Samsung Expects S6 to Buoy Q2 Profit

Samsung Electronics has reported a huge fall in net income for the first three months of the year but insisted that earnings will recover in the second quarter thanks to sales of its flagship Galaxy S6 smartphone, launched earlier this month.

The South Korean firm, which develops a range of consumer electronics products as well as semiconductors and network equipment, posted a 39% drop in net income, to 4.63 trillion Korean won (US$4.3 billion), compared with the same period last year, while sales fell by more than 12%, to KRW47.12 trillion ($44.1 billion), over the same period.

Hurt by the strength of the South Korean currency, Samsung Electronics Co. Ltd. (Korea: SEC) has continued to lose out at both ends of the mobile phone market, with Apple Inc. (Nasdaq: AAPL) luring the heavier-spending customers and low-cost Chinese rivals attracting interest from more price-sensitive consumers.

Samsung's update came just a day after Apple had flagged a 33% rise in net income on the back of strong iPhone sales, increasing the pressure on the South Korean player to prove that it can spar with its US rival.

Encouragingly, there were signs of a turnaround in the market for lower-cost handsets compared with the final three months of 2014. Samsung pointed to an uptick in device shipments and a fall in average selling prices, while data released by Strategy Analytics, a market research company, showed the company had sold more smartphones than any other player, having tied with Apple in the preceding quarter.

Table 1: Global Smartphone Vendor Shipments (Millions of Units)

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015
Samsung 89.0 74.5 79.2 74.5 83.2
Apple 43.7 35.2 39.3 74.5 61.2
Lenovo-Motorola 19.7 23.8 24.5 24.7 18.8
Huawei 13.4 20.1 16.5 24.1 17.3
Others 119.2 141.4 163.9 182.3 164.5
Total 285.0 295.0 323.4 380.1 345.0
Source: Strategy Analytics

Samsung's share price closed 1.4% higher on the Korea Exchange earlier today, suggesting investors had taken heart from this development and the company's upbeat S6 outlook.

In a statement, Samsung told investors to expect an earnings improvement in the April-to-June quarter "led by increased high-end sales with S6 global expansion."

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

Unveiled at this year's Mobile World Congress, the S6 has received positive reviews from analysts and is widely seen as one of the strongest challengers to Apple's iPhone 6, which came out in late 2014.

Nevertheless, Samsung also issued a warning that competition in the smartphone sector is likely to intensify this year amid a general slowdown in growth, while noting the weakness of the euro could hamper demand in some of its markets.

Global Smartphone Vendor Market Share
Source: Strategy Analytics
Source: Strategy Analytics

Revenues from the sale of IT and mobile communications products, including smartphones, accounted for nearly 55% of the total in the first quarter but were 20% lower than in the same period last year.

Even more troubling, however, was a 57% drop in operating profit in this area, to KRW2.74 trillion ($2.6 billion), as marketing costs and falling prices squeezed margins.

Samsung did not break out revenues from the sale of network equipment but indicated these were lower than in the final quarter of 2014 because of "decreased investment in LTE network [sic] by overseas carriers."

Sales at the company's device solutions unit, which includes its semiconductor and display panels business, accounted for 36% of the total and were 10% higher than in the first quarter of 2014.

Samsung is using its own chips in the S6 handset, having previously relied on processors from Qualcomm Inc. (Nasdaq: QCOM) in its top-of-the-range devices. According to a report from Bloomberg earlier this month, it has also just snagged a contract to supply processors for Apple's next iPhone model, beating off competition from Taiwan Semiconductor Manufacturing Co. (TSMC) (NYSE: TSM), whose components are used in the iPhone 6. (See Qualcomm Slashes Revenue Forecast by $1B and Qualcomm Urged to Spin Off Chips Unit.)

The consumer electronics division, which manufactures various household products, saw revenues fall by 9% on a year-on-year basis, to KRW10.3 trillion ($9.6 billion), and operating profit drop by 26%, to KRW140 billion ($131 million).

Samsung blamed seasonality and the impact of weak currencies in Europe and central Asia for the setback.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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