Samsung to Launch New Smartphones as Profit Falls

SEOUL— Samsung Electronics Co. 005930.SE -3.73% said it plans to launch two new high-end smartphones in the next six months in a bid to stem an earnings slide and protect the company’s lead in mobile phones.

But the news did little to assuage investors, who sold off Samsung’s stock Thursday after a disappointing earnings report, wiping out about $7.5 billion from the company’s market capitalization.

Samsung posted its first year-over-year drop in net profit in nearly three years for the second quarter, as fierce competition, especially from Chinese rivals, squeezed the company’s smartphone margins.

Kim Hyun-Joon, a senior vice president at Samsung’s mobile-communications business, told investors on an earnings call that one model will feature a large screen, while the other will be made using “new materials.” He didn’t elaborate. Samsung has previously hinted that it might use bendable screens in its future mobile devices.

The new large-screen model is believed to be the latest version of the Galaxy Note smartphone-tablet hybrid that Samsung typically launches each fall. This year, rival Apple Inc. AAPL -2.58% is also expected to launch new versions of its iPhone that are closer in size to the Note device.

Mr. Kim added that Samsung also will introduce new low-end and midrange models with enhanced features.

The world’s biggest mobile-phone maker by shipments said net profit fell 20% to 6.25 trillion won ($6.1 billion) from 7.77 trillion won a year earlier. Revenue fell 8.9% to 52.35 trillion won. The last time the company recorded a net-profit drop on a year-over-year basis was for the third quarter of 2011.

Samsung said it overestimated smartphone demand, which led to high inventories in the quarter. It also cited stiff competition and a recent spike in the local currency that made its products less competitive overseas. Samsung said operating profit slid 25% from a year earlier to 7.19 trillion won as the stronger won hit the company’s profit by 500 billion won.

Operating profit at Samsung’s mobile division, its biggest profit generator, fell 30% from a year earlier as the company faced more competition from Apple and a flurry of low-cost Android phone makers. The mobile division’s contribution to Samsung’s bottom line dropped to 61% from 76% in the first quarter of this year. Profit margin fell to 15.5% from 17.7%. That is the lowest profit margin for the division since the fourth quarter of 2011. Apple’s gross margin was 39.4% for the quarter ended in June, a rise from the same period a year earlier.

“Prospects for growth remain unclear as competition over global market share intensifies in the mobile industry,” Samsung said.

While Samsung expects the impact of a stronger won to diminish in coming quarters, the company said the second half “will remain a challenge,” as profitability in its mobile unit might suffer because of a heated race over price and products. Analysts say Samsung will have little choice but to cut smartphone prices because customers will find less reason to pay double or triple the price for a Galaxy phone over low-cost models made by Chinese brands. Samsung might need to increase its focus on making smartphones in the sub-$200 range, they said.

The company said it would find ways to produce its high-end phones more cost effectively, through savings in research and development and better management of its supply chain.

In China, where Samsung faces formidable competition, Mr. Kim said the company would focus on a smaller number of models that boast some features of its high-end phones while competing on price with low-end and midrange local rivals. In particular, Mr. Kim said that large-screen phones would be crucial to the company’s approach.
Research firm IDC said Samsung shipped 74.3 million smartphones in the quarter, far below the 90 million expected by analysts, despite the company’s launch of a new flagship model, the Galaxy S5, in the second quarter.

Samsung didn’t disclose how many smartphones it sold, but said it expects its sales of mobile devices to increase in the second half with the rollout of flagship products and new models.

The company also disappointed some investors on dividends, saying that executives were still deciding how much of its $59 billion cash pile it needs to allocate to investments to stay competitive in semiconductors and components.

Robert Yi, Samsung’s head of investor relations, said on the earnings call that the company’s interim dividend this year will remain unchanged at 500 won (49 U.S. cents) a share, because it needs to retain cash to invest further.

source: Wall Street Journal