Samsung’s Second-Quarter Operating Profit Hits 2-Year Low

Samsung Electronics Co. said its second-quarter operating income has declined to a two-year low, hit by the strong local currency and slowing demand for smartphones in China.

The South Korean company said Tuesday in its earnings preview that its operating income was 7.2 trillion won ($7.1 billion) for the three months ending June 30.

The quarterly profit represents a 24 percent drop from the previous year. It is below analysts’ expectations of about 8 trillion won.

The figure was the lowest since the second quarter of 2012, when Samsung’s income stood at 6.5 trillion won. Since then, Samsung’s operating profit never fell below 8 trillion won, largely driven by robust sales of Galaxy smartphones.

Sales fell 10 percent from the previous year, to 52 trillion won, in the latest period. It did not provide its quarterly net profit and breakdown for its four business divisions.

Samsung, which usually does not elaborate on its financial performance during the earnings preview but waits until its full earnings release at the end of the month, issued a rare statement to explain its disappointing result.

The company blamed the weak profit on the Korean currency’s appreciation against the U.S. dollar and the euro, as well as most emerging market currencies. The Korean won hit a 6-year high against the U.S. dollar earlier this month.

It also said sales of medium- and low-end smartphones were weak in the Chinese and some European markets, because of stronger competition and sluggish demand. Fewer consumers in China bought handsets that run on the 3G mobile network, as they waited for the growth of the faster 4G network.

Samsung, which had vowed earlier this year to aggressively expand its tablet sales, acknowledged it faced some challenges in selling tablet PCs. Consumers did not replace their tablet PCs as often as they did with smartphones, while smartphones with a giant screen of around 5 or 6 inches, such as its Galaxy Note series, replaced demand for small-sized tablet PCs that measure about 7 or 8 inches.

“Expectations have been lowered on Samsung,” said Will Cho, an analyst at KDB Daewoo Securities. “With intensified competition in the mid- and low-end smartphones, it will be tough to stay as lucrative as in the past.”

About three of every 10 smartphones sold globally were made by Samsung in 2013, and the company’s handset sales will likely improve during the current period. But Cho said how much profit it can take would be more important than how many handsets it can sell, because most sales growth would come from cheap smartphones.

In that cheap-smartphone segment, Samsung faces an uphill battle with brands like Xiaomi and Lenovo. Xiaomi, an upstart company that sold mostly in China and is gradually expanding in a few Asian countries, surprised the market with its $100-level smartphones that were snapped up by fans. Counterpoint Technology Market Research said last month that Xiaomi’s $130 smartphone Redmi was the most-sold mobile device in China in April, beating Apple’s iPhone and Samsung’s Galaxy.

Samsung shifted its focus to affordable smartphones, tablets and wearable devices, such as the Gear wristwatches, to offset falling profit, but they were yet to offset eroding profit in smartphones and main components in mobile devices that Samsung supplies — memory chips and display screens.

Despite the lower-than-expected profit preview, shares of Samsung traded 0.5 percent higher in Seoul bourse, as the firm gave an outlook that appeared to have calmed the market.

“The company cautiously expects a more positive outlook in the third quarter with the coming release of its new smartphone lineup,” it said. “Samsung expects stronger smartphone sales and this will have a positive impact on the company’s display panel businesses.”

The company is expected to announce an upgrade in the Galaxy Note series in the fall, around the time that Apple usually upgrades its iPhone.

This article appeared in print in the July 9th, 2014 edition of Hamodia.