eighteen days after forecasting similar numbers, Samsung reported Q3 revenue of KRW62.05 trillion (up 30% annually and equal to $55.5 billion) and operating income of KRW14.53 trillion ($13 billion). Net income more than doubled to roughly $1 billion.
The results look especially good outside for Samsung's mobile, chip and display businesses, which between them account for about 80% of its sales.
Strong demand for the Galaxy Note 8 and Samsung's low-end J-Series phones helped mobile product revenue rise 23% annually to KRW27.2 trillion ($24.3 billion), a healthy improvement from Q2's 11% growth. And though Samsung cautioned it will face tougher high-end smartphone competition in Q4 -- a reference to Apple Inc.'s (AAPL) iPhone X and 8 launches, and perhaps also Alphabet Inc./Google's (GOOGL) Pixel 2 launch -- it also forecast better Note 8 distribution and higher ad spend will help it grow the percentage of phone sales it gets from flagship models.
Samsung/Apple chip suppliers Skyworks Solutions Inc. (SWKS) , Broadcom Ltd. (AVGO) and Knowles Corp. (KN) rose moderately following Samsung's report. Meanwhile, Integrated Device Technology Inc. (IDTI) , which supplies wireless charging ICs for Samsung phones, rose over 7% following solid results and guidance.
Samsung's chip sales rose 51% annually to KRW19.9 trillion ($17.8 billion), topping the 46% growth seen in Q2. This was largely driven by a 65% increase in memory chip sales to KRW16.3 trillion ($14.6 billion), as DRAM and flash memory boom cycles remained in full swing. Strong mobile DRAM and NAND sales (aided by Apple and Samsung's phone launches) helped, as did growing server DRAM and solid-state drive (SSD) demand.
DRAM/NAND rival Micron Technology Corp. (MU) rose 6.4% to $44.31 following Samsung's report, and NAND supplier Western Digital Corp. (WDC) rose 4.1% to $89.27. But those gains might've had more to do with Samsung's very bullish commentary on supply/demand trends. Especially for NAND.
Though NAND demand is expected to remain strong in Q4 due to server and mobile demand, Samsung now forecasts NAND industry bit shipments will only grow by a high-20s percentage this year, down from a prior outlook of 30% and less than the high-30s growth Micron has forecast. Though production of high-density 3D NAND chips continues ramping, Samsung suggests the removal of planar (2D) NAND production lines and "increasing technical difficulties" related to 3D NAND ramps is holding back bit growth.
For the DRAM market, Samsung expects 20% 2017 bit supply growth. That's slightly higher than before, but on par with what Micron forecasts and still pretty restrained in light of mobile and server demand, as the amount of DRAM in the average phone keeps growing and deployments of memory-intensive cloud, AI and analytics server workloads rise further. And Samsung echoes Micron in forecasting most DRAM bit supply growth going forward will come from upgrading existing production lines to new manufacturing processes, rather than building new lines.
Nonetheless, Samsung is forecasting it will spend a whopping KRW29.5 trillion ($26.4 billion) on semiconductor capex this year, a 123% increase from 2016. For comparison, Intel and TSMC, the chip industry's other two top-tier capital equipment buyers, respectively have 2017 capex budgets of $11.5 billion (plus or minus $500 million) and $10.8 billion.
That's music to the ears of chip equipment suppliers with strong memory exposure, such KLA-Tencor Corp. (KLAC) and Lam Research Corp. (LRCX) . Samsung says its 2017 chip capex will be largely directed towards 3D NAND capacity expansion, DRAM process migrations and increasing 10-nanometer process capacity for its foundry (chip contract manufacturing) business.
The NAND investments, together with those being made by many peers, could lead to a very different supply/demand dynamic at some point in 2018. Micron, it should be noted, expects close to 50% NAND bit supply growth next year. On the other hand, a consolidated DRAM industry continues for now to take a pretty disciplined approach to growing bit supply.
Samsung's display panel business, buoyed by strong OLED panel shipments to Samsung's phone business as well as iPhone X OLED shipments, saw revenue grow 17% to KRW8.3 trillion ($7.4 billion). Samsung also provided upbeat commentary about Q4 and 2018 demand, predicting OLED sales will (with Apple's help) "increase significantly" in Q4 and that the technology will go "mainstream" in the mobile phone market next year. That helped OLED materials and licensing firm Universal Display Corp. (OLED) rise 5.7% to $146.50, and make new highs along the way.
Intriguingly, Samsung also noted on its call that it continues to invest in foldable OLED R&D "in line with [its] customer's needs and schedules." Samsung is aiming to to launch a foldable phone in 2018, and Apple has been rumored to be working on iPads with foldable OLEDs.
All in all, Samsung can be much more optimistic about where it stands than it could a year ago, when it was contending with the fallout from the Galaxy Note 7 fiasco and the DRAM industry was just starting to climb out of a sharp downturn. And in many cases, what's good news for Samsung is also good news for quite a few other tech companies.
