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 Though the South Korean company said it saw better business
conditions in the third quarter, it faces slowing market growth,
intensifying price competition at the lower end and the looming
threat of Apple Inc's next iPhone.
"The earnings deliver a harsh reality check to Samsung that it is
not Apple, but Samsung. Its strategy of selling phones at expensive
prices will not work anymore, as Chinese rivals also offer good
enough phones at much cheaper prices," Lee Seung-woo, a technology
analyst at IBK Securities, said.
"Samsung needs to review its smartphone strategy," he said.
While smartphones drove Samsung to record profits last year, the
market is maturing. Research firm IDC predicts global shipments
growth will slow to 19.3 percent this year from 39.2 percent in
2013, while average sales prices will also drop.
Some analysts said Samsung may have no choice but to slash prices
for mid-to-low tier devices, where growth is stronger, to go after
Chinese rivals such as Huawei Technologies Co Ltd and Lenovo Group
Ltd. While that would help defend market share it would also hurt
margins, curbing its earnings recovery in the short term.
The company said it "cautiously expects" a better third-quarter
outlook with the release of a new smartphone lineup, lower marketing
costs and a seasonal lift in demand for its memory business. Its
flagship Galaxy Note 4 is expected to hit the market in September.
Samsung's second-quarter guidance was well below the mean forecast
of 8.3 trillion won from a Thomson Reuters I/B/E/S survey of 38
analysts.
CIMB analyst Lee Do-hoon, one of the few to accurately predict
Samsung's second-quarter guidance, said the company appeared to be
taking longer to address challenges it is facing in the mid-to-low
end of the market. He did not expect a meaningful third-quarter
earnings recovery and predicted that analysts would cut their
forecasts.
"Samsung has been talking about strengthening its mid-to-low tier
lineup but we found that this has not happened yet and will take
more time," he said.
Shares in Samsung, down more than 10 percent since the start of June
through Monday, rose as much as 2.1 percent after the earnings
guidance, as some analysts said the second-quarter results may mark
a low point in earnings. The stock later gave back much of that
gain.
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SAGGING PROFITS
Samsung estimated on Tuesday that its April-June operating profit
likely fell 24.5 percent from a year earlier to 7.2 trillion won
($7.12 billion), the sharpest percentage drop since the first
quarter of 2011 and the weakest level since a 6.5 trillion won
profit in the second quarter of 2012.
The figure, which marks the third straight quarter of annual profit
decline, was far below market expectations as sales fell for the
first time since the company adopted new accounting standards in
2009.
In a separate statement, Samsung said second-quarter earnings would
be hit by slower global smartphone market growth, competition in
China, inventory buildup in Europe and the strength of the won,
which appreciated by around 9 percent on average against the dollar
during the second quarter.
But analysts on average expect the streak of on-year profit declines
to extend into the third quarter, with Apple widely tipped to launch
a successor to the iPhone 5 to compete with Samsung's high-end
smartphones. The prior year's record 10.2 trillion won profit could
also be difficult to beat.
"Samsung is most competitive in the mid-to-high end products, but
market demand is being driven in the lower-tier end where the
biggest issue is price," said HMC Investment analyst Greg Roh.
"I think problems for the company's mobile division will continue in
the third quarter."
(Additional reporting by Hyunjoo Jin; Editing by Tony Munroe and
Stephen Coates)
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