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Samsung Electronics Co posted the smallest quarterly earnings in more than two years as profit margins are squeezed by competition from Apple Inc's new iPhones and cheaper Chinese devices.
Net income, excluding minority interests, fell 49 per cent to 4.14 trillion won ($4 billion) in the three months ended September, the Suwon, South Korea-based company said in a filing on Thursday. That's the lowest profit since the fourth quarter of 2011 and compares with the 4.27 trillion-won average of 19 analyst estimates compiled by Bloomberg.
Samsung faces the strongest challenge yet to its reign as the world's biggest smartphone maker with the iPhone 6 models winning customers in the large-screen market and Xiaomi Corp and Lenovo Group Ltd attracting budget buyers in China. The squeeze is hurting Samsung's other businesses, curbing earnings at its display and processor chip divisions, as it prepares to release phones with flexible screens in 2015.
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"Samsung has lost touch with its customers as it has been unable to differentiate its offerings from established and emerging competitors," said Dan Wagner, the London-based CEO at Powa Technologies. "The jury is out if Samsung will recover in this tough, saturated market." Samsung "cautiously expects" an increase in fourth- quarter profit on seasonal demand for TVs, with flat-panel shipments forecast to rise 40 per cent, and growth at the chip division, the company said in an e-mailed statement.
Shares of Samsung rose 4.5 per cent to 1,181,000 won in Seoul trading, paring this year's decline to 14 per cent.
The earnings slump comes as Chairman Lee Kun Hee recuperates from a heart attack in May and as his family prepares to hold initial public offerings for other parts of Samsung Group, South Korea's largest family-run conglomerate.
Operating profit for the quarter was 4.06 trillion won while sales fell to 47.45 trillion won, the lowest in more than two years.
At the mobile unit, which had been the biggest contributor to earnings since 2011, operating income slumped to 1.75 trillion won from a record 6.7 trillion won a year earlier.
Samsung introduced two new Note devices with larger displays last month as it tried to blunt the impact of the new iPhone 6 and iPhone 6 Plus that debuted on September 19.
Profit margins on smartphones are falling as competition pushes down the average selling price and Samsung boosts marketing spending to rekindle growth. That pressure will continue in the "near-term," the company said on Thursday.
China market
Samsung shipped 102 million mobile phones in the quarter, Senior Vice-President Robert Yi said on a conference call on Thursday.
Samsung lost its top spot in China smartphone sales to Xiaomi, according to research firms, as the nation's mobile carriers cut back on phone subsidies.
"Considering an ongoing structural change in China, including subsidy cuts, it looks daunting for Samsung to see a strong rebound in smartphone market share there," Lee Min Hee, a Seoul-based analyst at I'M Securities Co, said before the earnings release.
Profit at Samsung's chip unit, which supplies its own smartphones and those of competitors including Apple, was 2.26 trillion won.
Even with slowing growth in sales of tablet computers, continued demand for personal computers and servers globally drove sales of Samsung's memory chips.
"PC demand was fairly good. Chip earnings will improve in the fourth quarter, largely on memory chips," said Kim Sung In, a Seoul-based analyst at Kiwoom Securities Co. "Apple's bigger iPhones partly drove Samsung's NAND flash chip sales, while it also receives a premium for its most advanced DRAM chips." DRAM Chips
DRAM chips are used in PCs to help run multiple programs simultaneously, while NAND memory is needed in smartphones and tablet computers for functions from playing videos and multitasking to storing books and photographs.
Samsung will start construction of a new plant in Gyeonggi province, south of Seoul, in the first half of next year, with operations due to begin in 2017.
Profit at Samsung's consumer-electronics division, which oversees the TV and home-appliance businesses, dropped to 50 billion won in the quarter on falling prices and competition with Japanese and Chinese producers.
The display division, which dominates the market for screens using organic light-emitting diodes, posted an operating profit of 60 billion won amid slowing demand for Samsung's high- end Galaxy smartphones.
"The overall smartphone landscape is fast shifting to the lower-end segment from high-end," Nam Dae Jong, an analyst at Hana Daetoo Securities Co. in Seoul, said before the earnings announcement. "That suggests Samsung can't expect a strong profit margin from its component business, either, especially from displays."
