Aug 30 - Fitch Ratings does not plan any immediate action on Samsung Electronics' 'A+'/Stable rating following a decision by the US Jury on 24 August in favour of Apple Inc. The ruling stands in contrast to a split ruling on the same day in South Korea, and a decision by a UK court in July in favour of Samsung.
The agency does not assume that this verdict will be automatically followed in other global jurisdictions, and foresees only a limited impact on Samsung's financial profile over the next 12-18 months. This is on the assumption that the sales restrictions in the US are unlikely to include the company's latest Galaxy SIII and Galaxy Note flagship models.
The USD1.05bn in damages recommended by the jury represents less than 5% of Fitch's operating profit forecast for Samsung in 2012, and 5% of the company's cash balance of USD 21bn as of end-Q212. Yet Fitch notes that the implied penalty per smartphone sold - of USD49.40 or 14% of sales - is nonetheless quite severe. The district judge in California is due to deliver a final ruling over the next month, when it is possible that the USD1.05bn may be either increased or decreased. In any case, the matter is unlikely to be finalized within the next 12 months, as Samsung would be expected to appeal this decision to a higher court.
Nevertheless, reputational damage could affect Samsung's US sales in the short term, albeit marginally. The US is currently the largest single market for smartphones (Q212: 15.3%), and US consumers may gravitate more toward Apple's products following this decision. Fitch believes Samsung will need to place greater emphasis on more distinctive design features. Samsung's leading mobile display panel technology, and its pending transition to smartphones with both unbreakable and flexible AMOLED screens, is one important development that may enable its future smartphone models to look markedly different to Apple's iPhones.
Out of Samsung's 22 smartphones deemed by the US jury to be infringing on Apple's design and utility patents, Apple has requested the courts to ban eight models that are still being sold in the US market. An injunction hearing is scheduled for December. Fitch understands that Samsung's latest Galaxy SIII will not be included as it was not part of the recent court case, and it is separately scheduled to be considered in March 2014. Under this scenario, the most severe setback for Samsung would be the inability to sell its Galaxy SII model in the US, but the impact on Samsung's future sales in the US may be limited with the Galaxy SIII set to overtake the Galaxy SII in terms of unit sales in Q4.
However, there is an outside risk that Apple may on this occasion be able to fast-track the Galaxy SIII, and possibly the larger Galaxy Note model, on to the banned list via a "contempt proceeding" before the judge. Under this scenario, the negative impact on Samsung's financials could be more meaningful in 2013, although Samsung is likely to mitigate this by releasing the next version of its flagship Galaxy smartphone series in a timely manner.
Fitch expects it will be more difficult for Apple to block the sale of Samsung's Galaxy SIII and Galaxy Note models, given that both models are significantly larger than any of Apple's iPhone's released so far. Moreover, Samsung has already changed the disputed scroll and bounce-bank features in its smartphones via software updates, and is certain to provide further software updates and recalibrate future US model releases to ensure it is not in breach of Apple's utility patents.
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