Samsung Electronics' second quarter misses forecast as smartphone worries deepen

SEOUL Fri Jul 5, 2013 3:29am EDT

1 of 2. A man uses his mobile phone in front of a Samsung mobile shop in Seoul July 4, 2013. Samsung Electronics Co Ltd estimated its April-June operating profit rose 47 percent to a record 9.5 trillion won ($8.3 billion), lifted by the late April launch of its flagship Galaxy S4 smartphones. Picture taken on July 4, 2013.

Credit: Reuters/Kim Hong-Ji

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SEOUL (Reuters) - Samsung Electronics Co Ltd missed already modest expectations for its quarterly earnings guidance on Friday, deepening worries that its smartphone business may have peaked, as growth in sales of its blockbuster Galaxy phones begins to wane and new rivals emerge to eat away at its market share.

The Galaxy S, powered by Google's free Android platform, propelled the South Korean firm into the top rank of smartphone makers in 2012, overtaking Apple Inc whose iPhone had set an industry standard five years earlier.

Now investors fear Samsung may also follow in the footsteps of Apple and other once-mighty players that are struggling with shrinking margins, in an industry where companies live and die by their ability to stay ahead of the innovation curve.

"Is Samsung's smartphone story now over? Not quite yet. It's growth is indeed slowing due largely to disappointing sales of the S4," said Jung Sang-jin, a fund manager at Dongbu Asset Management, which owns Samsung shares.

"Yet I think Samsung has some exciting stuff up its sleeves. The problem is no one is sure whether these products can really wow investors and consumers."

The disappointing earnings estimate by Samsung, which has had a track record of beating even the most bullish forecasts, sent its shares down more than 3 percent on Friday.

They have dropped 17 percent since early June, hit by a series of brokerage downgrades. The share price reflects concerns about Samsung's handset margins, with its mobile business generating 70 percent of the tech giant's total profit.

The fall in the share price equates to a drop in market value of 39 trillion won ($34.2 billion), or worth the combined market capitalisation of Sony Corp and LG Electronics Inc.

"One of the biggest risks for Samsung Electronics going forward is that 70 percent of total operating profit comes from mobile business. Diversification is key. Samsung needs to engage in active business transition until end-2014," said Jeff Kim, an analyst at Hyundai Securities.

ALL TIME HIGH AGAIN IN H2?

To be sure, Samsung's 9.5 trillion won ($8.3 billion) operating profit forecast, up 47 percent from a year ago, is a record and it is expected to report higher earnings in the current and fourth quarters as sales of its latest Galaxy S4 phone pick up and new products hit the stores. Prices of memory chips, another industry which Samsung holds the lead, are also expected to remain strong.

"Samsung's got diversified businesses. When one business lags, it's got others outperforming and propping up the overall profit," Jung at Dongbu said.

"The component business is widely expected to pick up the slack in the second half when smartphones slow, but now worries are also mounting that the component business' recovery could be short-lived."

The guidance, released ahead of full quarterly results due on July 26, was worse than an average forecast of 10.16 trillion won in a poll of 43 analysts by Thomson Reuters I/B/E/S.

"I think Samsung spent more on marketing expenses than expected because of the launch of Galaxy S4 smartphone, which led the company's results to miss the market consensus," HMC Investment Securities analyst Nho Geun-Chang said.

Samsung spent more on marketing than R&D in 2012 for the first time in at least three years, and the S4 was launched in March with a Broadway-style show in New York.

The company also invested heavily in distribution channels including opening brand shops in 1,400 Best Buy stores in the United States.

But the glitz and glamour has failed to arrest a slide in handset sales growth, and shipments are seen rising only 4 percent to 8 percent in the second quarter from the previous quarter.

Handset margins are also being squeezed, as consumers in countries like China - the world's biggest smartphone market - opt for stripped-down cheaper devices.

NEXT BIG THING

Competition is getting intense with Chinese manufacturers such as Huawei Technologies Co Ltd and ZTE Corp making ground in the popular mid- to low-end market.

Nokia Oyj, once the handset king, unveiled two back-to-basics 3G phones this week. They allow access to popular applications such as Facebook and Twitter, and sell for just $68.

"There's still a big uncertainty about how Samsung will respond to the low-end market," said Brian Park, an analyst at Tong Yang Securities, referring to its plans to launch a device based on the open-source Tizen operating system.

Wearable gadgets will also be crucial to the company's hopes of riding a new wave of extraordinary profit growth.

Apple has applied for a trademark for "iWatch" in Japan, signaling the iPhone-maker may be moving ahead with plans for a watch-like device as the industry turn its attention to wearable computers.

Samsung has also filed a trademark for "Samsung Gear" in the Untied States for its range of wearable devices.

"The (expected launch of) wearable devices won't be able to replace Samsung's smartphone business, but it's more likely to complement its earnings at best," said Byun Han-joon, an analyst at KB Investment & Securities. ($1 = 1139.2000 Korean won)

(Additional reporting by Joyce Lee and Hyunjoo Jin; Editing by Stephen Coates)

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Comments (9)
timebandit wrote:
Most of Samsung’s business is mobile. Unlike Apple, Samsung is also encumbered by its factories and labor issues.

Jul 04, 2013 11:04pm EDT  --  Report as abuse
TheBasicMind wrote:
Apple are for sure in a much stronger position. They have much more entrenched customer loyalty and they back up the premium slot they occupy (where brand has far stronger associations) with solid quality products. Plus they have a far better track record on innovation, saying “no” to quirks and “yes” more consistently for the solid features that are in for the long haul. Their customer satisfaction levels are far higher than for Samsung and research into buying intent favours them more than any other manufacturer. Samsung have recently shut-up on the line about iPhones being for oldies, since surveys have confirmed far more teenagers desire an iPhone, even if they can’t afford one.

Analysts are about to learn not all market share percentages are equal. Each percentage of Apple market share represents more in the form of profit, loyalty and desirability.

Samsung on the other hand, are still not a coveted brand and Samsung customers will switch much faster than Apple customers if a new groundbreaking Android phone is delivered by another company.

Jul 05, 2013 4:41am EDT  --  Report as abuse
ralphos wrote:
When Vonage offers a cell phone let mt know.
Until then cost of service stops me from buying any smart phone.
I need my retirement more than a phone.

Jul 05, 2013 9:25am EDT  --  Report as abuse
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