Samsung Struggles, Expects Decline in Earnings

Samsung Struggles, Expects Decline in Earnings

South Korea-based smartphone maker, Samsung, estimates a greater-than-expected decline in profits and sales amid stiff competition and slowing market growth


By Larry Darrell on Jan 7, 2014 at 6:19 am Est

Samsung (SSNLF), the world's largest smartphone maker provided earnings guidance for 4QFY13, and estimates a decline in its quarterly operating profits for the first time in more than two years. The company cited fierce competition and slowing market growth for the expected drop in earnings.

The company has guided operating profit of $7.8 billion (8.3 trillion won), reflecting a decline of 6.1% from the same period last year. The company’s profit estimates were significantly lower than analysts' estimates of 9.65 trillion won. Samsung posted growth of 26% in its profits in the previous quarter (3QFY13).

Samsung's sales for the quarter are likely to be around 59 trillion won, reflecting an increase of 5.3% year-over-year (YoY). However, this is the slowest rate of increase the company has experienced in the last two years. The company’s sales estimates are lower than analysts' average estimate of 61.5 trillion won.

The company earns more than two-thirds of its total profits from its mobile devices unit, which is facing fierce competition from long-standing rival, Apple (AAPL) as well as local brands in China. Analysts expect the company to record an operating profit of 6.2 trillion won from its mobile division, reflecting an increase of 14% YoY, but a decline of 8% quarter-over-quarter (QoQ). In its fourth quarter, according to KB Investment & Securities Co., Samsung shipped 91 million smartphones; the company sold 87.3 million in the previous quarter.

The company’s share price fell by 4.6% due to investors' concerns regarding a slowdown in the company’s growth, resulting in an erosion in its market cap by $9 billion at the beginning of the new year. Apple's deal with China Mobile (CHL) which will allow the Cupertino-based smartphone maker to offer the iPhone 5S and the 5C to the world’s largest market is likely to hurt Samsung even more.

Apart from the chances that Apple will take away a portion of Samsung's high-end market share, local brands offering phones priced as low as $100 continue to corner the company as well.

One of the reasons Samsung has been able to bag significant market share (32% of the global smartphone market) in the mobile market is because of its large-sized phone displays. There are rumors that this year, Apple may also introduce larger displays which could threaten Samsung’s position.

According to the International Data Corporation (IDC), smartphone shipments will reach 1.7 billion units by 2017, and average selling prices (ASPs) will decline from $337 to $265 over the same period. Samsung is still the leader in terms of market share but changing industry dynamics - strongly influenced by customers swaying towards cheaper phones - will put pressure on the company's margins. In 2013, the company witnessed slowing growth in its mobile division due to higher marketing costs and declining ASPs.

2014 will be even more challenging for Samsung owing to strong competition, a maturing market, and declining ASPs. The squeeze will significantly impact the bottom line as the company earns two-thirds of its operating profits from its mobile division.

Samsung will release its earnings on January 24.

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