Samsung Display’s 3Q19 Earnings Highlight Industry Struggles
Samsung Display's 3Q results and management discussions confirm our thesis that 2020 will be a struggle for the display industry. Mobile flexible OLED shipments are masking how bad Samsung Display's (“SDC”) LCD business is performing. There is a risk that BOE's OLED development has reduced Samsung Display's 2020 mobile OLED pricing agreement with Apple and other customers. Samsung also communicated an increase in 2020 marketing expenses reinforcing our thesis that display marking expenses will have to increase to drive sales. Further, we expect the same for R&D spend. In order to keep ahead of the competition, SDC is going to have to invest. SDC’s investments will put further pressure on less capitalized suppliers (e.g. AOU, Japan Display).
Lastly, there will be increased investment in differentiated capacity. Samsung Display will invest 13 trillion Won in quantum dot capacity through 2025. SDC will convert its 8.5 generation LCD capacity in Asan. The investment in equipment and facilities will be 10 trillion KRW, and the remaining will be R&D investment. The aforementioned investments and competition will pressure on SDC’s free cash flow.
Samsung Display 3Q 2019 Capacity
We calculate that Samsung Display utilized less than 67% of its display capacity in 3Q. This is a historically low utilization, but similar to LG Display’s 3Q utilization. Commodity LCD pricing is below cash costs and therefore Samsung Display, LG Display, and other suppliers are idling production lines.
Apple iPhone and Samsung Mobile investors consider Samsung management’s guidance that: “mobile displays will likely report weaker results in the fourth quarter, as demand falls short of initial expectations for certain premium smartphones and costs increase due to lower utilization in some production lines.”
Samsung Display (“SDC”) detailed it will get more competitive on mobile display product pricing by increasing utilization (decreasing fixed cost per unit and increasing purchasing scale); however, SDC will also idle other lines which will hurt total profitability. For large-displays SDC will continue to focus on differentiated products and trying to focus on sales mix (e.g. increased monitor mix).
Samsung Display 3Q 2019 Financial Results
SDC reported 9.3 trillion Won in revenue with an operating margin of 12.7% for its display business in the most recent third quarter. Total revenue was up 12.5% versus the prior quarter, but down 8.2% from 2018. The driver of the quarterly revenue growth was due to an increase in mobile OLED volume and OLED mix. Mobile OLED was 85% of the revenue mix versus in 2Q19 it was 78%. Additionally, Samsung Display shipped 85M handsets (smartphone mix of ~90%) versus 83M handsets in 2Q19. We estimate a large percentage of the mobile OLED was flexible OLED. Flexible OLED can carry a price of 2x to 4x versus rigid OLED based on the specs. The shipment growth and flexible mix improved revenue and operating margin.
We calculate an average sales price (“ASP”) of $922 USD per square meter (sales divided by shipments). The reason for the year-over-year increase in ASP and lower total revenue is due to an increased OLED mix (i.e. 85% vs 80%) and lower utilization. Details on the quarter are in our subscription model and summarized below.
Source: Company Financials (Won in billions)
Free cash flow (“FCF”) was 6.5 trillion Won on a trailing twelve-month basis. Samsung invested almost nothing in display capex in Q3 2019. This was the lowest display capex over the past decade. Free cash flow (“FCF”) growth is primarily driven by the lack of capex during the current 12 month period. During 2017 and 2018 SDC spent heavily on its A3 and A4 fabs. We forecast that SDC will increase its LCD maintenance capex to differentiate its LCD products.
Samsung Display 3Q 2019 Financial Takeaways
Samsung is the best in class. SDC’s research and development spend is one reason why it consistently beats peers in ASP, margins, and free cash flow growth. However, SDC is facing increased industry pricing pressure and we forecast a decrease in free cash flow through 2023 due to QD investments, mobile OLED pricing pressure, and increased operating spend.
Tech Financial Analysis' subscription Excel model provides the ability to forecast the cost for each display product type and display size at each supplier fab. It currently incorporates 2020+ pricing implications for OLED and LCD panels based on backplane technology.
Our detailed Should-Cost Model contains financial statements and KPIs by supplier (e.g. Supplier Health modeling).
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