Samsung Sees Seventh Straight Profit Decline

Jul 07, 2015

The world’s largest smartphone maker by shipments said operating profit likely fell about 4%

Samsung Electronics Co.’s second-quarter earnings estimates Tuesday suggest that sales of its new flagship smartphones were significantly worse than expected.

The disappointment underscores the perils of navigating the fast-changing smartphone market: Even with a hit product on its hands, the South Korean company appears to have misjudged demand.

The South Korean technology giant said that it expects to earn just 6.9 trillion Korean won ($6.1 billion) in operating profit for the three months ended June 30, a 4% decline from the same period a year earlier. It said revenue likely dropped to 48 trillion won, down 8.4% from the same period last year.

The overall year-over-year profit and sales declines come amid likely robust growth in Samsung’s semiconductor operations, leaving most of the blame for the slide on the company’s once-highflying mobile division.

The company didn’t break out its quarterly earnings projections by business units.

Final quarterly results are due later this month.

When the Galaxy S6 and its curved-screen variant, the Galaxy S6 Edge, were launched in April, the phones were praised by reviewers and greeted with strong advance orders from consumers.

But Samsung appears to have badly miscalculated in its expectations for what kinds of smartphones these consumers were after.

According to a person familiar with the matter, the company initially expected to sell four Galaxy S6 smartphones for each Galaxy S6 Edge that it sold, and set up its production facilities accordingly. Instead, demand was much likely closer to even for the two devices, the person said.

That led to a glut of unsold Galaxy S6 devices—particularly white-colored devices—and not enough Galaxy S6 Edge smartphones, the person said.

In April, just two days before the Galaxy S6 and its companion device became available in stores, Samsung’s mobile chief J.K. Shin pledged to boost production of the curved-screen Galaxy S6 Edge to meet demand, citing evidence of supply constraints.

In late April, executives said on a conference call with analysts that the company would be able to meet demand by the end of June.

Since then, the company has reconfigured its manufacturing operations, which are concentrated in Vietnam, to be able to produce as many Galaxy S6 Edge devices as the market demands, according to the person, who says that sales and profit figures could pick up again in the third and fourth quarter of the year.

It remains unclear whether Samsung may have missed its window of opportunity with consumers, however. Unlike rival Apple Inc., whose iPhones tend to sell well even a year after they are first introduced to the market, Samsung’s flagship smartphone sales have historically peaked in the first few months after its launch.

For Samsung, the expected drop in operating profit marks the seventh consecutive quarter of year-over-year declines, and is a steep come down from initial analyst expectations that earnings would rebound strongly from the dismal results after the Galaxy S5’s launch in the second quarter last year.

The results, however, were better than the 30% year-over-year operating profit decline that the company suffered in the first quarter of the year.

For the second quarter, analysts estimate the company shipped 71 million to 76 million smartphones, with the two Galaxy S6 phones accounting for slightly more than 20% of the shipments. This compares with an estimated 74.5 million units shipped during the year-ago period, according to Strategy Analytics.

Following years of robust earnings growth on the back of the popularity of its Galaxy S smartphones, Samsung’s mobile profits began falling last year after the Galaxy S5 largely fell flat with consumers. The company also saw its market share eroded by a number of low-cost competitors from China and India, a threat that may continue to challenge the South Korean company.

Shares in Samsung, which tumbled 5.3% in the previous two sessions, to a 2015 low, weren’t active ahead of the stock market opening in Seoul on Tuesday. The stock has fallen 17% since the April 10 launch of the Galaxy S6 and the S6 Edge.

Source: The Wall Street Journal