Samsung Profit Falls

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The FINANCIAL — Samsung Electronics Co. continued to struggle in the first three months of the year, raising the stakes for the success of its new flagship Galaxy S6 smartphone, according to Nasdaq.

Samsung said on April 28 its net profit for the three months ended March 31 was 4.63 trillion Korean won ($4.3 billion), down 39% from a year earlier. The result was worse than market expectations for a 30% decline, according to the average forecast of a Dow Jones survey of eight analysts.

The company’s mobile division limped along as consumers flocked to Apple Inc.’s new iPhones and devices made by Chinese brands like Xiaomi Corp. The division’s operating profit fell to 2.74 trillion won, 57% lower than a year earlier.

In one bright spot, mobile operating profit margins rose to 10.6% for the quarter, an improvement from the 7.5% in the fourth quarter of 2014. The company attributed the rise to lower marketing costs and better sales of midrange smartphones.

Company executives have said they are aiming to maintain mobile profit margins in “the low double digit” percentage range–a far cry from the nearly 20% margins that Samsung enjoyed in 2012 and 2013. To do so, the company has pledged to tighten its belt on marketing expenditures.

The mobile division’s fortunes are largely tied to the strength of the Galaxy S6 and its curved-screen companion the Galaxy S6 Edge, which went on sale in 20 countries around the world on April 10.

The pair of new Galaxy phones could account for as much as a quarter of total smartphone sales in the second quarter, analysts say. That would likely help lift margins since the phones, particularly the Galaxy S6 Edge, are priced at a premium to Samsung’s lower-end smartphones.

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Samsung hinted at an earnings improvement in the second quarter as sales of the new smartphones ramp up, helping its semiconductor business, which supplies the chips that power the Galaxy S6.

“With premium smartphone sales entering into full swing, the [components division] is expected to see demand in growth for its semiconductor products,” the South Korean company said in a statement.

Local analysts estimate Samsung to have shipped 82 million smartphones in the first quarter. The figure represents a drop from 89 million units shipped during the same period a year ago, according to research firm Strategy Analytics.

The company didn’t disclose shipment figures.

Apple, meanwhile, said this week it sold 61.2 million iPhones in the three months ended March, up 40% from the year- earlier period. Many of those sales came in emerging markets including China, helping the Cupertino, Calif.-based company register a 33% increase in net profit.

Overall, Samsung’s mobile division continued to take a back seat to its components division, which began accounting for more than half of the company’s total operating profits from the third quarter of last year.

The components business contributed 57% of operating profits in the latest quarter.

“As the specification of smartphones in general become increasingly sophisticated, demand for mobile chips is expected to grow,” the company said.

Margins for the chip unit continued an upward climb to 28.5% thanks to tight supply and solid pricing. This compares with a 20.8% margin logged in the year-ago period and a steady rise from a low of 8.8% marked at the beginning of 2012 when the company began its mobile business growth spurt.

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Samsung’s semiconductor business is divided into two parts: the profitable memory-chip business and the beleaguered logic-chip division that manufactures microprocessors for clients like Apple and Samsung’s own mobile unit.

Chip margins are likely to inch higher up later this year, getting an extra leg up from the company’s Exynos mobile processors that power the Galaxy S6 phones together with the anticipated recovery in microprocessor demand from Apple in the second half. Some analysts say margins could top 30% toward the end of the year, hitting a five-year high.

Total company revenue slipped 12% to 47 trillion won, in line with estimates provided by Samsung earlier this month.

Samsung is also starting to dig deep into its cash pile, which at its peak late last year had risen to about 67 trillion Korean won. The 56 trillion won that the company says it now has in its coffers is the lowest level since the fourth quarter of 2013, as Samsung announces big-ticket capital expenditures, including new factories in South Korea and Vietnam.


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