Blame the Galaxy S6: Samsung earnings miss forecasts

Samsung’s second-quarter profit missed analysts’ estimates after misfiring on its Galaxy S6 sales strategy and losing ground in emerging markets to Chinese smartphone brands.

Net income, excluding minority interests, fell to 5.63 trillion won ($6.71 billion) in the three months ended June, the Suwon, South Korea-based company said on Thursday. That compares with the 6 trillion-won average of estimates compiled by  BLOOMBERG and is the fifth straight decline. The company doubled its interim dividend and indicated price cuts for S6 models.

Samsung misread demand for the high-end devices released in April, failing to produce enough curved screens for the popular Edge version while the traditional model struggled to challenge Apple’s bigger iPhones. The company advanced the release date of its next device for high-end users to combat slowing demand in China amid gains by Xiaomi.

“Samsung’s new S6 helped fatten up component profits but it failed to meet the golden timing of demand for the device because of the supply issue,” said Lee Seung Woo, an analyst at IBK Securities in Seoul. “Sales of S6 devices are expected to shrink further in the third quarter and its smartphone slump could spill over to other component businesses, including chips.”

Shares of Samsung had fallen 1.6 per cent to 1,243,000 won at 9.18am in Seoul. The stock has lost 6.3 per cent this year, compared with a 6.6 per cent gain in the Kospi index. Samsung will pay a dividend of 1000 won a share, compared with 500 won a year earlier. Operating profit at the mobile phone unit slumped to 2.76 trillion won, from 4.42 trillion won a year earlier. Samsung will add more middle- and low-end models, change pricing on the S6 and cut spending in the phone division.

“Sales momentum for high-end products will be maintained by adjusting the price of the Galaxy S6 and S6 Edge and introducing new premium smartphone models,” the company said in an emailed statement. Samsung, which had projected record sales for the S6, started making curved screens at a third factory about two months earlier than planned to meet demand for the Edge.

‘CHINA IS BECOMING A PROBLEM CHILD’

The world’s biggest smartphone maker saw its share in China slide to 8.6 per cent in the second quarter, from 9.8 per cent in the first quarter, according to IHS. Xiaomi had 18.2 per cent, followed by Huawei’s 16.2 per cent and Apple’s 11.6 per cent.

“China is becoming a problem child for Samsung that it needs to fix,” said Neil Mawston, executive director of  research firm Strategy Analytics. Samsung will sell 40 million units of the S6 models this year, compared with an earlier projection of 43 million, said Lee Jae Yun, an analyst at Yuanta Securities Korea Co. Lee also cut Samsung’s full-year smartphone sales target to 310 million units from 340 million. Samsung announced this week that it would hold a “Galaxy Unpacked” event on August 13, with the company due to unveil its next Note device and a larger S6 Edge. Profit at Samsung’s semiconductor business, which makes memory chips and applications processors, was 3.4 trillion won, compared with 1.86 trillion won a year earlier.

Samsung’s chip division was the biggest beneficiary of the new S6 as its mobile unit switched to in-house applications processors and modem chips instead of those from Qualcomm. The company is said to have won orders for the main processors in the next iPhone. Doh Hyun Woo, a Seoul-based analyst at Mirae Asset Securities said in a July 17 report: “Smartphone sales, which drive demand for semiconductors, aren’t likely to rebound sharply in the second half, while overall supply is expected to increase from the first half.”

The consumer-electronics division, which oversees TVs and home appliances, posted a 210 billion-won profit in the quarter, from 770 billion won a year earlier. Gains in the won made Samsung products more expensive in export markets, as the South Korean currency advanced about 10 per cent against the euro in the 12 months ended June.

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