Samsung Profit Beats Estimates, Fueled by Galaxy S7 Sales

Wireless Carriers' Promotion of Smartphone Reduced Marketing Costs

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Samsung Electronics reported second-quarter profit that beat analysts' estimates, fueled by stronger sales of Galaxy S7 smartphones and aggressive cost cuts.

Net income, excluding minority interests, was 5.83 trillion won ($5.1 billion) in the period, the Suwon, South Korea-based company said in a filing Thursday. That compares with the 5.64 trillion-won average of estimates compiled by Bloomberg. The company also announced a 1.79 trillion won share buyback, the final stage of a plan announced last year.

Samsung has benefited from sluggish sales of iPhones as U.S. wireless carriers promoted the Galaxy S7 for high-end consumers, helping to reduce marketing expenses. That could change in the second half as the company faces new models from Apple. Lower prices for semiconductors and displays has also helped sales of the company's other consumer electronics, even amid sluggish economic growth across the globe.

"The smartphone and TV divisions led the earnings surprise for the quarter," said Greg Roh, an analyst at HMC Investment Securities in Seoul. "Samsung did well in the first half, but it's the matter of how well it could defend itself from the overall downside risks in the second half."

Shares of Samsung fell 1.3% to 1,507,000 won at the close of trade. The stock has gained 20% this year after three straight annual declines.

"We will be implementing very active marketing activities in the second half to drive up actual purchases and through this, we plan to continue to maintain overall sales of our premium handsets," Lee Kyeong-Tae, vice president of the mobile communications business, told a conference call. "Given the fact that we plan to launch a large screen flagship model combined with the maintained S7 prices, we expect the average sales price in the third quarter to improve."

Samsung will unveil its next-generation Note device with larger displays on Aug. 2 in New York, Brazil and in London, the company said. While the company is finalizing its capital spending plans, it expects a slight increase from the year earlier.

Revenue was 50.9 trillion won in the quarter, slightly higher than the 50 trillion won of its July 7 preliminary earnings announcement.

Samsung's earnings came the same day that June quarter data on the global market was released, showing the fastest growth coming from Chinese vendors. Samsung maintained its global leadership and shipped 3.4% more smartphones, while those at fourth-ranked Oppo more than doubled and fifth-placed Vivo jumped 62%, according to data from Counterpoint Research.

Sustained profit gains from the company's cheaper smartphones, such as the J series, also helped to boost mobile earnings. Operating profit at the mobile unit rose to 4.32 trillion won from 2.76 trillion won. Operating income at the chip unit was 2.64 trillion won, compared with 3.40 trillion won a year earlier, as weaker demand pressured component prices.

Sluggish sales of personal computers and global smartphones weighed on the prices of memory chips, with a slide in average selling prices of dynamic random access chips. "Component prices are rebounding now so that could have a reverse impact on set products, such as phones and TVs and appliances," said Lee Seung Woo, an analyst at IBK Securities Co. in Seoul.

The company's main LCD business still faces price declines and intense competition. Operating income from displays was 140 billion won, down from 540 billion won. Focus is also shifting to Samsung's display unit, which is working on flexible displays.

Electronics makers are counting on the technology to spawn a new class of products and fuel future growth. "Although liquid-crystal display has dominated mobile phone displays for more than 15 years, OLED display technology is set to become the leading smartphone display technology in 2020," IHS Markit wrote in a July 26 report.

One beneficiary of falling panel prices was TV sales. Profit at the consumer electronics division, which includes the TV and home appliance businesses, was 1.03 trillion won in the quarter, compared with 210 billion won a year earlier.

-- Bloomberg News

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