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Samsung profit plunges to 4.1 trillion won in Q3

Oct 08,2014
The easy days of runaway smartphone sales have ended for Samsung Electronics.

For the first time since 2011, Samsung Electronics’ operating profit has plunged below the 5 trillion won mark as the company was hit by sluggish sales of its mobile phones due to competition from longtime rival Apple and upstart Chinese companies.

Still the world’s top smartphone maker, Samsung yesterday announced an earnings guidance for the third quarter that estimated operating profit in the July-September period will be 4.1 trillion won ($3.8 billion), which is 43 percent down from the previous quarter and a 60 percent plunge from a year ago.

Samsung had its best quarterly performance ever in the third quarter of last year, when operating profit hit 10.1 trillion won.

However, this is the first time since the fourth quarter of 2011 that the Korean tech giant’s operating profit is under 5 trillion won.

Samsung said revenue for the third quarter was estimated at 47 trillion won, which is 10.2 percent down from the previous quarter and 20.4 percent down from a year ago.

It is the first time since the second quarter of 2012 that the company saw its quarterly revenue fall under the 50 trillion won mark.

With the falls in both sales and operating profit, Samsung’s operating profit ratio stood at 8.72 percent, which is the first time in three years that the ratio has fallen below the 10 percent mark. Samsung has been keeping double-digit operating profit ratios since the third quarter of 2011.

Local analysts had predicted that Samsung’s third-quarter performance would not be rosy because of fierce competition in its mobile business. Some analysts even predicted third-quarter operating profit could fall below 4 trillion won.

Data from FnGuide, a local financial information provider that gathered earnings predictions from 22 security firms, showed that the tech giant would have 4.4 trillion won in operating profit.

Samsung said that its earnings drop was due to declines in its mobile business, weakened profitability of its system LSI (large-scale integration) and OLED panel products, retail price drops in televisions, and an early curtailing of air conditioner sales due to the weather.

Samsung did not disclose earnings of each business division yesterday, but some analysts expect that a poor performance from the information technology and mobile communication (IM) division is the biggest culprit, as its operating profit is expected to fall under 2 trillion won in the third quarter.

Samsung’s IM division has been a cash cow for the company with the Galaxy series, but recently has slowed down. Since it had 6.4 trillion won in operating profit in the first quarter, accounting for more than 70 percent of the company’s total operating profit, the amount was reduced to 4.4 trillion won in the second quarter, accounting for only 62 percent of total profit.

“As the competition gets heated in smartphones, our sales volume increased slightly, but because of a reduced portion of high-end model sales and price decreases for older models, the average selling price [ASP] was lowered,” the company said in a statement.

“The aggressive execution of marketing costs is also one reason for the reduced margins.”

Samsung is being squeezed from the high end with Apple releasing iPhones with larger displays, and in the low end by Chinese manufacturers like Xiaomi and Lenovo.

“Samsung’s smartphone performance is declining, and as the market is entering a phase of maturity, it is not easy for the company to come up with products differentiated from others,” said Lee Se-chul, an analyst at Woori Investment & Securities.

Analysts predicted that Samsung’s device solutions (DS) division, which manages the semiconductor business, has had a solid performance as its third-quarter operating profit is expected to surpass the 2 trillion won mark. In the previous quarter, the DS division had 1.87 trillion won in operating profit, accounting for 26 percent of the company’s total operating profit.

With the slump in the IM division, the percentage is likely to go up to 50 percent of total profit.

Despite sluggish demand in system LSI chips because of weak demand for mobile devices, Samsung hinted that its memory semiconductor products have sold well in the third quarter as the dynamic random access memory (DRAM) and NAND flash memory chip markets are on the rise.

“The reduction of cost by manufacturing process changes also enabled the improvement in performance,” Samsung said in a statement.

Samsung announced a 15.6 trillion won investment to build the world’s largest semiconductor plant in Pyeongtaek, Gyeonggi, on Monday.

For the fourth quarter, Samsung said it was looking forward to the peak season for TV sales, driven by Black Friday sales in the United States. It warned that the business environment for its IM division is “still uncertain” because of heated smartphone competition.

Analysts expect that the fourth quarter will not be a major improvement from the third quarter, with operating profits staying around the mid-4 trillion won range.

“Samsung Electronics’ fourthquarter performance is expected to be similar or better than the third quarter,” said Song Myung-sub, an analyst at HI Investment & Securities. “What’s important is how Samsung’s low- to mid-range priced phones will perform.”



BY Joo Kyung-don [kjoo@joongang.co.kr]




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