Samsung third-quarter earnings collapse

Samsung Electronics has warned that its third-quarter earnings would be 60 per cent lower than a year earlier, as its smartphone division reeled from a competitive assault by cheaper Chinese competitors.

In preliminary guidance on Tuesday, the South Korean group said operating profit for the three months to September 30 would be Won4.1tn ($3.8bn) – down from Won10.2tn a year before and Won7.2tn in the second quarter. Revenue was down 20 per cent year-on-year to Won47tn.

The guidance fell well short of analysts’ predictions – a survey by Bloomberg had given a consensus forecast of Won5.3tn for operating profit. But investors reacted bullishly on Tuesday morning, pushing Samsung’s shares up 0.8 per cent to Won1.151m.
“It came out better than the worst fears,” said Peter Yu, an analyst at BNP Paribas.
This year has brought the reversal of a trend under which Samsung’s mobile phone division drove consistent increases in profit, growing to account for nearly three-quarters of company earnings.
A major reason for the company’s sliding smartphone sales has been the growing threat from Chinese competitors such as Huawei, Lenovo and Xiaomi, which are enjoying growing sales in China and other Asian markets.
Samsung’s smartphone market share was 25 per cent in the second quarter, according to the research group IDC – still making it comfortably the global leader but well down from the 32 per cent share reported a year before.
As it did in the previous quarter, Samsung issued an explanatory statement – a step apparently aimed at addressing investor jitters.
Samsung said its shipments of smartphones had increased “marginally”, stressing the impact on margins of increased marketing expenditure, while lower-end phones accounted for a growing share of sales.
There was a better performance from the memory chip division, which is benefiting from a period of stronger pricing after the elimination of some smaller producers from the sector.
The company reported increased earnings from the division, helped by strong demand for chips used in PCs and servers, while technological advances lowered costs.
Analysts expect the share of Samsung’s profit from semiconductors to continue to grow, and the company signalled its commitment to the business by announcing on Monday a Won15.6tn plan to build a chip factory in South Korea.
In a brief outlook statement, Samsung said it “cautiously expects” higher shipments of smartphones in the fourth quarter, promising to develop new mid to low-end phones with “competitive positioning on both hardware specs and price”.
BNP Paribas’ Mr Yu said Samsung was “in the middle of a business transformation”, as it seeks to overhaul its mid- and low-end smartphone offerings to capitalise on the fastest-growing part of the sector.
“They have been criticised for offering far less specs for more money,” he said. “They thought the phones would sell because of the Samsung brand but it didn’t work that way.”