Samsung cuts capex despite higher profits

January 12, 2006 – Samsung Electronics Co. Ltd. has slightly lowered its planned capex for 2007 despite higher sales and profits in 2006, though the company sees better demand in early 2007 and hinted at “significant” growth later in the year from new products.

Samsung says its overall capital expenditures will shrink about 3% in 2007 to 9.7 trillion won (US $8.73 billion), including 1.1 trillion won ($1.19 billion) on its US operation (Samsung Austin Semiconductor), and another 500 billion won ($538.7 million) for its S-LCD JV with Sony Corp. Semiconductor capex is expected to total 5.44 trillion won ($5.86 billion), down about 18% from 2006, with 4.82 trillion won ($5.19 billion) for memory operations, a 17% decline, and 540 billion won ($581.7 million) for System LSI, a 28% decrease. The company’s LCD investments also will take a hit, with capex cut nearly in half (44%) to 1.41 trillion won ($1.52 billion). R&D spending, however, is expected to increase 10% to 6.14 trillion won ($6.61 billion).

Despite the year-on-year decline in capex, Samsung pointed out that the level is about even from last year, because the company’s memory and LCD businesses received a late infusion in November. In October Samsung hiked its 2006 capex plans for its semiconductor operations by about 18%, or 1 trillion won (US $1.4 billion), mostly for its memory operations — meaning that the company would end up spending 11% more than in 2005, rather than 5% less.

The cutbacks in spending come even though Samsung grew its sales and profits closing out the year. The company’s semiconductor unit increased operating margins to 31% in 3Q on 10% higher sales of 5.42 trillion won ($5.84 billion), although for the year margins slipped to 26% vs. 30%, on 4% sales growth of 19.08 trillion won ($20.55 billion). Memory sales surged 15% during the final quarter to 4.19 trillion won ($4.51 billion), but were only 2% higher in 2006 vs. 2005 (14.39 trillion won/$15.50 billion, vs. 14.08 trillion won/$15.17 billion). System LSI revenues slowed to 3% growth in 4Q, for a 10% year-on-year increase to 2.21 trillion won ($2.38 billion).

Overall, Samsung reported slightly higher 13% operating margins (2.05 trillion won/$2.21 billion) for 3Q, and slightly lower for FY06 (12%, 6.93 trillion won/$7.47 billion).

Strong demand for PCs in 4Q (shipments rose 13% Q-Q) continued to drive “robust” demand for DDR2 memory, which saw 19% bit growth during the quarter. 80nm chips, now in volume production, accounted for 25% of wafer-out in December, the company said. Despite NAND price declines, Samsung said its NAND business further improved profitability thanks to continued cost reductions due to its transition to 60nm and multilevel cell migration, with NAND also seeing 19% bit growth during the quarter.

For 1Q07, Samsung expects “stable overall performance” with higher demand for DRAM and IT panels and better profitability for mobile phones offsetting “challenges in key product areas,” said Woosik Chu, SVP and head of Samsung Electronics’ investor-relations team, in a statement. “Our key businesses, such as DRAMs, NAND flash memory chips, LCDs, mobile phones, and flat-panel TVs, will enter into a growth momentum after the first half, and we expect significant growth both in revenue and profits in the second half,” he stated.

Looking further into 2007, Samsung projects strong memory demand due to the launch of Microsoft’s Vista and more growth for specialty DRAM. Shipments of mobile DRAM for high-end 2.50-3.5G handsets are seen rising 80% during 2007, while graphics DRAM shipments for game consoles are expected to sure 75% Y-Y. NAND business should see increasing card densities in 1H07 despite slow seasonality, the company says, with 2GB-and greater cards entering “the sweet-spot price,” pushed by demand for handsets.

Samsung also hinted that new product launches in 2H07 should “significantly drive up demand,” with 1GB-8GB music phones and 8G+ PMPs. It’s worth noting that Samsung is believed to have won most of the processing sockets for Apple’s just-unveiled iPhone, which should be released later this year.


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