Smartphones weigh on Samsung as guidance disappoints

Tuesday 08 July 2014 13.57
Samsung faces slowing market growth, intensifying price competition and the looming threat of Apple's next iPhone
Samsung faces slowing market growth, intensifying price competition and the looming threat of Apple's next iPhone

Samsung Electronics today issued unexpectedly weak quarterly earnings guidance which put it on track for its worst results in two years.

The figures also 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's next iPhone.

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% this year from 39.2% 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 and Lenovo. 

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 survey of 38 analysts.

Samsung estimated today its operating profit for the three months from April to June likely fell 24.5% from a year earlier to 7.2 trillion won ($7.12 billion). 

This would be 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 quarter of annual profit decline in a row, 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% 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 previous year's record 10.2 trillion won profit could also be difficult to beat.