Bloomberg News

Samsung Profit Drops as New IPhones Win Sales, Won Gains

January 24, 2014

Galaxy Note 3

An event employee holds up a Samsung Electronics Co. Galaxy Note 3 smartphone at the launch event for the company's Galaxy Note 3 smartphone and Galaxy Gear smartwatch in Seoul. Photographer: SeongJoon Cho/Bloomberg

Samsung Electronics Co. (005930), the world’s biggest maker of smartphones, posted its slowest profit growth since 2011 as new Apple Inc. (AAPL:US) iPhones lured high-end customers and gains in the Korean won curbed the value of overseas sales.

Net income, excluding minority interests, rose 5.4 percent to 7.22 trillion won ($6.7 billion) in the three months ended Dec. 31, the Suwon, South Korea-based company said in a filing today. That’s the slowest since profit fell in the third quarter of 2011.

Asia’s biggest technology company is facing a squeeze on profit margins as new iPhones and cheaper devices made by Lenovo Group Ltd. (992) and Huawei Technologies Co. crimp growth of Samsung’s Galaxy devices. Currency moves cut about 700 billion won from earnings, and the company made bonus payments to workers and boosted marketing as it prepares to release its new S5 high-end device to battle Apple.

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“Earnings will remain stagnant this year as the explosive growth of the past two to three years seems to have ended,” said Lee Sun Tae, a Seoul-based analyst at NH Investment & Securities Co. “Although the lower-end smartphone market will continue to grow, the scale of profit from that segment doesn’t compare to the high-end market so the growth seems limited.”

Samsung, which gets more than 80 percent of sales from outside its home market, has been hit by the rising South Korean currency, which cuts the value of overseas sales. The won was the best-performing major Asian currency against the U.S. dollar in the fourth quarter with a 2.4 percent gain.

Worker Bonus

The company also paid a special bonus of 800 billion won to workers to celebrate the 20th anniversary of Chairman Lee Kun Hee’s new management strategy, it said.

Shares of Samsung rose 0.6 percent to 1,307,000 won at the close of trade in Seoul. Before today, the stock had fallen 18 percent from its record close of 1,576,000 won on Jan. 2, 2013, wiping out $38 billion of market value, more than double what Sony Corp. is worth.

Capital spending in 2014 will be similar to last year, it said. The company spent 23.8 trillion won on capital expenditure in 2013.

Fourth-quarter operating income at Samsung’s mobile unit, the company’s biggest profit driver, was 5.47 trillion won, little changed from a year earlier and down from a record 6.7 trillion-won profit in the quarter ended Sept. 30, the company said.

First-quarter smartphone shipments are expected to rise at a “mid single digit” rate from the fourth quarter, while tablets are forecast to gain at a “high single digit” pace.

Wearable Devices

Samsung, which sells about one of every three smartphones worldwide, plans to release the Galaxy S5 by April, pairing it with the successor to its Gear smartwatch, Lee Young Hee, executive vice president of the mobile business, said in a Jan. 6 interview.

The company is counting on new features to spark sales after its predecessor, the S4, fell short of analyst expectations amid competition from Chinese makers bringing out smartphones costing as little as $100.

Samsung will announce at least one other wearable device this year, Lee said without elaborating, as the company also releases new tablet computers to take on Apple’s iPad.

“Samsung’s two major challenges for 2014 are to maintain its mobile-phone leadership in China and the U.S., while simultaneously growing its tablet business quickly enough to knock Apple iPad from its perch,” said Neil Mawston, an executive director at researcher Strategy Analytics. “A flood of Asian rivals from China and India, such as Lenovo, as well as a product refresh from Apple, are pressuring Samsung.”

Apple Shipments

Apple shipped 33.8 million smartphones in the quarter ended Sept. 30, the iPhone maker said. The company started selling the iPhone 5s and the cheaper 5c in September. Samsung shipped 9 million units of the S4 in the fourth quarter, according to a Jan. 8 report from Daewoo Securities Co.

Samsung also faces a new threat from Apple after the Cupertino, California-based company struck a distribution deal with China Mobile Ltd., the world’s biggest carrier by users.

Samsung is the top seller in China, where large-screen devices such as its 5.7-inch Note have won customers who prefer one device for checking e-mail, browsing the Web and watching videos. The iPhone has a 4-inch screen.

“It’s critical that Samsung comes up with new designs in order to protect its market share from Apple in the high-end segment,” said Jae H. Lee, a Seoul-based analyst at Daiwa Securities Group Inc. “No rapid earnings growth is expected this year as margins at its handset business will remain pressured.”

Chip Rally

To address such challenges, the Galaxy maker’s next Note handset may use a three-sided display so messages can be read from an angle, Samsung’s Lee said Jan. 6. The latest model will be released in the second half of this year and be aimed at the high-end segment.

Operating profit at Samsung’s chip division, a supplier to Apple, was 1.99 trillion won, compared with 1.42 trillion won a year earlier.

A fire at an SK Hynix Inc. factory in Wuxi, China, in September pushed up chip prices, which remain near three-year highs. The price of the benchmark DDR3 2-gigabit dynamic random-access memory chip reached $2.91 on Jan. 23, according to DRAMeXchange, Asia’s largest market for the components. That compares with $1.60 on Sept. 4, when the fire hit.

“The semiconductor business will perform better this year than last year,” said Lee Do Hoon, an analyst at CIMB Group Holdings Bhd in Seoul.

Sluggish TVs

Operating earnings at Samsung’s display division, which dominates the market for panels using organic light-emitting diodes, slumped 90 percent to 110 billion won amid slowing high-end smartphone sales and sluggish demand for TVs.

Operating profit at Samsung’s consumer-electronics division, which includes the TV and home-appliance businesses, fell to 660 billion won from 700 billion won a year earlier.

Samsung said it will release its first TV set with a bendable screen later this year. Viewers can change the display from flat to curved by touching a button, it said Jan. 7.

To revive demand, the company is shifting its focus to less-expensive ultra high definition screens, which offer four times the resolution of conventional displays.

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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