Samsung sees profit jump on chip business growth

Friday 26 July 2013 08.25
The launch of Samsung's flagship Galaxy S4 phone failed to halt a profit dip at its mobile division
The launch of Samsung's flagship Galaxy S4 phone failed to halt a profit dip at its mobile division

Samsung has reported an operating profit of 9.53 trillion won (€6.54 billion) in its last quarter, 47.5% higher than in the same period of last year.

The company launched the latest iteration of its flagship smartphone – the Galaxy S4 – earlier this year, though its arrival failed to halt a decline in quarter-on-quarter profits at its mobile division.

However its semiconductor business enjoyed significant profit growth, with profits from that segment of the South Korean giant rising 71% to 1.76 trillion won (€1.2 billion).

Samsung also announced a $1 billion increase in investment, hoping a strong recovery in semiconductors will make up for weakening smartphone growth.

The high-end smartphone market, which Samsung dominates along with Apple is slowing and investors remain unconvinced that either firm can crack the rapidly growing low-end segment, where its rivals include China's Huawei.

Executives offered little to give investors hope that a new market-shifting breakthrough in high-end smartphone technology is around the corner, fuelling uncertainty over a segment which appears to have peaked in the first quarter after driving a series of record profits for Samsung in recent years.

Mobile division profit was still up 52% from a year ago but even that fell short of expectations, as slower sales of old models like the S3 and the marketing bill for the S4 took their toll.

"It is clear that the global smartphone market is stalling because of the slowing growth of high-end smartphones and rising competition from lower-priced smartphones," said Ahn Young-hoe, a fund manager at KTB Asset Management, which owns Samsung shares.

"There is no major momentum for Samsung. The key is whether Samsung, which sources smartphone parts in-house unlike Apple, will be able to cut parts costs and increase volume and market share to offset reduced smartphone margins."

Samsung warned that global smartphone sales growth could weaken further in the third quarter, and said it expected stiffer competition due to new product launches.

Apple is expected to release the iPhone 5S and a low-end iPhone later this year.

"As we go into a typically strong season for the IT industry, we expect earnings to continue to increase," Samsung said in its earnings statement.

"However, we cannot overlook delayed economic recovery in Europe and risks from increased competition for smartphones and other set products."

Samsung forecast stronger earnings in the second half thanks in part to its component business, which was staging a solid recovery on the back of soaring prices for semiconductors used in personal computers and mobile devices.

Capital spending in 2013 would increase by more than 1 trillion won to 24 trillion won, and could rise further depending on market conditions.

More than 80% of that expenditure would be devoted to chips and flat panels such as liquid crystal displays and organic light emitting diode technology, seen as the next big thing in television.

Shares of Samsung, worth $172 billion, traded down 0.8%, lagging a 0.1% gain in the broader market.

The stock has lost 14% or $29.4 billion since early June, hit by a series of brokerage downgrades sparked by fears the high-end smartphone market had reached saturation.

Those concerns eased somewhat on Tuesday when Apple reported stronger-than-expected iPhone sales, even if demand was stoked by aggressively discounted older models.

The California-based company still reported a fall in quarterly profit of 22% as its margins slipped in the absence of new products.

Research firm Strategy Analytics said Samsung sold 76 million smartphones in the second quarter to take 33.1% of the market, widening the gap with second-ranked Apple which saw its share shrink to 13.6%.

"I expect Samsung's smartphone profit to stagnate in the current quarter compared to the previous quarter as there are no sensational products in the market. This is a problem facing not only Samsung but Apple and the entire industry," said Samsung Securities Analyst Harrison Cho.

"Apple's new iPhone, which is expected to be released early September, will be nothing new."