Samsung closes profitability gap with Apple no thanks to smartphones

Samsung and Apple have both posted their earnings results for this past quarter and the numbers show that Samsung has done a great job at closing the profitability gap with its biggest rival. However, while the iPhone drives much of Apple’s profits, it’s a different story over at Samsung. So even though Samsung has been able to narrow the profitability gap with Apple, it has done that without any substantial contributions from its smartphone division.

Semiconductors steal the show again

Apple posted sales of $61.1 billion this past quarter and an operating profit of $15.8 billion. This brings the company’s operating profit-to-sales ratio to 26 percent, slightly down from 26.7 percent a year earlier.

Samsung beat market expectations with its Q1 2018 earnings as it posted a 57.6 percent surge in profit for the January-March 2018 period. The company posted sales of over $56 billion and an operating profit of $14.4 billion. This brings Samsung’s operating profit-to-sales ratio to 25.8 percent.

It’s a big achievement on Samsung’s part as Apple was ahead by more than 10 percentage points in the profit-to-sale ratio for 2016. Market observers say that Samsung has been successful in increasing its profit margins and now appears to be gaining on Apple in this metric. Some even expect Samsung to post a higher operating profit-to-sales ratio than Apple in the second quarter of this year, though that could partly be because of Apple’s historically weaker earnings in the April-June period. That’s when iPhone sales slow down a bit in anticipation of the newer models.

We recently explained in detail why Samsung may never earn the kind of profits that Apple does from smartphones. Apple ships fewer handsets than Samsung but makes more money while Samsung enjoys leading the market in terms of volume shipments but it makes less money from smartphones. That’s because it caters to all three market segments and profit margins are wildly different in each.

So while it’s impressive that Samsung has closed this gap, it has been able to do this because its semiconductor division continues to mint money. The bulk of Samsung’s profits actually come from its semiconductor division which is riding a wave of high prices and subsequently higher profits in the memory market.

Things can go sour pretty quickly from Samsung if it comes under intense pressure in the memory market. The company is already facing a lawsuit along with other memory suppliers alleging that they colluded to artificially raise prices of memory products.

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