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Samsung posts 19.6% fall in Q2 net profit

Samsung Electronics on Thursday (July 31) said its second-quarter net profit plunged nearly 20 per cent from a year ago to 6.25 trillion won (US$6.1 billion).

SEOUL: Samsung Electronics on Thursday (July 31) reported a near 20 per cent decline in second quarter net profit, due to increased competition from cheap Chinese devices in the key smartphone sector and a surging Korean won.

The South Korean electronics giant posted a net profit of 6.25 trillion won ($6.1 billion) -- its lowest figure for two years and down 19.6 per cent from the same quarter last year. Operating profit stood at 7.19 trillion won, down 24.6 per cent from a year ago, while sales tumbled 8.9 per cent to 52.35 trillion won.

"The second quarter was affected by several factors including the slow global sales of smartphones and tablets and escalating marketing expenditure to reduce inventory," the company said in its earnings report. "The appreciation of the Korean currency also chipped away at this quarter's operating profits, which amounted to about 500 billion won in missed revenues prompted by the foreign exchange market."

Samsung added that the second half of 2014 would "remain a challenge". The won is currently running at six-year highs against the dollar, impacting South Korea's export-driven economy.

Thursday's figures were in line with earnings estimates released earlier this month, when Samsung also issued an explanatory note attributing the profit decline to increased competition from cheap Chinese devices.

Samsung had expressed cautious optimism about a more positive third quarter with the release of its new smartphone line-up, and a much lower marketing spend compared to the second quarter. However, the next quarter will also see the competition heat up with the expected launch of the iPhone 6 by chief high-end rival Apple.

Alarm bells have been sounding for a while over Samsung's reliance on smartphone sales in mature markets such as Europe and the United States, and emerging markets like China. Kim Hyun-joon, senior vice president of Samsung's mobile unit, vowed to "act more aggressively" in China by rolling out more mid- and low-end phones.

"There are concerns about profit margins being squeezed in a short term... but growth of the low-and mid-end market is a global trend," Kim said in a conference call. "We will respond more aggressively to meet demand in the Chinese market... in the latter half of this year by introducing more products with better specification as well as better price competitiveness." 

However, Kim added that concessions on price would probably prevent and improvement in mobile unit profits in the third quarter.

Samsung, the world's largest smartphone maker, has a diverse product line ranging from memory chips to home appliances, but more than half of its profits are generated by mobile devices.

Second quarter sales of its mobile unit fell 20 per cent on-year to 28.45 trillion won, while operating profit slid nearly 30 per cent to 4.42 trillion won. The consumer electronics unit -- selling products from TVs to refrigerators -- saw operating profit surge 80 per cent on-year to 770 billion won, but not enough to offset the decline in the mobile business.  

April saw the global roll-out of the latest version of its flagship Galaxy series smartphone, the Galaxy S5, which came with a free premium software bundle valued at more than $500 as Samsung sought to pull in buyers tempted by cheaper models from Chinese rivals like Lenovo and Huawei. Initial sales of the S5 were positive, although critics said it offered little in the way of real innovation to set it apart from the iPhone and the Chinese phones.

There is a general consensus that smartphone evolution has hit a barrier that will only allow incremental improvements on existing design and technology, rather than market-changing reinvention.

"You can say Samsung's smartphone heyday is now over," said Greg Roh, a Seoul-based analyst at HMC Investment Securities. "Given that companies are now competing over price rather than hardware specification, the key challenge will be how to minimise the pace of profit decline."

According to International Data Corp. (IDC), a record-high 295.3 million smartphones were shipped worldwide in the second quarter. Huawei nearly doubled its shipments from the same quarter a year ago, while Lenovo also weighed in with strong performance, IDC figures indicated.

Samsung remained the world's top vendor with 74 million handsets shipped, but saw its overall market share slip seven per cent to 25.2 per cent.

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