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Samsung Posts Second Straight Profit Drop on Cheaper Smartphones

Monday, 07 April 2014 09:33 PM

Samsung Electronics Co., the world’s biggest maker of smartphones, posted its second straight decline in quarterly profit as stalling demand lowers prices for Galaxy devices and components.

Operating profit fell to 8.4 trillion won ($8 billion) in the three months ended March from 8.8 trillion won a year earlier, the Suwon, South Korea-based company said in a statement Tuesday. The result compares with the 8.3 trillion-won average of 29 analyst estimates compiled by Bloomberg.

Sales of high-end products are slowing because of market saturation and the debuts of new Apple Inc. iPhones, curbing earnings at the world’s biggest smartphone maker at the same time it focuses more on lower-priced devices. The marquee Galaxy S5 smartphone and an expanded range of tablet computers are being released to spark demand as competition from Chinese producers hits display-unit income.

“Samsung’s smartphone sales strategy is changing to churning out a wider and varied product lineups with lower price tags, rather than placing its focus on one blockbuster model,” Marcello Ahn, a Seoul-based analyst at Quad Investment Management, said before the earnings announcement. “Despite falling average selling price of smartphones due to slowing high-end demand, Samsung smartphones outsold second-tier laggards.”

Shares of Samsung fell 0.8 percent to 1,386,000 won as of 9:17 a.m. in Seoul, paring its annual gain to 1 percent. The stock dropped 9.9 percent last year, its first annual decline since 2008.

Sales Miss

Sales were about 53 trillion won in the quarter, the company said today. That compares with the 54 trillion-won average of 33 estimates.

Samsung didn’t provide net income or details of divisional earnings with audited results due to be reported later this month.

In the December quarter, earnings fell 7.9 percent from a year earlier.

First-quarter operating profit at the mobile unit, the company’s biggest business, was probably 5.9 trillion won on sales of 33 trillion won, according to the median estimates of six analysts surveyed by Bloomberg News. The unit’s profit has fallen from a record 6.7 trillion won in the third quarter of 2013.

Samsung unveiled the 5.1-inch Galaxy S5 smartphone with a fingerprint reader in February, and the device is due to be available outside South Korea starting April 11 as it seeks to fight back against the iPhone 5s and 5c released in September.

“The significance of S5 device has somewhat dropped compared to its predecessors,” Lee Sun Tae, a Seoul-based analyst at NH Investment & Securities, said by phone today.

Large Screens

The company’s smartphone shipments reached 90 million units in the first quarter, according to Nomura Holdings Inc. estimates. In the fourth quarter of 2013, Samsung shipped 86 million smartphones worldwide, research firm Strategy Analytics said Jan. 27.

Samsung will release its next large-screen Note device in the second half of this year, Lee Young Hee, executive vice president of the mobile business, said in a Jan. 6 interview. The newest Note may use a three-sided display so messages can be read from an angle.

The company’s grip on the large-screen market it pioneered with products such as the 5.7-inch Galaxy Note 3 faces new threats from other producers. Apple is developing new iPhone designs including bigger screens, a person familiar with the plans said last year.

Such a move may hurt Samsung’s earnings and market share, according to Nomura.

New Tablets

In January, Samsung announced its largest tablet, with a 12.2-inch screen, as it seeks to win more business customers with features that allow users to split the display into four windows running different applications.

Also, Samsung may book as much as $290 million in charges related to its patent dispute with Apple, Seo Won Seok, an analyst at Korea Investment & Securities in Seoul, said in a March 28 report.

The display unit, which dominates the market for screens using organic light-emitting diodes, probably had operating profit of 100 billion won in the first quarter, down 87 percent from a year earlier, according to the Bloomberg News survey.

Sales at the unit declined 13 percent to 6.2 trillion won, according to the six analysts surveyed.

New Televisions

“Samsung’s aggressive cost-cutting efforts was already proven by the deteriorating profits at its OLED” business, Hanwha Securities Co. said in a March 21 report. “This suggests a higher possibility of more profit declines from its smartphones well into the second half of the year.”

Operating profit at Samsung’s consumer-electronics division, which oversees the TV and home-appliance businesses, probably rose to 245 billion won from 230 billion won a year earlier, according to the analyst survey.

The company introduced a wider range of TVs using ultra high definition screens at the International Consumer Electronics Show in Las Vegas in January to combat weakening sales and stagnating prices.

Ultra-HD, which offers four times the picture resolution of conventional displays, has struggled to gain traction in the market because of a lack of content for the format and higher prices.

Chip Prices

Profit at Samsung’s chip unit, which supplies its own handsets and also rivals such as Apple, nearly doubled to 2 trillion won on sales of 9.8 trillion won, according to the Bloomberg News survey of analyst estimates.

The price of benchmark DDR3 2-gigabit dynamic random-access memory chips was $2.04 yesterday after peaking at $2.92 on Jan. 15, according to DRAMeXchange, Asia’s largest market for the components. That compares with $1.60 on Sept. 4, when global supplies were hit by a fire at an SK Hynix Inc. factory in China.

“Overall chip prices have recently dropped given the fully restored SK Hynix’s Wuxi plant in the first quarter,” Lee Min Hee, a Seoul-based analyst at I’M Investment & Securities Co., said. “Memory-chip prices will start to rebound from the end of second-quarter on increasing release of new mobile products, including tablets.”

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Samsung Electronics Co., the world's biggest maker of smartphones, posted its second straight decline in quarterly profit as stalling demand lowers prices for Galaxy devices and components.
Monday, 07 April 2014 09:33 PM
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