Friday, 29 July 2016 13:44

LG has good Q2 results (with commentary) Featured

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LG has posted vastly improved Q2 financial results – nearly 140% higher than the previous year.

The star performer was its Home Appliance and Air Solution, and Home Entertainment divisions, both reporting the highest quarterly operating profit in LG’s history. Global consolidated revenues of US$12.05 billion increased both year-on-year and quarter-on-quarter.

LG Home Appliance and Air Solution accounted for the largest share of Q2’s operating profit with US$373.24 million on revenues of US$4.04 billion driven by growth in B2B sales of air-conditioning systems and strong overall performance in South Korea, Europe, and other parts of Asia. With an improved product portfolio and cost structure, the business unit was able to achieve more than a 9% operating margin. Premium products such as the LG SIGNATURE collection, TWINWash, and LG Styler are expected to contribute positively to the company's performance.

LG Mobile Communications had revenues of US$2.86 billion, a 12% increase over Q1 but down on Q2 last year. An operating loss of US$132.10 million reflected increased marketing expenditures and slower than expected initial sales of the G5 smartphone. Overall smartphone shipments increased to 13.9 million – a 3% increase over Q1. The launch of the new V series (sometime between August and November) and expanding sales of mass-tier K and X series models are expected to improve the business unit’s performance next quarter.

LG Home Entertainment Company had a record US$306.97 million operating profit on revenues of US$3.58 billion, a 5.7% increase from this time last year. This was driven by the growing market for premium TVs – especially in the OLED screen segment. An increase in sales of higher-end ULTRA HD and OLED TVs and improved cost structure management contributed to an operating margin of 8.6%. The division will continue to benefit from the growing UHD and OLED TV markets and cost competitiveness, although cost increases for flat-panel components may affect profitability.

LG Vehicle Components reported sales of US$550.4 million, an increase of 42% over last year due to high growth in the automotive infotainment sector. Increased R&D investments in infotainment and electric vehicle technologies led to an operating loss of US$14.46 million in Q2. The outlook for LG’s automotive component business is positive, with production of components for the Chevrolet Bolt electric vehicle commencing in the third quarter.

The report does not include LG Display  that makes high-quality LCD and OLED panels. It announced its 17th straight quarterly operating profit which resulted from a thorough and profit-focused management, based on differentiated technologies in response to difficult market conditions caused by continuing falls in panel prices and the aggressive expansion of LCD production capacity by Chinese panel makers.

The division increased profitability by expanding the production share of 60+” panels and premium HDR TV panels while continuously leading the Ultra HD TV panel market for 40-inch and above based on its differentiated M+ technology. Panels for TVs accounted for 39% of the revenue, tablets and notebook PCs 18%, mobile devices 27%, and desktop monitors 16%.

Comment

As always one quarter does not show the true annual results. But Q2, away from all major holiday periods and seasonal influences, is a pretty good indicator of the rest of the year. And all indicators are for good, sustained growth.

What is does show is that it is a diversified company that is has been struggling to find its “identity”, and, I suspect, trying a little too hard to compete with South Korean sibling Samsung. Over the past 12 months, I have seen a far more human face on this mega company along with more innovation and that is winning customers.

And the G5 is picking up speed, especially for its removable battery and innovative dual lens camera. iTWire says it is a 10 out of 10, an amazing piece of kit that any high-end buyer should seriously consider.

In the mobile market, it's well known than the flagship sector is toxic to all except players with the deepest pockets capable of going after, and winning that 10% niche of all smartphone sales.

But every analyst says the smartphone boom is over, the market is saturated, people are holding on to devices longer — well over the 24-month contract cycle and the Chinese makers like OPPO, VIVO, Lenovo (Moto), Huawei, and others have taken over the top five smartphone maker (by volume) rankings through sheer price and force. Then there is OnePlus with its amazing US$399 OnePlus Three smartphone and ZTE with its US$299, 6” phablet that may be even more amazing.

But LG is a very strong company and it is unlikely that it will ever pull out of the smartphone business. After all, it is a major component maker, and that gives it many advantages.

The question is how long it can tolerate losses before taking action. The market is littered with the carcasses of Microsoft, Nokia, Blackberry (and perhaps Sony and HTC) that waited hoping that things would improve. History has shown that it's difficult to pull out of a death spiral.

The announcement of a new model V series smartphone is interesting. LG released a premium V10 in October 2015 in selected markets. It had almost every feature you could want, including twin front cameras. This could herald dropping the G series back to mid-market with appropriate pricing – in which case it would be one of the better feature and value propositions.


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Ray Shaw

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Ray Shaw ray@im.com.au  has a passion for IT ever since building his first computer in 1980. He is a qualified journalist, hosted a consumer IT based radio program on ABC radio for 10 years, has developed world leading software for the events industry and is smart enough to no longer own a retail computer store!

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