Samsung sees Q1 profit decline amid market saturation

Samsung projects operating profit will be down in the second straight quarter of decline

Samsung Electronics on Tuesday warned that it would post a drop in operating profit during the first quarter of 2014.

The largest smartphone maker said consolidated operating profit would be an estimated 8.4 trillion Korean won (US$7.9 billion), down 4.3 percent from 8.78 trillion won a year earlier.

It said consolidated sales would be about 53 trillion won, up slightly from 52.87 trillion won in the first quarter of 2013.

Both figures are median values for ranges it provided. The manufacturer noted in a release that South Korean regulations do not allow earnings guidance to be stated in a range. It did not provide any figures for its smartphone business.

Samsung declined to comment on what was responsible for the latest numbers.

Neil Mawston of Strategy Analytics said, "Samsung is effectively in a holding pattern at the moment, as it tries to maintain its leadership position in multiple consumer electronics categories while simultaneously attempting to develop "the next big thing" like smartwatches or smartglasses that will reinvigorate profit growth."

The earnings notice preceded an official Samsung announcement Tuesday of the Galaxy Ace Style, a midrange smartphone with a 1.2 GHz dual-core processor, 4-inch touchscreen display and a 5-megapixel camera.

Samsung said the Android 4.4 KitKat-powered Ace Style is "designed to support and power young social consumers." It did not announce a price but said the handset would be available later in April.

Tom Kang, an analyst with Counterpoint Research in Seoul, said Samsung has to increase its focus on such less expensive phones to help its bottom line.

"Currently, the profit margins on the premium phones are very good but (Samsung is) not paying attention to the mid- and low-tier range," Kang said in a phone interview. "But that's the majority of the volume these days, so if they want to increase their profitability, they need to find a way to make the mid-low tier profitable."

Kang added that cellular operators don't want to spend as much on subsidies for Android phones as they used to, and that's also hurting Samsung.

In February, the company debuted its latest flagship smartphone, the Galaxy 5S, which has an improved camera and a fingerprint reader. It came after research group Gartner said that Samsung's market share fell slightly in the last quarter of 2013, citing a saturated high-end smartphone market in developed countries.

In January, Samsung said it expected 2014 would be a repeat of last year's pattern, with a weak first half and a strong second half.

"It will be challenging for Samsung to improve its earnings in the first quarter as the weak seasonality of the IT industry will put pressure on demand for components and TV products," the company said when announcing its fourth-quarter and fiscal 2013 results.

It had reported overall operating profit of 8.31 trillion won for the October-December period, down by close to 6 percent from 8.84 trillion won in the last quarter of 2012.

Operating profit is a useful measure because it shows the performance of a company's core operations, excluding other factors like investments.

Samsung's latest predictions follow flat profits in the company's smartphone and tablet business in the last quarter of 2013, when it posted 5.47 trillion won, unchanged from a year earlier. Although revenue was up 8.7 percent to over 32 trillion won, Samsung's mobile business suffered due to seasonally increased marketing expenditures and an unspecified one-off expense.

Samsung is scheduled to announce its full results for the first quarter of 2014 later this month.

Copyright © 2014 IDG Communications, Inc.

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