Samsung expects operating profit to decline in Q1

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Samsung Electronics expects its overall operating profit to slip in the first quarter and for sales to be essentially flat year-over-year, an indication that its mighty smartphone engine, especially at the high end of the market, may be slowing.

Samsung said in a statement that it expects operating profit to have fallen to $7.98 billion for the first quarter, down 4.5 percent from $8.36 billion in the year-ago period. The company expects total sales to come in at $50.3 billion, basically flat from the year-ago quarter.

The company will report full quarterly results later this month, but the expected results follow a 6 percent decline in operating profit in the fourth quarter. As the Wall Street Journal notes, that was the company's first year-over-year drop in two years. Until the third quarter of 2013, Samsung had record-breaking results driven by ever-increasing smartphone sales, but since then the company's mobile unit has been taking a hit because of falling average selling prices and large marketing costs.

Mobile phones and network gear accounted for 66 percent of Samsung's operating profit in the fourth quarter, and Samsung depends largely on its smartphone sales for that. In January, the South Korean conglomerate also said it plans to slash its marketing spending on mobile relative to revenue, though it declined to say by how much. Samsung spent $11.6 billion in total marketing expenses last year compared with $10.35 billion in 2012, according to the Journal.

Samsung's launch of its latest flagship smartphone, the Galaxy S5, is just days away. However, analysts and investors are worried that the phone might not generate the same kind of sky-high sales previous models did because of a perceived lack of flashy new hardware or software features.

"The Galaxy S5 isn't something that will awe investors ... and that's mostly the same with high-end phones at this point," IM Investment analyst Lee Min-hee told Reuters. "Smartphones no longer offer much groundbreaking innovation and are equalizing to a certain degree."

Reviewers have said the phone's biggest new hardware feature is water-proofing, which is good for accidental spills. The gadget also comes with a fingerprint scanner and heart rate sensor. "In most other ways, this update to Samsung's top-selling Galaxy S4 barely moves the needle," the Journal noted in its review.

"I've been testing the new S5 for a couple of weeks, and I like it, though I didn't find it especially exciting or novel," Walt Mossberg wrote in his Re/code review.

Samsung also makes memory chips, TVs and home appliances, so that diversification should help keep it insulated from any slowdown in its smartphone business. Samsung also has a dizzying array of phones in a wide range of prices, which makes it less susceptible to any weakness in the high end of the market than some of its competitors, notably Apple (NASDAQ:AAPL), which largely competes at the high end of the market.

"Demand for the S5 will start kicking in from the second quarter, which will also drive sales of chips and displays," NH Investment & Securities analyst Lee Sun Tae, told Bloomberg. "Samsung has well-diversified line-ups across all categories, so it will fare better than rivals, at least before the bigger iPhone hits the market in the latter half of the year."

For more:
- see this CNET article
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article

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