* Q2 op profit likely fell 24.5 pct on year to 7.2 tln won
* Guidance misses analyst estimates, worst since Q2 2012
* Samsung should cut prices for lower-end devices -analysts
(Adds link to graphic)
By Se Young Lee
SEOUL, July 8 Samsung Electronics Co Ltd
on Tuesday issued unexpectedly weak quarterly
earnings guidance which put it on track for its worst results in
two years and cast doubt on the smartphone leader's strategy
against cheaper Chinese rivals.
Though the South Korean company said it saw better business
conditions in the third quarter, it faces slowing market growth,
intensifying price competition at the lower end and the looming
threat of Apple Inc's next iPhone.
"The earnings deliver a harsh reality check to Samsung that
it is not Apple, but Samsung. Its strategy of selling phones at
expensive prices will not work anymore, as Chinese rivals also
offer good enough phones at much cheaper prices," Lee Seung-woo,
a technology analyst at IBK Securities, said.
"Samsung needs to review its smartphone strategy," he said.
While smartphones drove Samsung to record profits last year,
the market is maturing. Research firm IDC predicts global
shipments growth will slow to 19.3 percent this year from 39.2
percent in 2013, while average sales prices will also drop.
Some analysts said Samsung may have no choice but to slash
prices for mid-to-low tier devices, where growth is stronger, to
go after Chinese rivals such as Huawei Technologies Co Ltd
and Lenovo Group Ltd. While that would help
defend market share it would also hurt margins, curbing its
earnings recovery in the short term.
The company said it "cautiously expects" a better
third-quarter outlook with the release of a new smartphone
lineup, lower marketing costs and a seasonal lift in demand for
its memory business. Its flagship Galaxy Note 4 is expected to
hit the market in September.
Samsung's second-quarter guidance was well below the mean
forecast of 8.3 trillion won from a Thomson Reuters I/B/E/S
survey of 38 analysts.
CIMB analyst Lee Do-hoon, one of the few to accurately
predict Samsung's second-quarter guidance, said the company
appeared to be taking longer to address challenges it is facing
in the mid-to-low end of the market. He did not expect a
meaningful third-quarter earnings recovery and predicted that
analysts would cut their forecasts.
"Samsung has been talking about strengthening its mid-to-low
tier lineup but we found that this has not happened yet and will
take more time," he said.
Shares in Samsung, down more than 10 percent since the start
of June through Monday, rose as much as 2.1 percent after the
earnings guidance, as some analysts said the second-quarter
results may mark a low point in earnings. The stock later gave
back much of that gain.
Samsung estimated on Tuesday that its April-June operating
profit likely fell 24.5 percent from a year earlier to 7.2
trillion won ($7.12 billion), the sharpest percentage drop since
the first quarter of 2011 and the weakest level since a 6.5
trillion won profit in the second quarter of 2012.
The figure, which marks the third straight quarter of annual
profit decline, was far below market expectations as sales fell
for the first time since the company adopted new accounting
standards in 2009.
In a separate statement, Samsung said second-quarter
earnings would be hit by slower global smartphone market growth,
competition in China, inventory buildup in Europe and the
strength of the won, which appreciated by around 9
percent on average against the dollar during the second quarter.
But analysts on average expect the streak of on-year profit
declines to extend into the third quarter, with Apple widely
tipped to launch a successor to the iPhone 5 to compete with
Samsung's high-end smartphones. The prior year's record 10.2
trillion won profit could also be difficult to beat.
"Samsung is most competitive in the mid-to-high end
products, but market demand is being driven in the lower-tier
end where the biggest issue is price," said HMC Investment
analyst Greg Roh.
"I think problems for the company's mobile division will
continue in the third quarter."
($1 = 1011.0000 South Korean Won)
(Additional reporting by Hyunjoo Jin; Editing by Tony Munroe
and Stephen Coates)