State of the industry in Q3: Samsung a success story, LG and RIM losing ground

Now that all the third quarter reporting is behind us, we take our usual look at the 8 prominent cell phone makers to check how they did. It was one to remember, and saw many twists and turns that will shape the future of the mobile industry.

Some of the trends that appeared in Q2, like Samsung’s smartphone ascent, stayed, and others, like Nokia’s and Motorola's losses, were partly reversed.

The biggest losers were LG and RIM, but let’s start with the profit-makers:

Apple

Co-founder and inspirational leader Steve Jobs stepped down as CEO and was replaced by Tim Cook. The stock didn’t flinch after the news, as his fragile health condition was largely baked into the share price. Apple missed the analysts' earnings expectations on people waiting it out for the new iPhone, but took home over $5 billion of operating profit from the iPhone line alone, which, despite less than the $6 billion last quarter, is more than all the rest of the industry combined.

ASP remained largely the same, but the profit margin increased slightly due to a dip in both fixed and variable costs to get the iPhone 4 to doorsteps. That explains somewhat the smaller dip in profits, despite selling 15% fewer phones than in the previous quarter. 

The trend of Greater China becoming a very important market for Apple carried over from Q2, and the region accounted for 16% of its total revenue, becoming the second most important country for Apple's products, so it's something to keep an eye on for future quarters.

Samsung

Samsung started emerging as the industry’s next darling in Q2, when together with Apple passed Nokia in smartphone sales, and announced its highest operating margin in years. In Q3 this trend deepened, and Samsung became the largest smartphone producer in the world by volume, surpassing Apple.

What’s even more important is that its profit margin passed HTC’s second place for the first time, and, at nearly 17%, indicates a well thought-out product mix. This success was undoubtedly due to high-margin handsets like the Samsung Galaxy S II selling in droves. Unique propositions like the Super AMOLED Plus display and the Exynos chip, both made in-house, keep production costs in check. The final result is over $2 billion in profits from the mobile business, which is more than a third improvement compared to the previous quarter, and second only to Apple.
The company also standardized the naming scheme for its smartphones, and the first handsets with the new titling like the Omnia W, Galaxy R or Galaxy M Pro, started rolling down the conveyor belt.

With the Galaxy S II versions hitting the major US carriers full bore for the holiday season, and unique handsets like the Samsung Galaxy Nexus with Android Ice Cream Sandwich, we expect the upwards trend of Samsung to continue in Q4, for which the company issued an upbeat guidance as well.

HTC

As usual recently, Taiwan's most valuable brand performed admirably in Q3, carried on the wings of its high-margin handsets like the HTC Sensation 4G. HTC is now ahead of RIM in profits for the first time, and its margins also kept stable, making it the third manufacturer to actually make money from its mobile business.

The company spent north of $300 million to invest in the Beats by Dre brand, and the resulting handsets with Beats Audio, like the HTC Sensation XE, the HTC Sensation XL and the HTC Rezound are sure to contribute for its holiday performance. Still, HTC issued a lower guidance for its Q4 sales, citing a very competitive environment, so it will be interesting to follow up if this caution will materialize in the holiday season.

What caught our attention in the press release is also the fact that China exploded 9 times for HTC as far as shipped units goes, marked by the huge success of entry-level Android handsets like the HTC Wildfire S.

RIM

After resting on its laurels for about a year, RIM staged the biggest launch in its history, with the first BlackBerry OS 7 handsets scheduled to appear on 225 carriers worldwide.Unfortunately the new phones were announced the last month of the second quarter in RIM's fiscal year, which ended in August, so the sales of new devices like the BlackBerry Torch 9850/9860 haven't contributed much to the bottomline in RIM's quarterly report.

For the June-August quarter RIM reported revenue of $4.2 billion and income before taxes of $0.414 billion (net income was $0.329 billion), or 9.8% margin, with the last two numbers quite below the average expectations.

The ASP was higher than last quarter, but the profit margin from this average selling price has plunged, indicating that RIM needs to work further on costs. Co-CEO Jim Balsillie remained optimistic for the current quarter, citing strong sell-through interest in the new BlackBerries with OS 7. RIM is now the fourth most profitable company in the industry, a far cry from the second place it held just two quarters ago.

Nokia

Nokia lost money overall, but not as much as analysts expected, and if we strictly look at its cell phone business it managed to eke minimal profits. This, however, was achieved by slashing prices of its Symbian handsets across the board, sometimes up to 20%, which helped drive volume up and keep the unit sales in check, preserving Nokia's position of the largest cell phone maker by volume.

This strategy helped stave off the disaster that followed in Q2, after CEO Stephen Elop announced it will adopt Windows Phone as a primary platform, and sales of Symbian handsets plunged.

Nokia launched a number of handsets with Symbian Belle. Handsets like the Nokia 701 with the brightest screen out there keep the ball rolling until its first Windows Phone devices like the Lumia 800 go on sale this quarter. Nokia is planning the biggest marketing campaign in its history for the new Windows Phones, though, so the Q4 results might be affected by the costs associated with that.

Sony Ericsson

Sony Ericsson managed to eke small profits in Q2, but last quarter its earnings were almost flat. The company mostly rode on handsets announced in the beginning of the year, like the Xperia arc, but also came out with interesting additions to its lineup like the Xperia active rugged handset, and the compact Sony Ericsson Xperia ray, which was reviewed favorably by most.

It's still lagging behind in the flagship department, though - a dual-core phone with HD screen from the company is not expected in 2011, so the holiday quarter probably won't see much difference in financial results. Sony recently announced it will buy Ericsson's stake in the venture, becoming eventually just Sony, so the associated $1.5 billion expenses should further weigh on costs.

Motorola

The company held itself pretty well in Q3, issuing a smaller loss, but that was not the real story with Motorola in Q3. Google made a surprise announcement it is buying Motorola Mobility for $12.5 billion, which sent the share price soaring, and Android manufacturers worrying about
preferential treatments towards Motorola, which Googlers are trying to dissuade at every suitable occasion.

On the handset front we finally saw the arrival of the first dual-core phone with LTE connectivity – the DROID BIONIC, which no doubt contributed to the Q3 financials with its hefty $299 starting price tag on Verizon.

Motorola seems to also be reclaiming its manufacturing mojo this quarter with handsets like the DROID RAZR, which, besides the cult branding, is also the thinnest LTE phone out there, built with materials like Kevlar. It should boost holiday sales, but still, all eyes are on the Google deal, and what Motorola will become after it's done and dusted.

LG

LG didn't perform well in Q3, no matter how you slice it. Its quarterly loss wasn't terrible, but the operating margin went further in the negative territory, which is a pretty bad sign.

The third largest cell phone maker just doesn't seem to be able to change customers' perceptions about its products. And that's despite the fact that it was the first to offer a dual-core phone this year, the first with a 3D-capable handset and had the phone with the brightest screen on the market for quite a while.

There are interesting things on sale now from LG, like the first phone that came with a true HD screen – the 4.5” Optimus LTE, but its yet limited availability means it's unlikely to affect the profit margins. Such hardware achievements didn't translate into profits so far for LG, and Q4 could see more of the same.

Recap

To wrap up we'd say that in Q3 we had one of the most interesting quarters in the mobile industry, with the changes at Apple's helm, and Google acquiring Motorola.

Last quarter can therefore be considered as the end of an era, and Q4 the beginning of new battles, considering the launch of the Nokia Windows Phones. What will the holiday season hold for the eight mobile industry contenders is therefore a mystery, but rest assured we will follow up with a similar piece when the dust settles, and everyone reports early next year.