Samsung Lands Record Profits for Q2, Still Weaker than Expected

Samsung Electronics Headquarters

Samsung Electronics, the world’s largest television and mobile phone manufacturer, has forecast weaker than expected profits for the second quarter, prompting concerns among some investors that the company’s smartphone business may have already peaked.

The company recently issued a quarterly earnings guidance indicating an estimated operating profit of $8.3 billion from April to June. Most analysts had expected profits closer to $8.89 billion.

Samsung Electronics’ shares have seen a sharp decline since several brokerages downgraded their outlook for the firm in early June. Reuters reports that the company’s shares had plunged another 4.3 percent as of July 7.

The success of Samsung’s smartphone business has been key to the company’s recent growth. Industry observers however note that sales of the company’s Galaxy phones have begun to wane as strong competition emerges in some of Samsung’s most important markets.

Worse than expected

“The slowdown in its handset business appears to be worse than expected and the disappointing result simply reinforces the view that Samsung’s growth momentum is slowing,” Lee Se-chul, an analyst at Seoul-based Meritz Securities, told the BBC.

Samsung has enjoyed extraordinary success in the smartphone segment over the past few years. The Galaxy S, powered by the free Android platform, saw the company replace Nokia as the world’s largest mobile phone maker last year.

The huge popularity of the Galaxy series had also allowed the company to surpass Apple, whose iPhone had set the standard for smartphones five years earlier.

Samsung now accounts for nearly 95 percent of the Android smartphone sector’s profits worldwide. Analysts note that the company’s operating profit forecast of $8.3 billion is actually a record, and is some 47 percent higher than a year ago. But all this has failed to arrest the slide in the company’s handset sales. Shipments are expected to increase by only four to eight percent during the second quarter.

Apparently, a few investors have raised concerns about the company’s marketing expenses. Samsung spent more on marketing than research and development in 2012.

The Galaxy S4 was launched with a glitzy, Broadway-style show last March even as the company invested heavily on distribution channels, opening brand shops in 1,400 Best Buy stores across the United States.

“I think Samsung spent on more marketing expenses than expected because of the launch of the Galaxy S4 smartphone, which led the company’s results to miss the market consensus,” Nho Gheun-Chang, an analyst at HMC Investment Securities, told Reuters.

Are wearable devices Samsung’s future?

Most industry observers however agree that much of Samsung’s troubles in the handset segment are centered around China — the world’s biggest market for smartphones.

More and more Chinese consumers are buying mid to low end smartphones manufactured by Huawei and ZTE. When coupled with any VOIP service available in that country, Chinese-made smartphones can offer users considerable savings.

Some analysts have suggested that wearable devices might be the way forward for the company. “Diversification is key,” said Jeff Kim of Hyundai Securities. “Wearable devices are the next stage in a saturated industry that needs constant innovation to survive.”

Samsung has, in fact, applied for a trademark for “Samsung Gear” in the United States. But many doubt whether wearable devices can provide a substantial boost to Samsung’s earnings. “It’s more likely to complement its earnings at best,” said Byun Han-joon of KB Investment and Securities.

Jung Sang-jin, an analyst at Dongbu Asset Management, agrees. “The problem is no one is sure whether these products can really wow investors and consumers,” he said.

There are a few bright spots for the company, nonetheless. Samsung is expected to report higher earnings in the current and fourth quarters as the latest Galaxy S4 picks up and new products hit the market. Prices of memory chips, another segment in which Samsung leads, are also expected to remain strong throughout this year, according to Reuters.

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