The price of overconfidence? Samsung’s profits sinks to two year low

The price of overconfidence? Samsung’s profits sinks to two year lowSamsung Electronics’ earnings fell by almost a quarter in the three months to June, after the South Korean group was caught out by unexpectedly low demand for its smartphones in China and Europe.

Operating profit for the second quarter was about Won7.2 trillion ($7.1 billion), down from Won9.5 trillion a year earlier, the company said on Tuesday in preliminary guidance ahead of a full earnings statement later this month.

That would be the smallest profit since the second quarter of 2012. It was also far short of a Won8.1 trillion analysts’ consensus forecast compiled by Bloomberg, and the company sought to calm “concerns over uncertainties” by issuing a performance update alongside the earnings guidance — something it had never done before.

The statement said a market slowdown and heightened competition had resulted in a build-up of unsold smartphones in China and Europe, while sales of tablet devices had also been “sluggish”. The weaker performance of these businesses had hurt its mobile processor chip and display screen businesses, said Samsung, which also stressed the impact of a 12 per cent rise in the South Korean won against the US dollar over the past year.

Investors appear to have anticipated the weaker results, which were flagged by a recent comment from Samsung’s financial director that the quarter’s earnings were “not that good”.

Samsung shares had fallen heavily over the past month but rose 0.4 per cent on Tuesday, in a possible response to the company’s forecast that third-quarter performance would be better, driven by stronger demand for memory chips and the launch of new smartphones.

But analysts were cautious about this guidance, noting that the company’s optimistic outlook for smartphone demand had cost it heavily in the second quarter as it poured money into marketing to avoid being saddled with unwanted smartphones.

“This poor inventory management is not worthy of the Samsung name,” said Daniel Kim at Macquarie, criticising the company for “overconfidence on their products, and misreading the market”. Samsung will soon face a stern new challenge at the high end of the market, he added, with Apple expected to launch a larger-screen version of the iPhone in September.

Samsung said the second quarter was a “seasonally weak period for smartphone demand in China”, the world’s biggest smartphone market, and stressed the future opportunities in the country from cutting-edge 4G handsets.

It also said it plans to offer more innovative wearable devices and “smart” home appliances, though its foray into the former, with products such as the Gear smartwatch, has yet to contribute to earnings.

But Peter Yu, an analyst at BNP Paribas, said the company was facing a steady loss of market share in China to homegrown groups such as Xiaomi, and that the weak quarter was not simply a result of external forces.

“Other cellphone companies are not having this inventory issue,” he said. “The sales fell short of expectations. It’s not like Samsung’s shipment growth is slowing in line with the market — it’s more drastically slowing down.”

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