Samsung flags 60% plunge in Q3 operating profit

SEOUL, South Korea – Samsung Electronics on Tuesday, October 7, flagged a near 60% on-year plunge in its third quarter operating profit, as its key smartphone sector continued to struggle in the face of increased competition.

Operating profit for the July-September period was estimated at 4.1 trillion won ($3.8 billion), down 59.6% from the third quarter last year, the company said.

Sales were estimated at 47 trillion won, down 20.4% from 2013.

While smartphone shipments increased slightly, “operating margin declined due to increased marketing expenditures and a lowered average selling price, driven by reduced proportional shipments of high-end models coupled with price decreases for older smartphone models”, the South Korean electronics giant said in an explanatory note.

The company warned that uncertainty in the mobile sector would carry through into the fourth quarter, although it promised a new line-up of top-end smartphones featuring “new materials and innovative designs”.

In July, Samsung had reported a 20% drop in net profit for the second quarter, and its shares are sitting at a two-year low.

The share price actually rose by as much as 3.0% in early trading after the profit warning, and finally closed the day up 0.96% at 1.162 million won.

Lowered expectations

“Expectations have been lowered to a point where a 4 trillion won operating profit would relieve investors,” explained Lee Seung-woo, an analyst with IBK Securities in Seoul.

The mobile market, which has been the key driver of Samsung profits in recent years, has become increasingly saturated, while competition has intensified from cheaper Chinese handset makers such as Huawei and Lenovo.

The world’s largest smartphone maker has a diverse product line ranging from memory chips to home appliances, but more than half of its profits are generated by mobile devices.

The explanatory note said shipments and profits in the company’s display panel business had also fallen in the third quarter due to weaker demand in the mobile sector.

It did not provide a breakdown of profit estimates by businesses, but noted the “improved” performance of its memory chip unit in the third quarter.

Samsung said Monday that it planned to invest 15.6 trillion won to build a high-tech chip-making facility in the northwestern city of Pyongtaek.

Demand for memory chips is expected to remain robust, and the new facility –scheduled to begin operations in 2017 – is seen as a strategic effort to offset further profit falls in the smartphone segment.

A double hit

Samsung’s smartphone profits have been hit at both ends of the spectrum.

Its previously all-conquering flagship Galaxy S series has come under renewed pressure with the release of the popular iPhone 6 from arch-rival Apple, which has also challenged Samsung’s dominance of the oversized smartphone market with the introduction of the larger-screen iPhone 6 Plus.

In the low- to mid-range smartphone segment, the challenge has come from Chinese handset makers who have begun to make substantial inroads into Samsung’s market share.

According to International Data Corp., a record-high 295.3 million smartphones were shipped worldwide in the second quarter.

Samsung remained the world’s top vendor, moving 74 million handsets, but saw its overall market share slip seven percentage points to 25.2%, while China’s Huawei nearly doubled its shipments from the same quarter a year ago.

Samsung said Tuesday it would bring out a new series of mid- to low-end smartphones in the fourth quarter “with strong competitive positioning on both hardware specifications and price”.

Last month, Samsung brought forward the launch of its oversized Galaxy Note 4 smartphone and got it into Chinese and South Korean stores ahead of its sale in 140 other countries.

It was the first time a flagship Samsung product had gone on sale in China ahead of other markets.

“We are temporarily going through a difficult business situation,” Lee Don-Joo, head of sales and marketing for Samsung’s mobile unit, told reporters at the Note 4 launch. – Rappler.com