Samsung Smartphone Sales Miss Estimates Due to 'Galaxy Fatigue'

The World's Biggest Smartphone Maker Falters, Even As it Pours On Marketing Spend

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Samsung Electronics, the world's biggest smartphone maker, posted second-quarter earnings that missed analyst estimates as sales of its flagship Galaxy S4 handset fell short of analyst expectations.

Operating profit rose to about 9.5 trillion won ($8.3 billion) in the three months ended June from 6.5 trillion won a year earlier, Suwon, South Korea-based Samsung said in preliminary earnings released today. That compares with the 10 trillion-won average of 34 analyst estimates compiled by Bloomberg.

The S4 was released in April with a bigger screen and motion-detecting software to help Samsung reclaim the top spot in the U.S. market from Apple's iPhone and boost growth at its biggest source of earnings. The stock slumped 13% last month as at least 15 analysts cut earnings estimates amid concern the high-end smartphone market is nearing saturation.

"It sharply missed the market expectation, and that worries me," said Byun Han Joon, a Seoul-based analyst at KB Investment & Securities Co. "The market was initially concerned about the third- and fourth-quarter results, but today's news raises questions if the earnings are already in bad shape." Byun said smartphone shipments for the quarter totaled 74 million, or 2 million less than he expected.

Sales were about 57 trillion won in the June quarter, compared with 47.6 trillion won a year earlier, the company said today. That compares with the 58.6 trillion-won average of 38 estimates.

Last month, Samsung lost $25.3 billion in market capitalization, more than the value of competitor Sony, as analysts scaled back expectations for the S4 and cut profit estimates. JPMorgan Chase & Co. revised its sales estimate to 60 million units this year from 80 million, and Morgan Stanley lowered its forecast to 61 million units from 71 million, analysts led by Shawn Kim said. Samsung ships one of every four handsets in the world.

Cheaper handsets
In the absence of a new handset from Apple so far this year, Samsung is counting on the S4 to attract high-end shoppers. The company, which unveiled the S4 at New York's Radio City Music Hall, said May 23 it sold 10 million units within the first month -- about half the time it took the S3 to reach that mark. The new phone features a 5-inch screen and 13-megapixel camera.

"I had expected Samsung's profit to be sustained due to its multiple products across all price points in smartphones," said Lee Seung Woo, a Seoul-based analyst at IBK Securities Co. "The latest results sharply missed the consensus, and I may have to revise the third-quarter profit forecast."

Scaled-down versions of the Galaxy and other models are being released to protect market share from Chinese rivals selling smartphones for $100.

'Galaxy fatigue'
To help boost demand for its devices in the $358 billion mobile-phone market, Samsung worked with rapper Jay-Z to launch his new album before its official release via an app exclusive to models including the Galaxy S3, S4 and Note 2.

The company also plans to release more high-end models this year, including a device using the Tizen operating system and the Galaxy Note 3.

Samsung increased its U.S. marketing budget by 58% in 2012, more than any of the top-100 leading national advertisers, according to Ad Age Datacenter. Samsung spent to $881 million on measured advertising in the U.S. in 2012, and $4.3 billion globally.

"Apple is suffering from iPhone fatigue, while Samsung is suffering from Galaxy fatigue," Neil Mawston, executive director of Strategy Analytics, said in an e-mail before the release.

Samsung shipped 69.4 million smartphones in the first quarter, Strategy Analytics said in April.

Operating earnings from the TV-making unit probably slumped to 390 billion won in the June quarter, according to the analyst survey, as companies struggled to stay profitable by slashing prices. Samsung is the world's biggest TV maker with 27.9 percent market share by revenue from flat-panel sets, researcher Display Search said in June.

-- Bloomberg News --

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