Samsung guidance reveals smartphone struggles

Samsung’s Q3 2014 pre-earnings guidance concedes the Korean giant is finding it tough to keep growing its smartphone shipments. Revealing that profits are likely to come in well below analyst expectations, Samsung pinned the blame mainly on its mobile business.

Guidance for the third quarter is now that Samsung’s sales will amount to around 47 trillion Korean won and profits will be around 4.1 trillion Korean won. In Q3 2013 Samsung managed over 10 trillion won profit and analyst expectations for this quarter were for 5.3 trillion won, so by any objective measurement things are moving in the wrong direction.

Here’s how Samsung described the situation: “Samsung Electronics’ 3Q earnings is expected to decrease substantially quarter-on-quarter as a result of declines in the mobile business due to intensified smartphone competition, which also had an adverse effect on the performance of the OLED and S.LSI businesses, and weak seasonal demand for the CE business, including TVs.”

In other words, Samsung doesn’t just rely on revenues from the phones themselves, but from the components its supplies for the phones. Additionally, this decline is not the result of lower shipments, rather smaller margins.

“Smartphone shipments increased marginally amid intense competition. However, the operating margin declined due to marketing expenses related to aggressive promotions and lowered ASP (Average Selling Price) driven by reduced proportional shipments of high-end models coupled with price decreases for older smartphone models,” said the guidance.

As we concluded last quarter, Samsung’s main problem isn’t so much Apple, which occupies a unique super-premium price tier, but the fact that most smartphone growth is in developing markets where ASP is typically far lower. A bunch of Chinese players, including as TCL Alcatel, Lenovo and Xiaomi are competing very aggressively both within China and internationally and that’s squeezing Samsung’s smartphone margins.

In other recent Samsung news the company has revealed it paid Microsoft over a billion dollars in Android-related license fees and royalties, which can’t be helping its margins. Also it will be spending over 15 trillion won on a new semiconductor fab, due to open in 2017, which indicates a possible shift in strategic emphasis towards the component manufacture side of things.