LG's handset unit turns a profit in Q3 on smartphone strength

Optimus G sales will be key for Q4
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LG Electronics bounced back to a profit in the third quarter on stronger-than-expected results from its handset division, which may be showing signs of turning around after several bumpy quarters.

Click here for details of LG's performance in the third quarter.

Overall the South Korean electronics conglomerate posted a net profit of around $142 million in the quarter, a major improvement over the loss of around $375 million the company posted in the year-ago period and beating analysts' estimates, according to Dow Jones Newswires. Total sales, however, fell 4 percent to $11.2 billion.

It was the strong performance in LG's mobile division that stood out. The company's handset unit reported an operating profit of $19.02 million, up from an operating loss of $127 million in the year-ago period and $53.4 million in the second quarter. The handset unit posted sales of $2.07 billion, up 6 percent from the second quarter but down 9 percent year-over-year. 

LG shipped 14 million handsets in the quarter, better than the 13.1 million it had in the second quarter but down from the 21.1 million handsets it shipped in the third quarter of 2011. Still, LG said it is benefiting from higher sales of its LTE smartphones in South Korea, Japan and the United States. The company said that, despite increased expenses for marketing and R&D, the unit turned profitable "as a result of improved product mix and cost structure."

"The biggest factor was their handset business returning to profit," Park Kang Ho, a Seoul-based analyst at Daishin Securities Co., told Bloomberg. "We thought their mobile business would at best break even. The overall product mix has improved and margins got better."

LG, once the world's No. 3 handset maker, slipped to No. 5 in the second quarter. However, the company has been trying to shift to smartphones to increase its profitability and catch up to rivals like Apple (NASDAQ:AAPL) and Samsung Electronics. 

LG sold 7 million smartphones in the third quarter and expects smartphone shipments to grow in the fourth quarter, exceeding shipments of feature phones for the first time, LG CFO David Jung said, according to Bloomberg. "We're trying to step up our marketing efforts to make sure our product competitiveness will lead to revenue growth," he said.

Looking ahead to the fourth quarter, LG said it expects both increased consumer demand and competition as OEMs push out their flagship products for the holiday shopping season. LG said it will focus heavily on its high-end Optimus G and Optimus Vu 2 products. LG is also widely rumored to be building a Nexus-branded smartphone for Google (NASDAQ:GOOG), called the Nexus 4, which reports have suggested Google will announce Oct. 29.

By making a Nexus device, LG could be able to raise its profile at a time when it is trying to gain more support from U.S. carriers and bolster its brand. Verizon Wireless (NYSE:VZ) recently launched the $200 LTE-powered LG Intuition "phablet," LG's first device in the larger-than-a -smartphone-but-smaller-than-a-tablet category in the United States. Both AT&T Mobility (NYSE:T) and Sprint Nextel (NYSE:S) will launch the Optimus G, LG's 4.7-inch screen smartphone that sports Qualcomm's (NASDAQ:QCOM) 1.5 GHz Snapdragon S4 Pro quad-core processor. Further, T-Mobile USA said it will launch the Optimus L9 for $80, which is part of LG's "L-Series" of phones that run on Android 4.0 and sport a dual-core 1 GHz processor and 4.5-inch display.

"Today's results show that it doesn't have to be Apple or Samsung to make profits in smartphones," Hong Sung-ho, an analyst at I'm Investment & Securities, told Reuters. "LG won't be able to earn double digit profit margin in handsets as Apple and Samsung do. Still, LG proved it has the potential to stand out among its second-tier peers of Huawei, ZTE, Motorola etc., with its manufacturing competitiveness."

For more:
- see this release
- see this presentation (PDF)
- see this Bloomberg article
- see this Reuters article
- see this WSJ article (sub. req.)

Special Report: Wireless in the third quarter of 2012

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