Samsung earnings disappoint as sales of Galaxy S4 fall short

Samsung Electronics missed already modest expectations for its quarterly earnings guidance today, deepening worries that its smartphone business may have peaked, as growth in sales of its Galaxy phones begin to wane and new rivals emerge to eat away at its market share.

The Galaxy S, powered by Google's free Android platform, propelled the South Korean firm into the top rank of smartphone makers last year, overtaking Apple whose iPhone had set an industry standard five years earlier.

Now investors fear Samsung may also follow in the footsteps of Apple and other once-mighty players that are struggling with shrinking margins, in an industry where companies live and die by their ability to stay ahead of the innovation curve.

“Is Samsung’s smartphone story now over? Not quite yet. It’s growth is indeed slowing due largely to disappointing sales of the S4,” said Jung Sang-jin, a fund manager at Dongbu Asset Management, which owns Samsung shares.

The disappointing earnings estimate by Samsung, which has had a track record of beating even the most bullish forecasts, sent its shares down more than 3 per cent today.

They have dropped 17 per cent since early June, hit by a series of brokerage downgrades. The share price reflects concerns about Samsung’s handset margins, with its mobile business generating 70 percent of the tech giant’s total profit.

The fall in the share price equates to a drop in market value of 39 trillion won (€26.4 billion), or worth the combined market capitalisation of Sony and LG Electronics.

"One of the biggest risks for Samsung Electronics going forward is that 70 per cent of total operating profit comes from mobile business. Diversification is key. Samsung needs to engage in active business transition until end-2014," said Jeff Kim, an analyst at Hyundai Securities.

To be sure, Samsung’s 9.5 trillion won (€6.4 billion) operating profit forecast, up 47 per cent from a year ago, is a record and it is expected to report higher earnings in the current and fourth quarters as sales of its latest Galaxy S4 phone pick up and new products hit the stores. Prices of memory chips, another industry which Samsung holds the lead, are also expected to remain strong.

The guidance, released ahead of full quarterly results due on July 26th, was worse than an average forecast of 10.16 trillion won in a Reuters poll of 43 analysts.

Samsung spent more on marketing than R&D in 2012 for the first time in at least three years, and the S4 was launched in March with a Broadway-style show in New York. The company also invested heavily in distribution channels including opening brand shops in 1,400 Best Buy stores in the United States.

But the glitz and glamour has failed to arrest a slide in handset sales growth, and shipments are seen rising only 4 per cent to 8 per cent in the second quarter from the previous quarter.

Handset margins are also being squeezed, as consumers in countries like China - the world’s biggest smartphone market - opt for stripped-down cheaper devices.

Competition is getting intense with Chinese manufacturers such as Huawei Technologies and ZTE making ground in the popular mid- to low-end market.

Nokia, once the handset king, unveiled two back-to-basics 3G phones this week. They allow access to popular applications such as Facebook and Twitter, and sell for just $68.

“There’s still a big uncertainty about how Samsung will respond to the low-end market,” said Brian Park, an analyst at Tong Yang Securities, referring to its plans to launch a device based on the open-source Tizen operating system.

Agencies