Ditching Qualcomm helped Samsung earn an extra $1.3 billion this quarter

A man stands next to a banner promoting Samsung Electronics' smartphone Galaxy 6 at a store in Seoul, South Korea, July 7, 2015. REUTERS/Kim Hong-Ji Thomson ReutersA man stands next to a banner promoting Samsung Electronics’ smartphone Galaxy 6 at a store in Seoul

Samsung Electronics saw its net profit slide again in the second quarter to 5.75 trillion won ($US4.9 billion), down 8% from the same quarter of last year. The dip was largely due to disappointing sales of its flagship Galaxy S6 smartphones.

But one bright spot of the earnings came from its semiconductor business, which saw the biggest sales jump among all units last quarter. Its operating profit jumped 83% year-over-year to 3.40 trillion won ($US2.9 billion), adding roughly $US1.3 billion in profit.

Samsung’s semiconductor unit is now its most profitable business, accounting for 49% of all operating profit, topping its mobile division’s 40% share.

Although Samsung doesn’t break the details of each business unit, a big part of the profit boost in its semiconductor business could be attributed to a move made earlier this year: Samsung’s decision to ditch Qualcomm and go in-house for the chips used in its S6 smartphones.

Samsung had been a loyal partner of Qualcomm for years, using the US chipmaker’s application processor for most of its premium smartphones. But after seeing some overheating issues with Qualcomm’s latest chip, Samsung decided to turn to its own semiconductor business starting from the S6 this year.

That left a big hole on Qualcomm’s sales. Samsung and Apple account for roughly 85% of premium smartphone sales, and with Apple designing its own main chips and Samsung going in-house, Qualcomm just lost a huge chunk of its sales.

In fact, the loss was so big that Qualcomm announced during its last earnings call that it would cut 15% of its workforce and $US1.4 billion in spending this year.

“The current industry environment has seen OEM share shift in the highly profitable premium tier, where the top player continues to take share and where, according to IDC, the top two manufacturers together now have more than 85% share of premium tier shipments,” Qualcomm CEO Steven Mollenkopf said during earnings call.

Mollenkopf also made a comment in reference to Samsung without explicitly mentioning the company’s name. “The current product cycle also has seen certain OEMs [phone manufacturers] pursue vertically integrated strategies at increased levels compared to the past. These developments along with other product cycle issues are currently impacting our business,” he said.

This doesn’t mean Samsung will continue to use its own chips forever. According to a person familiar with the situation who declined to be identified, Samsung has a long-lasting, strategic relationship with Qualcomm and it’s unlikely it will entirely drop its partnership. Also, Samsung’s mobile group doesn’t give any favourable treatment to its in-house chip unit, as evidenced by its previous models that used Qualcomm chips instead.

We’ll find out what happens early next year when Samsung comes out with its next flagship model.

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