Samsung has estimated that its April to June operating profit likely fell 24.5 per cent from a year earlier

Samsung headed for worst results in two years

Samsung Electronics has issued unexpectedly weak quarterly earnings guidance which put it on track for its worst results in two years.

The South Korean company said today that it saw better business conditions in the third quarter, but it faces slowing market growth, intensifying price competition at the lower end and the looming threat of Apple’s next iPhone.

While smartphones drove Samsung to record profits last year the market is maturing, with research firm IDC predicting global shipments growth will slow to 19.3 per cent this year from 39.2 per cent in 2013, while average sales prices will also drop.

Despite the potential damage to its margins, 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 cheaper Chinese rivals such as Huawei Technologies and Lenovo Group in an effort to defend its market share.

"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.”

The company said it "cautiously expects" a better third-quarter outlook with the release of a new smartphone line-up, 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.

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 line-up but we found that this has not happened yet and will take more time," he said.

Samsung estimated that its April to June operating profit likely fell 24.5 per cent from a year earlier to 7.2 trillion won (£4.16bn), 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.

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."

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