Samsung’s profits slump as consumers opt for cheaper handset makers

Samsung reported lower-than-expected profit for the second quarter on Thursday and said it was uncertain if handset business profit would improve during the current period.

Its net income during the April-June quarter dropped 20 percent to 6.3 trillion won ($6.1 billion), compared with 7.8 trillion won a year earlier. That was the lowest since the second quarter of 2012. Analysts surveyed by FactSet forecast 6.5 trillion won income.

Sales fell 9 percent to 52.4 trillion won while operating profit sank 25 percent to 7.2 trillion won, in line with Samsung’s guidance earlier this month.

Samsung had warned that the second quarter would be the worst in two years as its handset business halted growth. It struggled to compete in the cheap smartphone business, which is the fastest-growing smartphone segment.

Robert Yi, head of investor relations, told conference call that Samsung spent higher marketing expenses as competition increased in the mid- to low-end smartphones and because it tried to sell old products in the inventory ahead of new product launches in the fall. Tablet computers sales also fell, he said, citing weak demand.

Samsung did not unveil how many smartphones it sold. But research firm IDC estimated that Samsung shipped 74.3 million smartphones during the second quarter, down 4 percent from a year earlier, even as the overall smartphone market expanded 23 percent. Chinese vendors, Huawei and Lenovo, were the ones that largely drove global growth of smartphone sales, not Samsung.

Samsung was still the largest supplier of smartphones but its global market share fell to one quarter from 32 percent.

With lower sales, its profits also took a dent. Samsung’s mobile business recorded 4.4 trillion won in operating profit during the second quarter, the lowest quarterly profit in two years. Previously, Samsung’s mobile business contributed about 70 percent of its overall profit. That fell to about 60 percent in the second quarter.

Analysts said Samsung struggled in emerging markets as consumers using Android handsets were more willing to try devices from other brands. Switching between different Android devices has become easier and cheaper than before for consumers, giving less reasons for users to stick with one brand.

“We are hitting a phase where even in emerging markets people are not buying their first smartphones anymore. They are becoming more familiar with different kinds of brands,” said Melissa Chau, senior research manager at IDC, a market research firm. “Just staying on Android is not going to keep you in one brand.”

That would make it more important for Samsung to develop unique services just for its Galaxy phone users or come up with its own software that does not rely on Google’s Android. But Samsung stumbled in its push to take a step away from Google service. Earlier this week, it delayed the release of the first smartphone powered by Tizen, its own mobile operating system, just two months after promising its release. It did not give a future schedule.

During the third quarter, Samsung forecast it will likely sell more handsets as the autumn season usually sees higher demand for consumer electronics products. But it would also see higher competition. Apple. is widely expected to release a new iPhone with a larger screen, the key feature in Galaxy brands that helped Samsung win consumers away from small screens of the iPhone.

In the previous years, Samsung released one high-end model during the third quarter. But this year, Samsung hinted that there will be one additional high-end model.

Kim Hyunjoon, senior vice president at Samsung’s mobile business, told the conference call that several new handset models are in the pipeline for a launch in the next few months. They include a new flagship model in the large-screen category and another premium phone with new designs and materials. Kim did not elaborate what the new materials would be. In 2013, Samsung unveiled a smartphone with a curved display that was released in South Korea only.

But Samsung warned that it cannot guarantee a higher profit even with a number of new models.

The company’s reliance on the semiconductor business for profit is expected to increase as it cannot expect an explosive growth of handset profit anymore. Samsung, the world’s largest maker of memory chips, said its semiconductor division generated 1.9 trillion won profit during the April-June quarter.

Samsung said its capital expenditure would be 24 trillion won, including 14.4 trillion won in its semiconductor division.

Posted by : Gizmeon