Samsung Predicts Another Bad Quarter on Smartphone Slump

Big iPhones, Marketing Costs Spell Rough Third Quarter

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Samsung Electronics posted third-quarter earnings that missed analysts' estimates as the world's biggest smartphone maker loses ground to Apple and Chinese competitors.

Operating profit was 4.1 trillion won ($3.8 billion) in the three months ended September, a 53% annual decline, the South Korea-based company said in a regulatory filing Monday. In a statement, the company faulted lower selling prices for its more expensive smartphone lines and rising marketing costs.

In 2013, Samsung reported $11.3 billion in advertising and promotional spending. The electronics giant wrapped up an extensive global agency review last week.

Samsung is battling to stay on top as Apple wins customers with larger-screen devices, a market the Galaxy maker has dominated, and Xiaomi and Lenovo pack features into cheaper models. Declining market share in China and India, plus lower demand for Samsung's high-end products, are eroding profit from the units supplying displays and processor chips.

"China and India proving challenging at the low-end, and Apple's new iPhone 6 range delivering tougher competition at the high-end," Neil Mawston, executive director of Strategy Analytics in London, said before the earnings release. "Samsung's 'Chinese problem' is the one it needs to tackle most pressingly."

Sales were about 47 trillion won in the quarter, the company said. That compares with the 50.3 trillion-won average of 40 estimates.

Samsung didn't provide net income or details of divisional earnings, with audited results due to be reported later this month.

Mobile division
Third-quarter operating profit at the mobile unit, the company's biggest business, was probably 2.5 trillion won on sales of 26 trillion won, according to the median estimate of five analysts surveyed by Bloomberg News.

The unit's profit has fallen from a record 6.7 trillion won a year earlier.

Samsung released its Note 4 late last month to try defending its share of large-screen phone sales from the new iPhone 6 and iPhone 6 Plus that debuted Sept. 19.

"The Note 4 will help to stabilize Samsung's device unit in the fourth quarter, but it will need more than one evolutionary model to stop the iPhone juggernaut," said Mr. Mawston.

Samsung probably shipped 12 million units of its marquee S5 smartphones in the third quarter, compared with about 18 million units sold in the second quarter, according to I'M Investment & Securities Co.

Chip Plant
Samsung yesterday said it would spend 15.6 trillion won on a new semiconductor plant in South Korea to meet rising demand for the chips that power tablets, smartphones, wearable devices and appliances. Construction will begin in the first half of next year, with operations due to commence in 2017.

"We anticipate that Samsung's key growth driver will be switched from smartphones to semiconductors next year," Peter Lee, an analyst at Woori Investment & Securities' in Seoul, said in a Sept. 23 report.

Operating profit at Samsung's consumer-electronics division, which oversees the TV and home-appliance businesses, probably dropped to 140 billion won from 350 billion won a year earlier, according to the analyst survey.

Slower demand for TVs after the World Cup in Brazil and the weakening yen currency against the Korean won, which made sets from Japanese producers cheaper, probably lowered profit at the unit.

~Bloomberg News with Ad Age staff~

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